This article is the fourth in a series on how to get out of debt. If you haven’t already, you should check out the previous articles:

Step 4 – Find Ways to Cut Back & Earn More

       Once you’ve created a budget, you have a powerful tool to propel you out of debt. By looking at where your money is going, you can target areas to cut back. First, you can look at your biggest expenses. Finding ways to cut back just a bit (percentage-wise) will give you a large return on your effort. Saving 10% on your rent or mortgage payment will provide you with more extra money than saving 10% on your grocery bill. That’s not to say that the latter is not good, but going for the biggest wins first will help you get the best return on your time.

       Next, you can look at the small expenses. Where are the little leaks that are sinking your financial boat? Five dollars here and ten dollars there can add up to a significant sum by the end of the month. Pinpoint a few of your small expenses to target at first. You’ll soon plug all the holes in your boat.

       When you’re prioritizing the areas of your budget where you’ll cut back, don’t ignore the personal value you receive from each expense. You’ll find greater success by attacking the items you don’t enjoy very much rather than depriving yourself of small things that make you happy. For example, you’ll feel more satisfied by lowering your tax bill than you will by giving up sweet tea and drinking only water. (I bleed sweet tea so that’s my example.)

       Finally, find ways to earn more money. If you can take more hours at work or get overtime, that’s a good way to grab some extra cash. Get a second job, sell your stuff, or start your own side business. You don’t have to completely change careers to earn more money. Yes, you’ll have to give up some of your personal time. But if you really want to get rid of your debt, you’ll be well served by both cutting back and earning more. Combining those two strategies is like fanning the fire. You’ll burn more debt away in a much shorter period of time. (The same could be said for dieting and exercise. You lose the most weight by doing both.)

       What do you do with this extra money you find? You’ll first build your savings (so you don’t have to go into debt again). Then you’ll attack your debt aggressively. Every extra dollar you can get will bring you closer and closer to your goal. Be sure to check out the next article to find out why you should build your savings before paying off your debt.

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       If you want to keep getting tips on how you can get out of debt and manage your personal finances well, make sure you sign up for free updates to Provident Planning! I’ll be continuing this series throughout the year while I also explore other aspects of personal finance.

       Let me know how you’re going to cut back or earn more in the comments below!

Raising a Cow for Beef: Month 7

Corey —  March 23, 2010 — 4 Comments

       Last month, I posted an update about how my wife and I are raising a cow for beef. This is a summary of our activity and costs for month 7. As always, let’s first check Bambi’s growth. Here he is at six months old:

Bambi - 6 Months Old

       And here he is at seven months old:

Bambi - 7 Months Old

       My friend, Konrad, came down this past month with a weight tape (basically a tape measure that helps you estimate how much a cow weighs). Bambi’s up to at least 420 pounds now (probably more like 430-440 today). That means he’s been gaining about 2 pounds a day since we got him, which is excellent – especially for the breed of cow he is (75% Jersey/25% Holstein). Today, I’ve got an extra bonus for you. I took a short, one minute video of Bambi about a week ago while he was out eating some grass:

Costs & Time

       It still takes about the same amount of time to take care of Bambi every day. I should be able to speed up the process a bit since it’s warming up. Right now, I have to take his water bucket to the spigot to fill it up. But since Spring is coming, I’ll be able to run a hose to the bucket and fill it up in place. That’ll save me a couple minutes every day.

       We spent a bit more this month because we needed to buy feed, hay, and straw. However, we won’t need nearly as much hay or straw for the rest of Bambi’s life because we’ll be able to let him graze outside. That will cut back on our costs a bit. Here are our costs for this past month:

  • Feed – $40.81

  • Hay – $36.00

  • Straw – $5.00

  • Total Spent this Month – $81.81

  • Time – 7 hours

       And here are our total costs over the past seven months:

  • Cost of Bambi – Free!

  • Castration & Dehorning – $16.00

  • Milk Replacer – $45.54

  • Miscellaneous – $46.87

  • Feed – $201.16

  • Hay – $88.00

  • Straw – $20.00

  • Medicine – $5.00

  • Total Spent – $422.57

  • Time – 63 hours

       So after seven months we’ve spent a total of $422.57 and 63 hours raising a cow for beef. So far it’s working out to about $1.99/day and around 15-20 minutes/day to raise Bambi.

