5c6e849a05e2c03b933f0dba

THE 1-2-3 MONEY PLAN
The Three Most Important Steps

to Saving and Spending Smart
Gregory Karp
Vice President, Publisher: Tim Moore
Associate Publisher and Director of Marketing: Amy Neidlinger
Executive Editor: Jim Boyd
Editorial Assistant: Myesha Graham, Pamela Boland
Operations Manager: Gina Kanouse
Digital Marketing Manager: Julie Phifer
Publicity Manager: Laura Czaja
Assistant Marketing Manager: Megan Colvin
Cover Designer: Alan Clements
Managing Editor: Kristy Hart
Project Editor: Betsy Harris
Copy Editor: Karen Annett
Proofreader: Debbie Williams
Indexer: Lisa Stumpf
Senior Compositor: Gloria Schurick
Manufacturing Buyer: Dan Uhrig
© 2009 by Pearson Education, Inc.
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Printed in the United States of America
First Printing May 2009
ISBN-10: 0-13-714173-4
ISBN-13: 978-0-13-714173-9
Pearson Education LTD.
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Library of Congress Cataloging-in-Publication Data
Karp, Gregory.
The 1-2-3 money plan : the three most important steps to saving and spending
smart / Gregory Karp.
p. cm.
ISBN 0-13-714173-4 (pbk. : alk. paper) 1. Home economics—Accounting. 2.
Consumer education. 3. Budgets, Personal. 4. Finance, Personal. I. Title. II. Title:
One two three money plan.
TX326.K27 2009
332.024—dc22
2008054616
For Rebecca, Jacob, and Michael
This page intentionally left blank
Contents
Introduction Telling It Straight . . . . . . . . . . . . . . . . . . . . .1
Getting from Here to There . . . . . . . . . . . . . .1
Simple as an iPod . . . . . . . . . . . . . . . . . . . . . .4
Easy Is Hard . . . . . . . . . . . . . . . . . . . . . . . . . .5
When Good Enough Is
Good Enough . . . . . . . . . . . . . . . . . . . . . . . .7
Is This Book Different from
Living Rich by Spending Smart? . . . . . . . . . .9
How to Use This Book . . . . . . . . . . . . . . . . .10
The Power of Three . . . . . . . . . . . . . . . . . . .10
Chapter 1 Spending Smart Redux . . . . . . . . . . . . . . .13

What Is Spending Smart? . . . . . . . . . . . . . .13
When to Spend Your Money . . . . . . . . . . . .14
When to Spend Your Money,
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . . .15
1. Spend Today . . . . . . . . . . . . . . . . . . . .15
2. Spend Yesterday . . . . . . . . . . . . . . . . .15
3. Spend Tomorrow . . . . . . . . . . . . . . . .16
Why Pay Attention to Spending? . . . . . . .17
Why Pay Attention to Spending?
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . . .17
1. Magnitude . . . . . . . . . . . . . . . . . . . . . .18
2. Speed . . . . . . . . . . . . . . . . . . . . . . . . . .18
3. Control . . . . . . . . . . . . . . . . . . . . . . . .18
vi The 1-2-3 Money Plan
What to Spend Discretionary

Money On . . . . . . . . . . . . . . . . . . . . . . . . . . .19
What to Spend Discretionary
Money On, 1-2-3 . . . . . . . . . . . . . . .19
1. Things You Care About . . . . . . . . . .19
2. Experiences . . . . . . . . . . . . . . . . . . . . .21
3. Things That Rise in Value . . . . . . . .21
PART I SPENDING SMART TODAY

Chapter 2 First Things First . . . . . . . . . . . . . . . . . . . .27
Getting Started . . . . . . . . . . . . . . . . . . . . . . .27
Taking Stock . . . . . . . . . . . . . . . . . . . . . . . . .27
Taking Stock, 1-2-3 . . . . . . . . . . . . .28
1. Take a Snapshot . . . . . . . . . . . . . . . .29
2. Look Back . . . . . . . . . . . . . . . . . . . . .32
3. Look Ahead . . . . . . . . . . . . . . . . . . . .33
Estate Planning . . . . . . . . . . . . . . . . . . . . . . .37
Estate Planning, 1-2-3 . . . . . . . . . . .37
1. Will . . . . . . . . . . . . . . . . . . . . . . . . . . .39
2. Durable Power of Attorney for
Finances and for Health Care . . . . .40
3. Living Will . . . . . . . . . . . . . . . . . . . . .40
Do You Need a Living Trust? . . . . .40
Identity Theft . . . . . . . . . . . . . . . . . . . . . . . .41
Identity Theft, 1-2-3 . . . . . . . . . . . . .42
1. Be Guarded . . . . . . . . . . . . . . . . . . . .42
Contents vii
2. Buy a Crosscut Shredder . . . . . . . . .43

3. Opt Out . . . . . . . . . . . . . . . . . . . . . . .43
What about Fraud Alerts and
Credit Freezes? . . . . . . . . . . . . . . . . .44
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Get the Bank Accounts You Need,
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . . .48
1. Get a No-Fee Checking Account . . .49
Rewards Checking . . . . . . . . . . . . . .50
2. Set Up at Least One High-Interest
Online Bank Account . . . . . . . . . . . . . .52
FDIC Rules: Is My Money Safe? . .53
3. Join a Credit Union . . . . . . . . . . . . . .54
Bill Paying . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Bill Paying, 1-2-3 . . . . . . . . . . . . . . .56
1. Use Direct Deposit . . . . . . . . . . . . . .56
2. Automate Bill Paying . . . . . . . . . . . .57
Automation Drawbacks . . . . . . . . . .58
3. Prioritize in a Crisis . . . . . . . . . . . . .60
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
Chapter 3 Get Fit (Food, Insurance,

Telecommunications) . . . . . . . . . . . . . . . .63
Food at Home . . . . . . . . . . . . . . . . . . . . . . . .64
Food at Home, 1-2-3 . . . . . . . . . . . .64
1. Maintain a Price List . . . . . . . . . . . .64
Is Organic Food Worth
the Price? . . . . . . . . . . . . . . . . . . . . . .65
viii The 1-2-3 Money Plan
2. Stockpile Sale Items . . . . . . . . . . . . . .68

Freezing Times . . . . . . . . . . . . . . . . . .71
Cherry-Picking Pays . . . . . . . . . . . . .72
3. Match Coupons to Sales . . . . . . . . .73
Fun Tangent: Razor Blades . . . . . . .75
Food Away from Home . . . . . . . . . . . . . . . .76
Food Away from Home, 1-2-3 . . . .76
1. Make Freezer Meals . . . . . . . . . . . . .77
2. Use Coupons and Discounts . . . . . .77
3. Skimp on What You Don’t Care
About . . . . . . . . . . . . . . . . . . . . . . . . . . . .78
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
Insurance, 1-2-3 . . . . . . . . . . . . . . . .79
1. Say No to Extended Warranties
and Other Junk Insurance . . . . . . . .79
2. Refinance Your Term Life
Insurance . . . . . . . . . . . . . . . . . . . . . . .80
3. Raise Deductibles on Home and
Auto Insurance . . . . . . . . . . . . . . . . . .84
Telecommunications . . . . . . . . . . . . . . . . . . .85
Telecommunications, 1-2-3 . . . . . . .85
1. Cancel Your Traditional Landline
Phone Service . . . . . . . . . . . . . . . . . . .85
The MagicJack Phone Solution . . . .87
2. Rightsize Your Wireless
Phone Plan . . . . . . . . . . . . . . . . . . . . .89
My Prepaid Phone Story . . . . . . . . .92
Contents ix
3. Regularly Review TV and

Internet Service . . . . . . . . . . . . . . . . .96
Fun Tangent: Don’t Overpay for
Audio-Video Cables . . . . . . . . . . . .102
Chapter 4 How to Buy Stuff . . . . . . . . . . . . . . . . . .105

How to Buy Products . . . . . . . . . . . . . . . . .107
How to Buy Products, 1-2-3 . . . . .107
1. Read Reviews . . . . . . . . . . . . . . . . .108
2. Research Prices . . . . . . . . . . . . . . . .111
3. Reevaluate . . . . . . . . . . . . . . . . . . . .113
Price Protection . . . . . . . . . . . . . . .115
How to Buy Services . . . . . . . . . . . . . . . . .117
How to Buy Services, 1-2-3 . . . . .117
1. Seek Reviews and References . . . .118
2. Research Prices . . . . . . . . . . . . . . . .121
Be Afraid of Commitment . . . . . . .122
3. Reevaluate and Review
Contracts Carefully . . . . . . . . . . . . .124
How to Buy Online . . . . . . . . . . . . . . . . . .124
How to Buy Online, 1-2-3 . . . . . .125
1. Prefer Commodities . . . . . . . . . . . .126
2. Consider Shipping Cost Versus
Sales Tax . . . . . . . . . . . . . . . . . . . . .127
3. Use a Credit Card . . . . . . . . . . . . . .128
Coupon Codes and
Rebate Portals . . . . . . . . . . . . . . . . .130
Fun Tangent: Eyeglasses Online . .133
x The 1-2-3 Money Plan
How to Buy Used Stuff . . . . . . . . . . . . . . .134

How to Buy Used Stuff, 1-2-3 . . .135
1. Get Over the “Yuck” Factor . . . . .135
2. Evaluate Price and Quality . . . . . .137
3. Keep It Simple . . . . . . . . . . . . . . . . .137
Refurbished Electronics . . . . . . . . .138
How to Teach Kids about Money . . . . . .140
How to Teach Kids about
Money, 1-2-3 . . . . . . . . . . . . . . . . . .140
1. Give Children an Allowance . . . . .140
2. Don’t Tie Allowance to Chores . .141
3. Make Rules . . . . . . . . . . . . . . . . . . .142
Chapter 5 Green Means Green . . . . . . . . . . . . . . . .145

Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . .146
Gasoline, 1-2-3 . . . . . . . . . . . . . . . .146
1. Don’t Spill the Coffee . . . . . . . . . . .147
2. Take It Slow and Steady . . . . . . . . .148
3. Pump It Up . . . . . . . . . . . . . . . . . . .149
Gasoline Myths . . . . . . . . . . . . . . . .149
Home Heating and Cooling . . . . . . . . . . .150
Home Heating and Cooling,
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . .151
1. Make a Thermostat Plan . . . . . . . .151
2. Seal Leaks . . . . . . . . . . . . . . . . . . . .152
3. Avoid Big-Ticket Fixes . . . . . . . . . .154
Contents xi
Little Things Mean a Lot . . . . . . . . . . . . .154

Little Things Mean a Lot,
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . .154
1. Replace Your Five Most-Used
Bulbs with CFLs . . . . . . . . . . . . . . .155
2. Buy Rechargeable Batteries . . . . . .157
3. Don’t Buy Bottled Water . . . . . . . .159
Should You Buy Carbon
Offsets? . . . . . . . . . . . . . . . . . . . . . .161
PART II SPENDING SMART YESTERDAY

Chapter 6 Credit When Credit’s Due . . . . . . . . . . .165
Your Credit . . . . . . . . . . . . . . . . . . . . . . . . .166
Your Credit, 1-2-3 . . . . . . . . . . . . .166
What Is a Credit Rating? . . . . . . . . . .166
Why Your Credit Matters . . . . . . . . .168
Saving Money . . . . . . . . . . . . . . . . . . .169
Identity Theft . . . . . . . . . . . . . . . . . . . .170
1. Get Your Credit Reports . . . . . . . .170
2. Get Your Credit Scores
(Optional) . . . . . . . . . . . . . . . . . . . .172
Get a CLUE: Your Insurance
Report . . . . . . . . . . . . . . . . . . . . . . .174
3. Improve Your Scores . . . . . . . . . . .175
Establishing Credit . . . . . . . . . . . . .180
How You Pay . . . . . . . . . . . . . . . . . . . . . . .181
xii The 1-2-3 Money Plan
Noncredit Payment Methods . . . . . . . . . .182

Noncredit Payment Methods,
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . .182
1. Consider Cash as King . . . . . . . . . .182
2. Do Debit Right . . . . . . . . . . . . . . . .184
3. Limit Use of Checks . . . . . . . . . . . .186
Layaway and No-No-No Sales . . .188
Credit Cards . . . . . . . . . . . . . . . . . . . . . . . .191
Credit Cards, 1-2-3 . . . . . . . . . . . .192
1. Never Carry a Balance . . . . . . . . . .192
2. Know Your Perks . . . . . . . . . . . . . .195
3. Maintain Your Card . . . . . . . . . . . .196
How to Choose a Rewards
Credit Card . . . . . . . . . . . . . . . . . . . . . . . . .198
How to Choose a Rewards
Credit Card, 1-2-3 . . . . . . . . . . . . .199
1. Go Online . . . . . . . . . . . . . . . . . . . .199
2. Choose Cash Back . . . . . . . . . . . . .200
3. Get More Than 1 Percent . . . . . . .201
How to Get Out of Debt . . . . . . . . . . . . . .203
How to Get Out of Debt,
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . .204
1. Quit Borrowing Money . . . . . . . . .204
2. Quit Saving Money . . . . . . . . . . . . .205
3. Pay Small Debts First . . . . . . . . . . .206
Contents xiii
PART III SPENDING SMART TOMORROW

Chapter 7 How to Save Money . . . . . . . . . . . . . . . .215
Short-Term Savings . . . . . . . . . . . . . . . . . .218
Short-Term Savings, 1-2-3 . . . . . . .218
1. Emergency Fund . . . . . . . . . . . . . . .219
2. Car Fund . . . . . . . . . . . . . . . . . . . . .224
3. Seasonal Fund . . . . . . . . . . . . . . . . .225
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . .226
Retirement, 1-2-3 . . . . . . . . . . . . . .226
1. Invest Automatically . . . . . . . . . . . .229
2. Diversify . . . . . . . . . . . . . . . . . . . . . .233
Why Index Funds? . . . . . . . . . . . . .237
3. Hold On . . . . . . . . . . . . . . . . . . . . . .239
401(k) Rollovers . . . . . . . . . . . . . . .240
Saving for College . . . . . . . . . . . . . . . . . . .240
Saving for College, 1-2-3 . . . . . . . .241
1. Open a 529 College Savings
Account Online . . . . . . . . . . . . . . . .243
2. Select an Age-Based Plan . . . . . . . .249
3. Contribute Automatically . . . . . . .250
Community College Route . . . . . .251
Choosing a Financial Adviser . . . . . . . . .252
Choosing a Financial Adviser,
1-2-3 . . . . . . . . . . . . . . . . . . . . . . . . .252
1. Interview Three Fee-Only
Planners . . . . . . . . . . . . . . . . . . . . . .253
xiv The 1-2-3 Money Plan
2. Ask Questions and Listen to

Your Gut . . . . . . . . . . . . . . . . . . . . .256
ABCs of Financial
Certifications . . . . . . . . . . . . . . . . . .256
3. Never Agree to an Investment
You Don’t Understand . . . . . . . . . .260
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . .261
Chapter 8 Putting It All Together . . . . . . . . . . . . . .263

Succeeding with Money . . . . . . . . . . . . . . .263
Succeeding with Money, 1-2-3 . . .264
1. Never Buy a New Car Until
You’re a Millionaire . . . . . . . . . . . .265
2. Buy a Home That You
Can Afford . . . . . . . . . . . . . . . . . . . .266
3. Care about Spending . . . . . . . . . . .269
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .271
Acknowledgments
W
isdom in this book does not come from me
alone.
The great information herein can be largely attrib-

uted to the many experts who have agreed to talk with
me through the years.
Wisdom also comes from readers of my national
newspaper column, “Spending Smart,” and my previ-
ous book, Living Rich by Spending Smart. Literally
hundreds of readers have called and e-mailed to ask
questions, share their collective wisdom and experi-
ences, or just thank me for providing straightforward
advice, which is the only way I know how to give it.
They are a continuing inspiration to tackle new spend-
ing topics each week in my column and pursue larger
publishing projects. For all of those collaborators, I am
grateful.
I’d also like to thank editors at the Morning Call
newspaper in Allentown, Pennsylvania, where I work.
Editor Ardith Hilliard and managing editor David
Erdman have been supportive of my national newspa-
per column, “Spending Smart,” which is published in
Tribune Company newspapers. They have also made
allowances for my nonnewspaper writing.
Thanks to Jim Boyd, executive editor at FT Press,
and reviewers Russ Hall and Michael Thomsett. A spe-
cial thanks to Jeanne Bonner for meticulously reviewing
the manuscript.
xvi The 1-2-3 Money Plan
Thanks, too, to Clark Howard, author and host of

the Clark Howard Show on radio. Clark’s encyclopedic
knowledge of consumer issues is an inspiration. One
conversation with him, in particular, led to the idea for
the format of this book—of providing just three tasks
for each money topic.
To family, friends, and colleagues who have taken an
interest in my books, thank you. Your support means
a lot.
Most important, thanks to my immediate family—
Rebecca, Jacob, and Michael—for your support and
accommodation as I finished two books in 15 months.
Your love and understanding mean more than you
know.
About the Author
regory Karp is an author and journalist of 20
G years. His national newspaper column,