       I’m trying a new method for cleaning out his pen this month because it was very difficult the last time I cleaned it out. He tends to pull his hay into his straw, which then gets matted down with his manure and urine. The result is a stinky, impenetrable pile of muck that takes a long time to clean out. So now I’m taking just a couple minutes each day to fork out a little at a time so it doesn’t get so bad.

       Despite the frustration I had cleaning out his pen the last time, it helps me appreciate the value of physical labor. Most of my work is mental, and there are few tangible results at the end of the day. But when you clean out a pen full of poop and put in fresh straw, you can see (and smell) the results of your hard work. That’s satisfying in a way that publishing a post on here isn’t.

       That’s it for this month. If you have any questions or comments, please leave them below. And make sure you sign up for free updates to Provident Planning if you’re interested in knowing what it takes to raise a cow for beef!

Uncle Sam says,        The IRS determines your responsibility to file based on your gross income, which consists of both earned and unearned income. This is especially important if you can be claimed as a dependent on someone else’s tax return. Your eligibility for certain tax credits and IRA contributions also depends on how much earned income you have. This article will help you determine the difference between earned and unearned income.

Earned Income

       Obviously, any income you earn by working for someone else will be considered earned income. Salaries, wages, tips, professional fees, business income (from self-employment), and farm income all count as earned income. Those are pretty straightforward.

       But there are a few tricky ones. For example, alimony counts as earned income. (I’m talking about true alimony – you can’t count child support for this.) Also, income from partnerships, S corporations, trusts, and estates can only count as earned income if they are considered “non-passive”. For the most part, this means you must have actively participated in the business that provided the income. There are special rules relating to rental real estate on this issue. If you’re not sure about your situation, you need to consult a tax professional. Finally, taxable scholarships and fellowship grants can also count as earned income.

       That’s pretty much it for earned income. One last note – any earned income that you exclude under the Foreign Earned Income rules does not count as earned income for your IRA contributions. Again, this is another complicated situation that may require talking to a tax professional.

Unearned Income

       Calculating unearned income is very important if you can be claimed as a dependent on someone else’s tax return. You’ll want to know how much unearned income you have so you can figure out if you’re required to file a tax return. Also, if you’re looking to make IRA contributions, none of these items will count. Here are most of the items that are considered “unearned income” by the IRS:

  • Interest & Dividends
  • Capital Gains
  • Retirement Income (IRA distributions, pensions, and annuities)
  • Rental Real Estate Income
  • “Passive Income” from partnerships, S corporations, trusts, and estates
  • Unemployment Compensation
  • Social Security Benefits
  • Gambling Winnings
  • Cancellation of Debt
  • Excluded Income under Foreign Earned Income rules
  • and a few others…

       Your gross income is the combination of both your earned and unearned income. Knowing what counts for these amounts will help you figure out if you are required to file a tax return and if you’re eligible to make IRA contributions.

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       If you want to get more tax tips, make sure you sign up for free updates to Provident Planning. If you have any questions about earned or unearned income, leave a comment and I’ll do my best to help you!

Uncle Sam says,        With less than a month left to file your federal income taxes, I’m thinking some of you might have a tax question or two you’d like answered. So here’s my offer. You leave your tax question here in the comments or contact me directly, and I’ll answer it! Normally, I’d charge $100/hour for income tax planning and $75/hour for income tax preparation – but I’m offering this service to you absolutely free!!! I’m making this offer available until April 15th, 2010.

       Now just a few rules:

  1. Any tax question is fair game. Nothing is too simple or complex!

  3. Don’t leave any personal information in a comment. They’re available for the entire public to see!!!

  5. If you contact me directly, I’ll keep any personal information absolutely private. I will reserve the right to use your question in a post on this website, but I will not share any of your personal information on here.