“Spending Smart,” is published in papers that
together have millions of readers. The weekly column
appears in the Chicago Tribune, Baltimore Sun,
Hartford Courant, Orlando Sentinel, Allentown
Morning Call, and others. The column has twice won a
Best Column Award from the Society of American
Business Editors and Writers, in 2006 and 2008.
He is also author of Living Rich by Spending Smart:
How to Get More of What You Really Want.
Greg’s advice on spending money smarter has
appeared in national magazines, such as Newsweek and
SmartMoney; television broadcasts, such as WCBS in
New York, WSB in Atlanta, and WPVI in Philadelphia,
and literally dozens of newspapers nationwide, from the
Los Angeles Times to Newsday in New York.
He maintains a Web site at www.gregkarp.com and
blog at SpendingSmart.net.
Greg lives near Philadelphia with his wife and two
sons.
Introduction
Telling It Straight
T
his book is, admittedly, a low-tech device. But it’s
meant to offer advantages you find in a high-tech
GPS navigation system for your vehicle and an
iPod audio player.
In navigating money and spending issues, especially
in these challenging economic times, I hope you’ll find
this book as helpful and succinct as a GPS device that
gives driving directions in an unfamiliar region. And in
simplicity, it’s meant to be as easy to use as the ubiqui-
tous iPod music player.
Fortunately, you don’t have to be a gadget lover to
use it.
Getting from Here to There

I like my GPS navigation system, a Garmin Nuvi. I sug-
gest you buy one, after you get your money life in order
and are spending your money smarter every day.
No. It doesn’t have to be that brand or model of GPS
navigator. There are many good ones—ones with differ-
ent features and less-expensive ones that still get the job
1
2 The 1-2-3 Money Plan
done. But, the Garmin Nuvi is a very good line of GPS

systems for nearly everybody. And if you drive often in
unfamiliar areas, you should buy one.
This brief suggestion is indicative of this book. I
intend to give you very specific advice about spending
and handling money.
“Garmin,” as I unimaginatively named my GPS sys-
tem, tells me, turn by turn, how to get from where I am
now to where I want to go. I don’t mean that it lists
directions and a map on a screen. While I’m driving, a
voice inside the small box mounted on my dashboard
speaks directions and road names—albeit, sometimes
with butchered pronunciations.
Garmin doesn’t care where I started, even if I’m lost
to begin with. And it doesn’t always give me the
absolute-best route to where I’m going. But Garmin gets
me where I’m going, almost every time.
Garmin also provides me peace of mind. While driv-
ing in unfamiliar areas with confusing traffic patterns, I
don’t care that Garmin isn’t providing the absolute-best
directions—directions that might get me to my destina-
tion two minutes sooner. I care that it gives me clear,
understandable directions and gets me where I’m going
safely.
In an unfortunate parallel world, Garmin might have
a fatal flaw. It might have a Shakespearean Hamlet
complex, contemplating “To be or not to be.” It would
be much less useful.
What if at every intersection it spoke something like,
“Turn left on Maple Street…or go two blocks and turn
left on Main Street…or, if you’re in a hurry, avoid the
Telling It Straight 3
upcoming busy intersection and cut through the Cherry

Blossom housing development on the left…or if this is
rush hour, make a U-turn and take the on-ramp to the
bypass”?
Huh? Driving at 40 miles per hour and with little
time to make a decision, directions that offer every
route would be nearly useless. How am I to choose the
best route of those given? “Garmin, that’s what I paid
you to do!”
And so it is with financial advice.
Consumers view many financial books as they would
the indecisive GPS navigator. The books typically pro-
vide a confusing array of money advice that covers every
possible situation. Advice is rendered nearly useless
because the consumer has to make several complicated
decisions he or she feels ill-equipped to make. The reader
ends up needing advice in order to take the advice.
Sometimes, you just need a Garmin to tell you what
to do. This book intends to be your Garmin in navigat-
ing money issues, so you can get where you want to go,
with as little confusion as possible.
If I may stretch the metaphor one last time: When I’m
driving and I disobey Garmin—refusing to “turn left” or
“take the ramp on the right” as instructed—Garmin sim-
ply recalculates new directions for me based on where I
am now. You see, though Garmin is giving me specific
advice, I retain the right to choose my own way.
And so it is with this book. University of Chicago
professor Richard Thaler, the father of the study of
behavioral economics, calls it libertarian paternalism.
Basically, it means that leaders can use what we know
about consumer behavior to get people to do the right

things for themselves. So, in this book, I will nudge you
in a direction that is likely to be good for you. That’s the
paternal part. But, of course, you retain the free will to
modify or disregard the advice and choose a different
direction. That’s the libertarian part.
This book does not restrict your freedom to choose.
Nor does it advocate blindly following advice without
understanding it. You have the power to customize the
advice to your own life. The benefit of the book is pro-
viding you with a framework for making decisions, and
at the very least, showing you what a good decision
looks like.
Simple as an iPod
If you want to discuss simplicity, it’s hard not to talk
about Apple’s iPod digital music player. This handheld
device allows you to move music, audiobooks, and even
movies and TV shows from your computer to the device
for on-the-go listening and viewing.
Arguably, it is not the absolute-best music player on
the market. Others offer more features and even better
audio quality, some reviewers claim. Many are less
expensive. But none is easier to use. And for that rea-
son, the iPod blows away the competition in sales. And
for that reason, I recommend you buy an iPod if you’re
interested in taking your audio and video with you.
My in-laws wanted a digital music player. Know-
ing I’m a gadget guy, they asked me what I would
recommend.
In my mind, answering this question is complicated

calculus. That’s because I’m aware of the many offer-
ings among music players. I know the iPod’s strengths
and shortcomings. I could have given them a disserta-
tion on all the available models of music players and all
the possible features they could get. After hearing all
that, my in-laws’ minds would surely be swimming with
a slew of seemingly disconnected facts and considera-
tions. They would have to make a long series of compli-
cated prerequisite decisions just to make the one
decision they cared about: buying a music player.
In answering their question, the lengthy dissertation
played inside my head, but what I said was this: “Get an
iPod. It’s the easiest to use. You’ll love it.”
And they do.
Easy Is Hard
This might be at once the most controversial and most
helpful money book you have ever read.
Why?
Because I’m going to give you very specific advice on
what to do to handle your money better and improve
your spending habits. I’m going to name names and tell
it straight.
For example, I’ll tell you to invest in index mutual
funds. If you’re having trouble choosing a company to
buy index funds from, go with Vanguard. You won’t be
disappointed. I’ll tell you never to buy an extended war-
ranty—ever. I’ll suggest what type of wireless cell phone
plan to get—or switch to. Where it’s impractical to give
specific brand names—maybe because offerings change

too quickly—I’ll tell you specifically, step-by-step, how
to determine for yourself how to choose.
The wonderful secret of personal finance nowadays
is much of it is “set it and forget it.” There are things
you have to do once and never bother with again until
your life circumstances change. You can put your bills
on autopilot and set up an investing plan and not worry
about it.
Taking decisive stands in advice-giving is risky, espe-
cially for a journalist like me who is accustomed to pro-
viding both sides of the story. And I’ll concede up front
that people’s financial situations do, in fact, differ. But
so many people are overwhelmed with the numerous
choices for spending and investing their money that they
freeze. It’s too easy to get the deer-in-the-headlights look
and do nothing at all. In that way, the massive financial
tomes that attempt to cover every option actually do a
disservice.
This is borne out time and again, as I read through
and respond to hundreds of e-mails every year from
readers of my “Spending Smart” newspaper columns
published in Tribune Company newspapers. These
readers don’t want to know what all the options are,
necessarily. They want quality advice on what they
should do. What specific action should they take?
An acronym we learned as children is appropriate
when dealing with money. It is KISS. It stands for Keep
It Simple, Stupid. With money, simple does not mean
unsophisticated. You can keep it simple and KISS your
money worries good-bye.
Ask any financial adviser about it: Some people just

want to be told what to do. They will not invest the time
and effort to learn about a subject and investigate all the
alternatives. They’re sitting ducks for rip-offs, bad
spending decisions, and, at best, money mediocrity.
This book will infuriate some people, those whose
livelihoods depend on making finances as confusing as
possible in the areas of investing, insurance, and
telecommunications, for example. It will infuriate some
companies whose products are not recommended in
favor of their competitors’ offerings.
However, it will help the average consumer take con-
trol of his or her money life with minimal effort, allowing
the person to make better spending decisions every day.
When Good Enough Is Good Enough

I don’t pretend to proffer only original ideas. After all,
details change but the basics of personal finance remain
the same throughout time. Writings from the Bible to
Benjamin Franklin visit the same themes about money.
My contribution is taking literally volumes of informa-
tion and boiling them down to what you need to know.
Granted, it’s what I think you need to know. And what I
think is based on what’s safe and what’s “good enough.”
I heard the concept of good enough expressed most
clearly when I was interviewing personal finance guru
Jean Chatzky about her book, Make Money, Not
Excuses. She didn’t invent the concept of good enough,
but that’s where I heard it, so I’m more than happy to
give credit.
“The truly great thing about ‘good enough’—and

the reason it is so powerful—is that it allows you to get
to the starting line in a way that waiting for the ulti-
mate, best possible result does not,” Chatzky writes.
Good enough means just that. Every money decision
doesn’t have to be the very, absolute best you could pos-
sibly do. Sometimes good enough is good enough. You
will accomplish your goals. Get it done and get on with
your life. After all, so many of us don’t want to devote
innumerable hours to dealing with our finances and
picking nits with our spending.
“Give me something appropriate and smart to do,
and I’ll be happy with that,” some people think.
Of course, other people are wired to always want the
best, to strive for ultimate excellence in all they do. This
works well in some areas of life, but not so well with
money.
To those people, I would contend that sometimes
good enough is, in fact, well above average. Go back to
the topic of index mutual funds. With index funds,
you’ll get decidedly average returns—essentially what-
ever a market index returns. Yet most people would do
far better if they invested in simple, boring index funds,
rather than pursuing elusive market-beating returns.
Instead of juggling a retirement portfolio of wide-rang-
ing and overlapping investments, most would be best
served in a low-cost target-date fund composed of index
funds. It’s simple, and you’re virtually guaranteed to do
better than most investors because index funds outper-
form two-thirds to three-quarters of actively managed
(stock-picking) funds. Index funds and target-date
funds more than qualify as “good enough.”
We need to do smart things with our money, but

we’ll drive ourselves crazy wading through thousands of
options in a hopeless quest for that absolute-best thing.
Sometimes good enough is good enough.
Is This Book Different from

Living Rich by Spending Smart?
My previous book, Living Rich by Spending Smart:
How to Get More of What You Really Want, covered a
lot of ground. It provided literally hundreds of tips
about spending. Feedback from readers was over-
whelmingly positive. Even true cheapskates seemed
thrilled to find tips they had never seen before.
I was struck by one poignant comment left by a
reader on the book’s Amazon.com Web page:
“I’m age 70. Living Rich [by] Spending Smart has
opened my eyes as to how much money I have thrown
away. I hate this book. It makes me ashamed of myself.
On the other hand, this knowledge will make living
entirely on Social Security a lot easier.”
Of course, the book’s goal was to inspire smarter
spending rather than induce shame. But the point is that
many people found it changed the way they think about
spending.
This book is different. Though it touches on some of
the same topics, it is altogether unlike the first one. This
book provides concrete structure and linear sequence to
the many money issues that too often seem to move like
wafting puffs of smoke in a breeze.
Instead of striving to deliver more tips, we endeavor

to visit fewer—only the important ones most likely to
be useful to you.
A bigger difference, however, is this book pushes
ahead, beyond spending. We talk about many aspects of
your financial life, such as improving your credit rating,
planning for retirement, and paying for kids’ college
expenses. Of course, we look at those areas with an eye
toward spending and saving smarter.
How to Use This Book

You, no doubt, already accomplished some of the
money tasks outlined in this book—maybe many of
them. However, I’m sure you’ll excuse me if I start each
topic from ground zero, assuming you’ve done nothing.
For example, I’ll tell you to get a will, so when you die
your survivors will have direction. If you already have a
will, check it off the list and move along. But being
reminded isn’t a bad thing. It might just jog your mem-
ory to complete that money task you’ve been meaning
to get to. It might list a useful Web site you’ve never vis-
ited. It might provide a philosophy that changes your
thinking about saving and spending money.
The Power of Three

This book uses the rule of threes by providing three main
tips for each subject. For some reason, human brains do
well with information that comes in packets of three. It
seems to be the ideal number. Think about it:
• Life, liberty, and the pursuit of happiness

• Location, location, location
• Sex, lies, and videotape
There are often three characters in a story: the three

stooges, the three little pigs, and the three musketeers.
Survivalists claim humans can live for three weeks with-
out food, three days without water, and three minutes
without air.
The rule of threes has been a comedian’s tool forever.
It’s why jokes start: “Three guys walk into a bar” and
“A priest, a rabbi, and a minister.”
• “How do you get to my place? Go down to the
corner, turn left, and get lost.”
• “I know three French words: Bonjour, merci, and
surrender.”
• “I can’t think of anything worse after a night
of drinking than waking up next to someone
and not being able to remember their name,
or how you met, or why they’re dead.” Laura
Kightlinger, entertainer
So, topics in this book endeavor to keep your to-do

lists to three tasks, keeping it as simple as 1-2-3.
This book doesn’t address every last money issue in
your life, but it does give you tools and ideas to save
and spend money smarter. You don’t need to implement
all of the advice immediately, but you do need to get
started today.
Chapter 1
Spending Smart Redux
What Is Spending Smart?
B
efore we proceed, I should define one phrase, so
we are on the same page—both figuratively and lit-
erally, as it turns out. The phrase is spending smart.
Spending smart is a specific philosophy for achieving
financial security without depriving yourself. It is not a
cheapskate plan. It’s about spending your money
smarter on things you’re buying every day anyway. It
abides by the notion that you can’t outearn dumb
spending. Just ask all the millionaire celebrities, profes-
sional athletes, and lottery winners who end up broke.
Let me repeat for emphasis: You can’t outearn dumb
spending.
Spending smart aims to plug the leaks of wasteful
spending and redirect money to things you truly care
about.
Spending smart can pervade every aspect of your
money life. It is so powerful that it can mean the differ-
ence between struggling and living rich.
Spending smart is important now more than ever.
With the meltdown of banking and financial systems in
13
the fall of 2008, credit became more difficult to get, the

stock and bond markets tanked, and consumers
clamped down on spending. All of a sudden, frugality
was not only hip and cool, but necessary.
And we have more marketing coming at us than ever
before—on the television, newspapers, magazines,
radio, Internet, and billboards, to name a few. This
bombardment of messages enticing us to buy stuff
means we have to say no. If we didn’t say no, we’d go
broke in no time flat. We have to say no literally dozens
of times a day. We have to say no so often that we can
become weak, weary, and vulnerable as consumers.
We also have available credit like never before.
There was a time when no money meant no buying. Not
today. These days, you can charge it today and pay for
it whenever. Saying no becomes that much harder when
we have enough credit to buy.
Spending smart is about making good decisions when
saying yes. It’s not always about spending less, but
squeezing more value from the money you’re already
spending. It’s not about deprivation. It’s about liberation.
So, before we dive into very specific advice in the
next chapter, let’s briefly look at what this notion of
spending is all about.
When to Spend Your Money

Money is only good for one thing—spending it. The
question is when you spend it. So, that’s how we’ll
break down topics in this book. The following provides
a brief overview.
Spending Smart Redux 15
When to Spend Your Money, 1-2-3

1. Today. Spend smarter on current expenses.
2. Yesterday. Pay debt.
3. Tomorrow. Save money for spending later.
1. Spend Today
Spending today encompasses your current expenses. It’s
so important because you make dozens of spending
decisions every day. You decide whether to buy or not
to buy, whether to purchase item A or item B. And you
decide to buy now or buy later. The sum result of all
these daily decisions determines whether you struggle or
prosper with money.
The secret to successful money management has not
changed throughout time: You must spend less on cur-
rent expenses than you earn. How do you do that with-
out depriving yourself? You spend your money smarter,
every day.
2. Spend Yesterday
Spending yesterday is a way of saying that you should
finish paying for stuff you bought in the past. In other
words, pay off debt. This is a powerful type of spending
and should be a priority, especially for consumer debt,
such as credit cards and auto loans.
Debt, used irresponsibly, can be insidious. Its
destruction goes far beyond dollars and cents. For many
people, debt creates a level of stress that makes the orig-
inal purchase entirely regrettable.
3. Spend Tomorrow
Spending tomorrow refers to saving and investing.
Many people seem to think that saving is different from
spending. Really, it’s just deciding to spend at some
point in the future, such as when your child goes to col-
lege or when you retire. Of course, this goes against our
very nature. As humans, we’re hardwired to consume
immediately. It’s instinctual. It’s how we evolved. So,
saving takes a lot of intellect and discipline. It requires
us to fight back against our inner caveman (or cave-
woman).
That’s why successful savers make it automatic.
They stop fighting their instincts and live in blissful
ignorance. For example, most people find automatic
paycheck deductions that go into their 401(k) retire-
ment plans quite painless. They don’t miss the money
going to savings. But sitting down every month and
writing a check to deposit into your IRA? That takes a
whole different level of discipline, especially over long
periods of time.
Regular saving and investing is important because
most people working regular jobs don’t have enough
hours in the day to build wealth from a wage or salary.
You have to force your money to make its own money,
whether through compound interest, stock-market
gains, investing in your own profitable business, what-
ever. It’s the only way people of average means will
build wealth.
Of course, these three concepts are intertwined. If
you can’t get a handle on daily spending, you can’t pay
off debt or save. If all your money is going to interest
payments on debt and unnecessary daily expenses, you

won’t have any to save. If you don’t save, you can look
forward to a retirement featuring such meals as ramen
noodles, Spam, beans and rice, pork and beans, and
Alpo.
Why Pay Attention to Spending?