       So what do I get out of this? Well, other than the pleasure of helping my readers, I’ll be answering questions that other people are probably searching for as well. I’ll put the answers in posts on this website, and hopefully people will find those posts when they search for their question. More visits is a good thing for me! (But I’ll send you your answer before the post is published. I schedule my posts in advance, so I don’t want you to have to wait.)

       But you get free tax help at no cost, so what do you have to lose? Leave a comment now or contact me directly!

       I borrowed The Complete Tightwad Gazette by Amy Dacyczyn from my local library a while back because I’d read so much about it on other personal finance blogs. I started reading through it, and I found so many good tips and ideas that I decided to buy a copy for myself from Amazon. This post is part of a series where I’ll share my take on some of my favorite tips from the book.

Everything You Already Know

       Amy makes a point of explaining that personal finance advice is a lot like dieting advice. It’s mostly just a bunch of stuff you already know. We all know that to lose weight we need to eat fewer calories than we burn. To save money and get ahead in our personal finances, we need to spend less money than we earn. They’re both simple, and you already know those things. I’m not providing some great insight when I tell you to spend less than you earn.

       But in personal finance advice, you’ll run into some strange ideas. I’m referring to the philosophy of “Don’t worry about being frugal and spending less. Just focus on earning more.” They’ll even go to the point of saying that frugality is stupid and a waste of time. But the problem is that this approach is one-sided and blind to the advantages of a combined approach.

       The equivalent in dieting advice would be saying “Don’t eat less, just exercise more.” How many health professionals do you hear giving that kind of advice? None! The best dieting advice is a combination of eating less and exercising more.

       In the same way, the best personal finance advice is a combination of spending less (frugality and smart choices) and earning more (diligent work, entrepreneurship, and smart investing). That’s what I aim to give you on Provident Planning – a balanced approach. Indeed, God’s Provident Plan is designed with this approach in mind. Contentment and hard work combining to yield generous giving.

       But Amy offers a second part to this analogy. When she joined Weight Watchers, she already knew how to lose weight. But she kept going to the meetings because of the support network they provided. In the same way, she hoped The Tightwad Gazette could serve as a support network for those looking to save money – confirming what they already know, providing some useful tips, and encouraging each other along.

       That’s my desire for Provident Planning as well. I want to create a community where we continue to learn about God’s desire for personal finances and encourage each other along our journey. Together, we can support each other as we seek to glorify God through our personal finances. You can help me with this effort by continuing to read and comment, and I will help by continuing to write what I hope are useful articles. You can help even more by contacting me with any feedback that can improve Provident Planning for everyone.

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       If you want some more good ideas on saving money from The Complete Tightwad Gazette, make sure you sign up for free updates from Provident Planning. I write on a wide variety of personal finance topics, so even if you’re not interested in frugality I’m sure you’ll find something useful here.

       The What Would John Templeton Say? website is holding a blog contest asking bloggers which of the economic vices John Templeton described is most responsible for the recent economic downturn and which of his economic virtues is most important to the economy’s rebound. This is my response.

Moral Relativism – The Root of All Vices

       Envy, greed, pride, and intolerance have all contributed to the recent economic downturn. But to assign any one of those as most responsible is to ignore the root cause of them all. It is moral relativism that brought the economy to its knees. The lack of belief in an absolute truth – in a clear right and wrong – has deteriorated the business and personal ethics in our society.

       You see, if there is no absolute truth, then there is nothing inherently “wrong” with envy, greed, pride, or intolerance. Envy without truth lets us blame others for our own mistakes and ignore our personal responsibilities. Greed without truth allows us to ignore what is best for others because we need only look out for ourselves. Pride without truth puffs up our ideas of who we are, what we know, and why we don’t need help. And intolerance without truth helps us ignore the observations and warnings of others. Without an absolute truth, we practice these vices without thought as to their consequences or our responsibility to others.

       The absolute truth that comes to us from God, through the Bible and the revelation of Himself through Jesus Christ, teaches us that envy, greed, pride, and intolerance will destroy us. His truth teaches us that love, hope, contentment, diligence, humility, kindness, faithfulness, and self-control are the keys to success – in our personal lives and in society as a whole. Because of the prevalence of moral relativism, we reject such absolute truth and we have suffered the consequences.