Most personal finance books, including the get-rich-
quick books, all want to focus on one side of the house-
hold ledger—the earning side. “Get rich in real estate!”
“Become a millionaire day-trader!” “Wealth through
ostrich farming!”
But how do you accumulate a pile of cash in the first
place so you can take advantage of wealth-building
advice? You pay attention to spending. In the short
term, not spending a buck beats earning a buck every
time.
Why Pay Attention to Spending? 1-2-3

1. Magnitude. Saved money is more valuable
than earned money.
2. Speed. Cutting spending is quicker than earn-
ing money.
3. Control. You can do something about spend-
ing today.
These concepts about why spending is important

come from my previous book, Living Rich by Spending
Smart. But they’re so fundamental, they bear repeating.
The following descriptions tell you why.
1. Magnitude
You keep 100 cents of an unspent dollar but maybe 60
to 75 cents of an earned one, after taxes, Social Security,
and the other deductions take their bite from your pay-
check. Cutting out a $50-per-month cable TV bill is the
same as a $30,000-a-year worker getting a year’s pay
raise of 3.3 percent, or $1,000. Benjamin Franklin said,
“A penny saved is a penny earned.” But that was before
the era of income taxes. Today, a saved penny is worth
far more than an earned one.
2. Speed
Cutting spending is faster than earning money. You can
cancel an expense, such as your gym membership, and
start saving money today. You will be instantly better
off. But it takes a long time to change your income. It
might be months before you can get a pay raise at work,
and overtime hours might be sporadically available. The
only immediate thing you can do about income is to get
a second job that starts this week. Or, as many
Americans do, you can use fake income, such as a cred-
it card that gives you an illusion that you have more
cash. Of course, that just creates a crisis later on when
the credit card bill arrives.
3. Control
You have more control over spending than income. You
make dozens of spending decisions a day, from a morn-
ing mocha latte at Starbucks to whether you turn up the
heat an extra degree in your home. However, your deci-

sions about income are few on a daily basis, outside of
resolving to get up and go to work so you aren’t fired.
What to Spend Discretionary Money On

Discretionary spending is spending you have choices
about. You don’t have much choice to pay the mortgage
or the electric bill. But you do have choices about a sig-
nificant portion of your annual spending. It’s the coffee
and doughnut you buy each morning, the music you
download from iTunes, the greens fees for golf, or the
extra purse in that color you didn’t have.
What to Spend Discretionary Money On,

1-2-3
1. Things you care about.
2. Experiences.
3. Things that rise in value.
1. Things You Care About

Fundamental to the spending smart philosophy is reduc-
ing spending on things you don’t care about so you can
spend that money on things you do care about. This
might seem elementary. “Isn’t that what everybody
does?” you might ask.
Not really.
When is the last time you shopped for new home
phone service or insurance? Do you really care which
company provides your dial tone or pays your sur-

vivors, as long as they provide high-quality service?
Those two examples alone could be worth hundreds of
dollars a year. That’s money you could spend on some-
thing you need or want.
Think about work lunches. Many people would pre-
fer to eat the delicious leftover meatloaf from last
night’s dinner rather than go out to eat. They truly don’t
care about eating out for lunch. Paying for that restau-
rant or cafeteria lunch would be money poorly spent.
Yet, because they didn’t get around to packing that
meatloaf sandwich for work, lunch money trickled out
of their lives.
That waste is replicated over and over again, dollar
by dollar, day after day. Soon we’re a walking, talking
sieve of money leaks.
Everything has an opportunity cost. Opportunity
cost is what you can’t buy because you bought some-
thing else. You can’t go on the Caribbean vacation
because you refuse to bring lunch to work. It’s a trade-
off. It doesn’t matter how much money you earn, there
are always trade-offs and opportunity costs. I would
rather trade money spent on stuff I don’t care about
and, instead, spend it on stuff I need and want. I bet you
would, too. A sister concept is to measure the psycho-
logical value from a purchase, or how the purchase
makes you feel. That might seem like an overly touchy-
feely idea. But it’s real, nonetheless.
Some people derive a psychological benefit from
having a luxury wristwatch, for example. It might make
them feel a sense of accomplishment or superiority. If
they can afford it, people who get that extra feeling
might be spending smarter buying a brand closer to
Rolex than Timex. Other people get no psychological
boost from the brand of their wristwatch. An expensive
watch for them is money poorly spent.
2. Experiences
Did you know you could buy happiness? It’s true, if you
believe a slew of recent academic research. That
research has shown, time and again, that people are
happier when spending money on positive life experi-
ences, rather than on things.
The thrill of buying more stuff wears off in short
order. By contrast, the longevity of a great memory
improves over time. The other component to spending
for happiness is including people. Solo experiences, it
seems, don’t generate near as much joy.
So spend discretionary money on summer vacations
and weekend getaways, concerts, board games for the
family, and special dinners out (not routine ones).
Experiences appreciate, assets depreciate. Save on
the latter to get more of the former.
3. Things That Rise in Value

This is a tough one, but many wealthy people swear by
it. It’s wiser to spend your money on things that have a
chance to go up in value, rather than things that are sure
to plummet in value. In other words, try to do more
investing than consuming.
The most obvious examples are two of the biggest
purchases for any household: a house and a car.
Homes almost always rise in value over the long

term. The recent national housing crisis, which saw
home prices decline, is an anomaly. So, give the nod to
spending on education or sharpening job skills that will
lead to a higher salary. Invest in your own business and
buy mutual funds. All of those at least have a chance at
being worth more in the future than you spent on them.
That makes them worthy of consideration.
Of course, you’ll have to weed out spending money
on get-rich-quick schemes, from the state lottery to
pyramid schemes to no-money-down real estate.
QUICK TIP
If someone wants to sell you a program so you can
make big money like they’re making, pause a moment.
Think about it. Why would they put money, time, and
energy into developing a tape set or live presentation
instead of doing that thing that makes them big
money? It’s illogical, unless they’re truly being charita-
ble. More likely, they make their big money on selling
you the false hope of making big money.
By contrast, buying a new car or truck is a lousy

investment. It is certain to lose a ton of value the
moment you drive away from the car lot. A new car
loses about 30 percent of its value in the first year. Most
consumer purchases—from new electronic gadgets to
muffins in the morning to a new leather jacket—all lose
value quickly.
QUICK TIP
When buying something that will depreciate, imagine
what you could sell it for at a garage sale the next
day. A $15 music CD becomes 75 cents. An $80 cord-
less phone becomes $6. A $50 toaster oven becomes
$5. That puts the purchase in perspective in a hurry.
Of course, we all must buy many things that deteri-

orate in value. But if you can shift some spending from
consuming to investing, you’ll be wealthier for it.
Now that we’re on the same page philosophically,
let’s get down to the practical advice.
PART I
Spending Smart Today
Chapter 2 First Things First . . . . . . . . . .27

Chapter 3 Get FIT (Food, Insurance,
Telecommunications) . . . . . .63
Chapter 4 How to Buy Stuff . . . . . . . .105
Chapter 5 Green Means Green . . . . . .145
25
Chapter 2
First Things First
Getting Started
Y
ou can take a number of supereasy steps to get
your financial life in order. For some tasks, it’s a
matter of actually doing them and crossing them
off your list. Others require periodic maintenance.
Often, these fundamentals alone will put you on a
path to money success. It’s like learning to golf. If you
don’t have a proper grip and stance, your swing is
doomed. Children can’t read until they know the alpha-
bet and what sounds letters make. You’ll be an unsuc-
cessful driver until you learn about the accelerator, the
brake, and the rules of the road.
These fundamentals are always taught—and
learned—the same way, step-by-step, in a process as
easy as 1-2-3.
Taking Stock
Nobody is starting this minute with a clean financial
slate. We already have a lot going on. We’re spending
and saving every day. So, it’s time to take stock.
27
Taking Stock, 1-2-3

1. Take a snapshot. Find out where you stand
now.
2. Look back. Track previous spending to see
where your money goes.
3. Look ahead. Set specific goals for where
money will go in the future.
Imagine your money life is moving along a timeline.

All you own and all you owe is constantly changing,
with every swipe of your debit card and every deposit in
your retirement plan.
It’s important occasionally to take a snapshot of
where you are now, a freeze-frame in the motion picture
that is your money life.
In the introduction, I wrote about how receiving
financial advice is like taking driving directions from a
GPS navigation device in your car. No matter how good
the machine is, it can’t give you directions to where
you’re going until it knows where you are now. It pin-
points your location by searching for and locking in
satellites as it boots up.
Well, it’s time to boot up with your finances and find
out where you are. It’s the first step in getting to where
you want to go.
First Things First 29
1. Take a Snapshot
There are two simple exercises to hone in on where you
are.
First, add up all the money you ever earned in your
life. I first saw this task in the book Your Money or
Your Life by Joe Dominguez and Vicki Robin. The
book is great, but the authors go into excruciating detail
with this exercise. I think you can get close with just a
little effort.
If you have worked for employers your whole career,
you can total your lifetime earnings fairly accurately
from your annual Social Security statement, which
details how much you earned each year. The statement
comes a few months before your birthday. If you need a
copy, go online to www.socialsecurity.gov/statement to
have one mailed to you, or call 1-800-772-1213.
Also, refer to federal income-tax returns. If you’ve
worked at the same employer for a long time, the
human resources department probably has a record of
your earnings. Estimate other income, such as gifts of
money, family loans that were forgiven, money earned
as a teenager, even significant gambling winnings.
This trip through your earnings history should be
illuminating. It lets you know you have earned signifi-
cant money over your lifetime. This counters any notion
that you don’t have enough money to save or enough
money to manage.
The second step is to figure out what you’re worth
today, specifically your net worth. If you liquidated
everything in your life—sold everything and paid off all
your debts—what would you have to show for it?
Create two columns on paper: all you own (assets) and

all you owe (liabilities).
For example, money in your retirement plan is an
asset. Furniture and jewelry are assets. Don’t stress
yourself out trying to get superaccurate values. Just give
items ballpark estimates. Meanwhile, credit card debt is
a liability, as are student loans and family loans.
If you’re making installment payments on something
you own, it might be both an asset and a liability. For
example, if you own a home with a market value of
$300,000, that goes in the assets column. If your mort-
gage is $225,000, that goes in the liability column. The
result? A net $75,000 is added to your net worth. It’s
similar if you’re making car payments, although some
people actually owe more than the vehicle is worth. If
so, the vehicle actually subtracts from total net worth.
So, now you have two numbers: your total lifetime
earnings and your net worth.
The big question to ask yourself is, “With all the
working and earning I’ve done over the years, what do
I have to show for it?” A lot, or too little?
Of course, much of that earned money went to
necessities that added little or nothing directly to your
net worth—food, clothing, vacations. Meanwhile, some
of your assets have appreciated, such as your retirement
plan or the value of your house.
If you’re still in your working years and your net
worth roughly equals your lifetime earnings, you’re
doing really well. Even if your net worth is a quarter to
a half of your lifetime earnings, you’re not in bad shape.
The ratio should improve to one-to-one or better as you

approach retirement, says Liz Pulliam Weston in Easy
Money: How to Simplify Your Finances and Get What
You Want Out of Life.
But if your net worth is zero or negative, you might
honestly ask and answer, “With all I’ve earned, what do
I have to show for it? Nothing.”
The big question is, “Now that you have a snapshot
of where you are with money, what will you do from
here?” Will you do things to add to your net worth,
such as save and invest? Or, will you buy more con-
sumer goods and services, which subtracts from your
net worth? After 10 more years of earning money, will
you have more to show for it than during the past 10?
A wealth formula from the best-selling book The
Millionaire Next Door provides an interesting exercise.
It offers a measuring stick for how well you are accumu-
lating wealth.
Net worth = your age times your income, divided by 10.
A 40-year-old with a household income of $60,000

should have a net worth of $240,000. And that’s just to
be what the authors called an “average accumulator of
wealth,” AAW. To be what the authors called a PAW,
prodigious accumulator of wealth, you’ll need twice
that much net worth.
A basic philosophy is one often attributed to
American philosopher Bill Earle: “If your outgo exceeds
your income, then your upkeep will be your downfall.”
2. Look Back
Now that you’ve explored your earnings compared with
your wealth, let’s turn to spending. Minding your
spending isn’t a substitute for trying to raise your
income. You still need to do that. But, as I highlighted
previously, spending is where you have the most control
right away.
The best way to get a handle on spending is to track
it. I’m not talking about doing a full-fledged budget.
Instead, just track your expenses and categorize them.
Start by tracking expenses for two months. It does-
n’t matter how you do it. You can use pencil and paper,
a spreadsheet, or software programs such as Quicken or
Microsoft Money. You can keep a notepad with you at
all times to jot down spending, or compile store receipts
with monthly bills less often. If you mostly use debit
and credit cards instead of cash, a convenient list of
transactions will be on your statements.
Then categorize the expenses. Use categories that fit
your spending. Attempt to get a little detail on big
expenditures, such as food. Split it into two subcate-
gories, groceries and dining out.
QUICK TIP
Several Web sites now offer to help you track spending.
Among the most popular is Mint.com, which is free
and worth considering. It can automatically import
transactions from many bank accounts, credit card, and
investment accounts. It also suggests vendors that could
save you money. Similar sites are Wesabe.com,
Yodlee.com, Buxfer.com, and Geezeo.com.
With these categorized totals in hand, this is where

you face the ugly reality that you spend $534 a month
on dining out or that, on average, you spend $156 a
month on shoes. You’re probably already familiar with
your once-a-month expenses, such as your electric bill
and car payment. The more shocking figures will be the
little money leaks that add up. “Do I really spend $50 a
month on bottled water, $40 a month in bank fees, and
$60 a month on DVD movies?”
The point is to identify where your money has been
misspent in the past so you can redirect it toward your
priorities in the future. How do you know if it’s been
misspent? That’s the beauty. You decide.
3. Look Ahead
“Speaking of priorities, how do I get myself a set of
those?”
You set spending goals.
As the saying goes, “If you aim at nothing, you will
hit it every time.” Abraham Lincoln said, “A goal prop-
erly set is halfway reached.” And Benjamin E. Mays, a
mentor to Martin Luther King Jr., said, “It must be
borne in mind that the tragedy of life does not lie in not
reaching your goal. The tragedy of life lies in having no
goal to reach.”
“Yeah, yeah, yeah,” you might be thinking. “Set
goals. Next chapter, please!”
Before you dismiss the importance of setting goals
about money, read on.
Goals give you direction and can provide peace of
mind. They even have application in daily life. With all
the marketing bombarding us every day and fueling our

wants, a set of goals help us to say no. They remind us
there’s something we want more than the tempting pur-
chase right in front of us.
So, the antidote for leaky, undisciplined spending is
having goals.
Developing spending goals is not difficult.
Brainstorm the big, expensive stuff you want to buy and
do. Write them down, both long-term goals and short-
term ones. The only rules are that each objective must
have two components, a dollar figure and a date for
completion. We’ll talk about some of these in-depth
during future chapters, but the following are some typ-
ical goals:
• Eliminate consumer debt. Everybody knows you
want to get rid of debt so you can stop paying
interest. But some of the most valuable benefits
are nonfinancial—less money stress, a sense of
freedom, and possibly more relationship harmony
with your significant other. High-interest credit
card debt should be an urgent priority. Mortgage
debt and low-interest student loans are a lower
priority to pay off quickly.
• Build an emergency fund. Creating a rainy-day
fund can be a two-step process. The long-term
goal is a fund equal to three to six months worth
of bare-bones living expenses, such as food, shel-
ter, and utilities. A shorter-term goal might be to
stash away $1,000 or $2,500. Then, it’s not a cri-
sis or a time to incur debt when the car needs new
tires at the same time the roof needs repairs.
• Buy a house. Be clear about what price you will