       Consumers driven by envy, discontentment, and greed bought houses they could not afford. Realtors, banks, and financial institutions driven by greed encouraged consumers along and extended credit where they should not have. All of us suffered from pride in denying our need for help or the possibility that we made major mistakes. And intolerance closed our minds to the voices who cried out with warnings against all these vices. These all played a part in the economic downturn, and they all stem from moral relativism.

       Without God’s absolute truth, we neglect to consider the dangers of envy, greed, pride, and intolerance. We succumb to our desires and ignore responsibility. Until we learn that God’s Truth is absolute and absolutely right, we will continue to fall to these economic vices. This recent downturn is clear evidence for our need of Truth. But there is hope!

Integrity – The Key to Recovery

       The key to a true rebound is integrity. Without integrity, no economy can exist. Integrity is essential to creating a trusting environment where people can work together, use their various gifts and talents, help each other, and rely on each other to keep their personal responsibilities. If we neglect integrity, we will not experience a lasting economic rebound.

       Just as moral relativism is the root of the other economic vices, so is integrity the fountainhead of the other economic virtues of cooperation, creativity, charity, and adaptability. Integrity recognizes God’s absolute Truth and our responsibility to honor that Truth at all times. The connection from integrity to all other virtues is then easily formed.

       Love leads to cooperation and charity. Love wants to work together to achieve the good of all people. Love looks to the needs of others – especially those who are the most helpless. Likewise, contentment and kindness develop generous giving in our lives to the advantage of all.

       Diligence and faithfulness yield the creativity and hard work necessary for entrepreneurs to flourish. The drive to meet others’ needs and provide service have been the start of many businesses. And no business can survive without those as their primary motivation factors. Economic rebound will flourish under this creativity, and that creativity requires the diligence and faithfulness that result from integrity.

       Finally, hope and self-control help us adapt to the situations we find ourselves in. If we do not find new ways to meet our needs, to contribute to society, and to learn from the past while looking to the future, we will not recover from this economic downturn. But the hope that comes from God’s Truth will encourage us and help us press on to a brighter future ruled by integrity instead of ignorance.

       Moral relativism contributed in many ways to the fall of the economy. But integrity can contribute in many more ways to our recovery. The power of integrity – of holding to absolute truth and doing what is right – can overwhelm the destruction brought on by moral relativism. Through integrity we can conquer the obstacles we face by working together, finding solutions, meeting needs, and pressing forward. God’s Truth is the key to helping us do these things and will unlock our society’s potential to rebound from this setback with astounding success.

       This post is an entry in the Spring 2010 blog contest sponsored by What Would John Templeton Say?. The site, which examines the philosophies of this legendary stock picker, has invited any blogger to respond to a series of posts on what Templeton called the ”Economic Virtues and Vices.” The contest is open to all and further information can be found here.

       A while back I released my free retirement calculator designed to take your current age, retirement age, life expectancy, income needs, current savings, and market volatility into account in order to tell you how much you should be saving each year to reach your retirement goals. I designed it to be a more accurate retirement calculator than most of the ones you find online, but I also wanted to make it easy to use. Because of this, it’s not the most accurate calculator available, but it should do a good job for you if you follow the directions and revisit it every 3-5 years.

       What I hadn’t done, though, was to test the advice it gives against historical investment periods. I based the calculator on historical market data and ran millions of simulations to build the back-end of the calculator (which you don’t see when you use it). But I didn’t have a chance to test how it would have actually worked out for people until recently. So using historical performance numbers for a diversified portfolio along with historical inflation rates (all from 1927-2009), I tested what your results would have been if you had followed the advice given by my free retirement calculator. I tested two different scenarios:

  1. If you had saved the target amount the calculator estimates, would that have lasted throughout your retirement?

  3. If you had annually saved the amount the calculator tells you to, would you have reached that target amount by your retirement date?

       Basically, I wanted to see if this calculator would work in telling you how much to save and how much you can safely withdraw in retirement. Click here if you don’t want to read the nitty gritty and just want to get to the point.