pay for a house, which lets you estimate an
amount for a down payment. If you’re already a
homeowner, perhaps you desire a vacation home.
If so, it is unlikely to become a reality unless you
begin planning for it.
• Take a vacation. Vacations are optional, but don’t
totally dismiss the value of shared experiences
with family and friends. Paid-for vacations are
better. I recall a Parade magazine cartoon that
showed a couple sitting on lounge chairs aboard a
cruise ship. Suntan lotion and an umbrella drink
rested beside them. The guy turns to his wife and
says, “This would be a lot more relaxing if we
could afford it.”
• Complete home fix-ups. For homeowners, list
your major home-improvement projects and
home-furnishing purchases in priority order.
• Buy a vehicle. You will replace your car or truck.
It’s just a matter of when. Start talking about the
type of vehicle you might get next and when. That
should give you ample time to start saving a sub-
stantial down payment, or better yet, to pay in
cash. A slightly used car is a better value than buy-
ing new.
• Retire. Past generations often had defined pen-
sions, the kind where they guarantee you a check
every month regardless of what the financial mar-
kets are doing. But, today, it’s your job to figure
out how to squirrel away hundreds of thousands,
and maybe millions, of dollars, before you quit
work. What type of retirement do you foresee?
And when do you expect to gear down your
working life? Where will you be living in retire-

ment? Do you anticipate knocking off work at age
70 and being a homebody or quitting at age 55
and traveling the world? Those plans require
vastly different amounts of retirement savings.
Run through scenarios with easy-to-use calcula-
tors online at such sites as Dinkytown.com or
ChooseToSave.org. Estimate the nest egg you’ll
need. From that, you can back into a single dollar
figure: the amount you should be saving each
month for the type of retirement you want.
• Kids’ college. Although important, saving for
kids’ college expenses is a lower priority than
most. You can often get a low-interest loan for
college expenses, but nobody lends money for
retirement, for example. Open a 529 savings plan
and start contributing regularly, even if it’s only
$50 a month. As you free up money in your life,
revisit this goal and raise your contributions. Few
families will be able to fund all their other savings
goals and save 100 percent of college tuition. Do
what you can. Learn more about college savings
plans online at Savingforcollege.com.
Establishing goals is only the start. The rest is fol-

low-through. Allocate regular and automatic savings
amounts toward each goal that needs to be started now.
We’ll talk more about that in the chapters ahead.
If the goal amounts seem intimidating, break it down
further. For example, don’t think of saving $2,500 for
an emergency fund. Instead, you’re saving $6.85 per
day for a year. Opening separate fee-free savings
accounts for some top goals, such as a car fund, can
help improve your focus on the goal. Set up an auto-

matic draft from your checking account to fund each
goal. Your money is finite, so you might have to delay
funding lower-priority goals until ones that are more
important—or more immediate—are either under way
or completed.
You should also keep close track of your progress
toward achieving the goals, regularly revising both the
dollar figures—upward, we hope—and time frames—
sooner, we hope.
Then, next time you’re tempted with an impulse pur-
chase, you’ll have a reason to say no. That’s fundamen-
tal to spending smart.
Estate Planning
Nobody wants to consider their own demise, but death
planning is part of being an adult.
Estate Planning, 1-2-3
Make an appointment with an estate-planning

attorney to draw up or update the following
documents:
1. Will.
2. Durable power of attorney for finances and
for health care.
3. Living will (pull-the-plug papers).
“Isn’t this a book about saving money?” you might

be thinking. “Why is he telling me to pay an attorney to
draw up these documents?”
You could use lower-cost alternatives, certainly. You
can try to write a will yourself with the help of books.
You can write it with the help of a computer software
program. In fact, a program called Quicken WillMaker
Plus by Nolo generally gets rave reviews. You could buy
the Will & Trust Kit sold by personal finance guru Suze
Orman or use such Web sites as itsmylife.com and
LegalZoom.com.
But sometimes it just makes sense to cough up the
money and make sure it’s done right. This is one of
those times. Consider the issues: Who gets your money
if you die, who gets your kids if you die, who’s going to
pay the bills if you’re physically unable, and should doc-
tors keep you on artificial life support?
Rules vary by state on this stuff. For example, do
you know how many witnesses to the signing of a will
your state requires? If your life is the least bit compli-
cated—for example, estranged family members,
blended families, a special-needs child—these docu-
ments become all the more important. A good attorney
will walk you through all the scenarios, including many
you might not have thought about.
In short, spending a few hundred dollars for an
estate-planning attorney to create these documents is
spending smart. There’s no magic way of choosing an
attorney. Your state bar association will certainly have
a list. But you might ask for recommendations from
friends, relatives, and other professionals you use, such
as an accountant.
1. Will
A will is often the centerpiece of estate planning. Wills
aren’t only for rich people. A will dictates who gets your
money and property if you die. It dictates who will care
for your minor children. If you die without a will, the
state decides.
If you’re married, you might think it’s simple:
Everything—the house, money, and kids—goes to your
spouse. But what if you both die at the same time?
Think car crash. It’s not so clear-cut.
If you’re paying by the hour with an attorney, you
can save money by talking through some scenarios and
making decisions before you enter the law firm’s offices.
If you have children, you need to pick a guardian. You’ll
need to decide on an executor of the estate, which is the
person who manages the assets right after you die. List
your assets and liabilities and decide which beneficiary
gets which asset.
If you already have a will created years ago, whether
by an attorney, software program, or some other way, it
might be worth having an attorney review it again,
especially if your life circumstances have changed signif-
icantly since the will was drafted.
QUICK TIP
This estate-planning move is absolutely free. Make
sure all your financial accounts have up-to-date pri-
mary and secondary beneficiaries. These accounts
include retirement plans, bank accounts, and life
insurance policies.
2. Durable Power of Attorney for

Finances and for Health Care
If you’re incapacitated, you’ll need someone to make
decisions about your money and your medical treat-
ment. These are really different issues and can be differ-
ent people, but you should proactively decide who it
should be in both cases. These documents are generally
part of a package of estate-planning documents an
attorney will draw up for you.
3. Living Will
A living will addresses the scenario that, for some, might
be worse than death. You’re being kept alive artificially,
being fed through tubes and your quality of life has
diminished to near nothing. What type of end-of-life care
do you want if you’re terminally ill or incapacitated?
Do You Need a Living Trust?
There’s nothing wrong with a revocable living

trust, which is often touted as an alternative or
supplement to a will. This legal document
allows you to transfer assets into a trust while
you’re living, which can help bypass the court
process called probate after you die. It might
save money on legal and court fees during pro-
bate—which is expensive in some states, such as
California—and make the process quicker and
more private.
But living trusts are oversold and cost much

more to prepare than a will. A lawyer-prepared
will might cost $300, whereas a living trust
might cost $3,000, although you can prepare a
trust yourself. Trusts also require more mainte-
nance than a will. For example, you have to
transfer everything you own—personal property
you have now and will buy in the future—into
the trust. That can be a lot of paperwork, both
when setting up the trust and going forward.
If you’re considering a trust, have a good reason
to get one. What is the cost now, and what are
your heirs likely to save later, when you die? And
again, if you want a trust, consider having it
drawn up by an attorney, instead of a salesper-
son selling boilerplate trusts.
Identity Theft
Identity theft is when someone illegally uses your per-
sonal information, such as a Social Security number or
credit card number, usually for financial gain.
Most important about the advice here is what not to
do. For example, unless you’ve been a victim of identity
theft, you don’t need to pay for credit monitoring.
Monitor your credit yourself by accessing your credit
reports for free, as we’ll talk about in Chapter 6,
“Credit When Credit’s Due.”
Nobody needs to pay for identity theft insurance,
which just reimburses you for incidental costs of clean-
ing up identity theft. It might reimburse you for the
costs of mailings and phone calls, and perhaps lost

wages and attorney fees. But few victims of identity
theft actually incur any out-of-pocket expenses.
Instead, focus on these three, simple steps to help
prevent identity theft.
Identity Theft, 1-2-3

1. Be guarded. Think twice about divulging per-
sonal information.
2. Buy a crosscut shredder. Shred mail and doc-
uments containing personal information.
3. Opt out. Stop credit card solicitations by
going online to OptOutPrescreen.com.
These three steps are easy and relatively inexpensive,

especially compared to some of the pricey identity-theft
products and services out there.
1. Be Guarded
This might seem like obvious advice, but it’s by far the
most important. The most dangerous type of identity
theft is when a thief opens a new credit account in your
name. When this happens, it’s often because a thief has
your Social Security number. So, don’t give out your
number unless there’s a good reason. For example, it
seems every doctor’s office wants you to fill out a bunch
of paperwork, which often includes your Social Security
number—it seems, as a matter of routine. I usually just
leave it blank or provide the last four digits of my num-

ber. I’ve never had a problem. If you try that and the
doctor’s office insists on getting the full number, at least
get a good explanation as to why.
Less obvious might be safeguarding your informa-
tion by using fewer personal checks. Think about it. A
check has your name, address, and bank routing num-
ber. That’s everything a thief would need to empty your
account. Instead, pay by credit card and electronic pay-
ments. And if you must write a check that you will mail,
avoid putting it in your mailbox for pickup. A thief
might pluck it out of your box before the postal worker
does.
2. Buy a Crosscut Shredder