Withdrawal Results

       I found that my calculator was extremely good at estimating how much you should have by retirement so you don’t run out of money before you die. What I wanted to avoid was having any historical period where you would have run out of money before you hit your life expectancy. In most cases, you end up with quite a bit of money left over at your death. But in a few, you barely make it. All of these withdrawal scenarios assume you need $36,000/year in retirement income and you retire at age 65. I looked at three different scenarios: you die at age 85 (20 years of withdrawals), you die at age 80 (15 years), and you die at age 75 (10 years). You’ll need to click the graphs to get a clear, full-size picture. Here are the results for withdrawing from age 65-85 (20 years):

Withdrawals 65 to 85

Here are the results for 65-80 (15 years):

Withdrawals 65 to 80

And here are the results for 65-75 (10 years):

Withdrawals 65 to 75

       As you can see, you never would have run out of money if you had saved what the calculator estimated you would need. Now there’s no guarantee that would always be true, but it is good to see that it would have worked out historically. In many cases, you would have ended up with way more money than you needed, which illustrates why this isn’t a perfect calculator. (No calculator is going to figure this out perfectly for you, and this is why you have to revisit the calculation every so often.)

Savings Results

       Where I found the calculator needed some work was how much it was telling you to save every year. I was running a scenario where you start saving at age 25, retire at 65, and die at age 85 (40 years of saving, 20 years of withdrawals). What I found was that many times you’d end up with waaaaaay more than you needed to retire. You could have either retired earlier or saved less. This kind of result is almost as bad as finding out you didn’t save enough – simply because of all the sacrifices you would have made to meet your savings goal. I don’t have the results here to show you, but let’s just say you ended up with anywhere from 2-6 (yes 6!) times what you would have needed to retire.

       After a long process of studying the results, figuring out where it went wrong, debugging, and retesting, I made one small tweak to the calculator and now it works great. Historically speaking, you’d still save too much most of the time (anywhere from 1.25 to 2 times more than you need). But it cut the required savings rate back to a much more manageable and realistic level. So I’ve run four different scenarios and included the results here to show you how it worked out. These scenarios assume you retire at age 65 and die at age 85 while needing $36,000/year during retirement. The four scenarios differ in the age you start saving (with no savings to start): age 25 (40 years to save), age 35 (30 years), age 45 (20 years), and age 55 (10 years). Here are the results if you start at age 25:

Savings starting at Age 25

       On average, you would have saved about 50% more than necessary. Assuming you have 40 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 15% of your target retirement income every year. Here are the results if you start at age 35:

Savings starting at Age 35

       On average, you would have saved about 50% more than necessary once again. Assuming you have 30 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 29% of your target retirement income every year. Here are the results if you start at age 45:

Savings starting at Age 45

       On average, you would have saved about 50% more than necessary once again. You would have fallen a little short of your retirement goal 8 times out of 64 historical 20 year periods, which would have required you to retire on a slightly smaller retirement income or wait one more year to retire. Assuming you have 20 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 63% of your target retirement income every year. And here are the results if you start at age 55:

Savings starting at Age 55

       On average, you would have saved about 30% more than necessary. You would have fallen just short of your retirement goal 6 times out of 74 historical 10 year periods, which would have required you to retire on a slightly smaller retirement income or wait one more year to retire. Assuming you have 10 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving an astounding 170% of your target retirement income every year.

       Though it’s not necessary to get the point of this article, I threw in those required savings amounts to show you why you need to start saving for retirement early in life. If you start at age 25 (when you have 40 years to invest), you only need to save 15% of your target retirement income every year. But if you wait until you’re 45 or 55, you’re looking at 60-170%. Ouch!!! Start early and save yourself from scrambling at the end!

The Point

       While it worked great for withdrawals (during retirement), I’ve made the retirement calculator a bit more accurate and realistic while you’ll be saving – especially if you follow the instructions and run through the calculations again every 3-5 years. I hope you find it useful. If you have any questions, please feel free to leave them in the comments here or on the calculator’s page. Thanks!