You should be able to find a good shredder for less than
$50. The finer the confetti it makes, the better. Avoid
ribbon shredders that cut into long strips. Those pieces
can be reassembled by a thief.
Regularly shred all credit card offers, so a thief does-
n’t pick an application out of your trash and steal your
identity. Shred documents that list both your name and
account number, especially your Social Security number.
3. Opt Out
Stop many unsolicited credit offers by visiting
www.OptOutPrescreen.com or calling 1-888-5-
OPTOUT. This will help prevent a thief from stealing a
credit card application from your mailbox and signing up
for a card. You can opt out for five years online or per-
manently by mail using a form available at the Web site.
While you’re at it, opt out of junk mail at www.dma-

choice.org. You must renew after five years. And stop
unwanted catalogs at www.catalogchoice.org. You’ll
reduce paper waste and save a few trees, while reducing
unnecessary spending temptations.
And post your telephone number on the National
Do-Not-Call Registry run by the Federal Trade
Commission. Sign up online at www.donotcall.gov or
call 1-888-382-1222.
For more ways to reduce junk mail, see “Fact Sheet
4: Reducing Junk Mail at the Privacy Rights
Clearinghouse,” at www.privacyrights.org.
What about Fraud Alerts and Credit Freezes?
Many people try to safeguard their credit files

as an identity-theft prevention measure, hoping
to thwart thieves attempting to open new credit
accounts in their name. Two of the main tools
are fraud alerts and credit freezes.
In short, fraud alerts are a waste of time. Credit
freezes are great if you think you might be at risk
for identity theft.
Fraud Alerts
Fraud alerts are red flags in your credit file. They
are notations that suggest a creditor should
double-check the identity of the person apply-
ing for credit.
You can place fraud alerts on your credit

reports for free by contacting a credit bureau.
Ideally, you should only need to contact one of
the three. It is supposed to forward the request
to the other bureaus. However, evidence shows
that this doesn’t happen all the time. So, if
you’re going to place fraud alerts on your credit
files, contact all three bureaus:
G TransUnion: 1-800-680-7289
G Equifax: 1-800-525-6285
G Experian: 1-888-397-3742
Use your cell phone number as the fraud-alert

contact number. That way, if you’re applying
for credit, the creditor can call to confirm your
identity quickly, no matter where you are.
However, there are problems with fraud alerts.
First, alerts expire every 90 days. So, you need to
continually renew fraud-alert requests. This is
essentially what the heavily advertised LifeLock
and similar services do for you.
Second, creditors are not required to double-
check identity just because there’s a fraud alert
on file. It’s merely a suggestion. So, your effort
might be wasted.
Alerts were meant to be used by victims of iden-
tity theft. However, because consumers can place
free 90-day alerts on their credit files, many peo-
ple implemented fraud alerts as a preventative
measure—again, some through services such as
LifeLock. As a result, fraud alerts became useless

because many creditors ignored the warnings.
It’s like the fabled boy who cried wolf. So, often,
the alert didn’t really signify a potential identity
theft. After a while, creditors started ignoring the
warning.
Third, you might have a hassle getting on-the-
spot credit, not only for credit card applica-
tions, but also for signing up for a wireless
phone plan, for example. If the creditor pays
attention to the fraud alert, it will contact you
before approving the application.
Credit Freezes
A credit security freeze is far more restrictive
than a fraud alert. If you place a freeze on your
reports, no creditor can access your credit file
until you “thaw” it—provide permission by sup-
plying a personal identification number that
unlocks the reports. Unlike an alert, freezes
don’t expire every 90 days. Most freezes are
permanent until you lift them, whereas others
are good for seven years. For state-specific
information on security freezes, go online to
FinancialPrivacyNow.org.
The distinction between fraud alerts and credit
security freezes is the difference between a bur-
glar alarm and an impenetrable door lock. One
tells you to worry about a thief; the other never
allows the thief in.
But, there are hassles. Most people have to pay

a fee every time they freeze their credit and
again when they thaw it. A typical fee is $10 per
credit bureau, or $30 to place a freeze with all
three bureaus.
And, your credit is locked down tight. So, you
won’t get on-the-spot credit until you thaw it.
That also means a potential employer might
not be able to run a credit check until you thaw
your credit, at least with the bureau that it uses.
This delay problem seems to be getting better,
however. In late 2008, the credit bureaus were
lifting freezes in about 15 minutes, instead of
the three business days called for in many state
statutes.
If I had a reason to believe my personal
information was compromised, I would use a
credit freeze. Or if it helps you sleep at night, go
for it. Otherwise, I wouldn’t bother. Again, a
fraud alert is pretty useless. Don’t bother. And
definitely don’t pay any company to place fraud
alerts for you.
Banking
Not that many years ago, you would choose a bank
from the few available in your town or city. You visited
the bank and filled out paperwork to open new check-
ing and savings accounts. To become a member of a
consumer-friendly credit union, you had to work for an
employer affiliated with that credit union.
Today, things are far different. For one, the choices

are so much broader. You can choose among hundreds
of banks across the country. You can open an account
by filling out forms on the Internet and electronically
transferring money into the account, which isn’t as dif-
ficult as it sounds.
As for credit unions, most people nowadays qualify
for at least one.
No matter what accounts you investigate, keep one
main criterion in mind: No fees! Or as few as possible.
You shouldn’t have to pay a bank to hold your money.
The implied deal is this: They get use of your money. In
return, you get use of a bank account and some meager
amount of interest. Obviously, a fee for bouncing a
check is reasonable. But so many others just aren’t.
Here’s a generalization that will draw criticism, but
it’s true most of the time: The huge national banking
behemoths are probably not the right bank for you, or
any consumer. The fees are likely to be numerous and
expensive, and the service is likely to be lousy. And as
we saw with all the bank failures and bailouts during
the financial crisis of 2008 and 2009, big banks are cer-
tainly no safer.
Get the Bank Accounts You Need, 1-2-3

1. Get a no-fee checking account.
2. Set up at least one high-interest online bank
account.
3. Join a credit union.
1. Get a No-Fee Checking Account

Checking accounts are probably your most important
account. A checking account is your command center,
where all the action is. Money is coming in and going
out every week. It’s also where you can get ripped off
with a plethora of bank fees. So, it’s important to get a
suitable account that’s not going to cost you money.
When the first priority is to limit fees, make sure you
get a free checking account, which means no monthly
charge and no minimum balance, unless you’re certain
you can regularly meet that minimum balance require-
ment. You should also have unlimited check writing and
free use of your debit card, whether you use a PIN code
or sign a sales slip. You can even find accounts that
don’t charge ATM fees for using the wrong bank’s teller
machine. Others will rebate a certain dollar amount
each month for using “foreign” ATMs.
Here are criteria you might judge a bank on, when it
comes to checking accounts:
• Online bill paying
• Interest on balances
• Overdraft protection
• Unlimited check writing
• Free linked accounts
• 24-hour automated banking
• Free or discounted check printing
• Nonbank ATM fee rebates
• E-mail alerts
• Debit rewards card
• Downloads to Quicken or Microsoft Money
• Mobile banking services
As of this writing, a new online tool can help. It’s at

FindABetterBank.com. There, you answer questions
about which features of a checking account are impor-
tant to you. The Web site suggests a bank for you.
Bankrate.com, a generally good financial Web site, also
has a tool for choosing a checking account.
Try not to fixate on getting an interest-bearing
checking account, at least when interest rates are so low,
as they have been for years. Even if a bank paid a
healthy 2 percent on checking, that’s only $30 in inter-
est per year on an average balance of $1,500. Fees could
quickly demolish any interest earnings. Besides, banks
regularly change the interest rates they pay on accounts,
so it shouldn’t be your highest priority.
Rewards Checking
If you’re the type of person who must make the

most interest you can, you can try a rewards
checking account, which pays about 6 percent
interest on balances up to $25,000 and offers
free online bill paying and no ATM fees. But
there are catches. The primary requirement is
you have to make 10 debit-card purchases per
month. Not only that, but you must also use
your card as a credit card in which you sign for
the purchase, instead of using a PIN code. You
also have to create at least one direct deposit
into the account and receive an electronic state-
ment instead of a paper one.
How can banks afford to pay such a higher rate

of interest? Banks clean up on merchant fees for
signature-based debit-card transactions, so
they share that with you in the form of a higher
interest rate. Compare rewards checking
accounts at HighYieldCheckingDeals.com and
CheckingFinder.com.
Because checking accounts are so integral to your

financial life, switching accounts can be a headache.
That’s especially true if you have a number of automatic
deposits and bills paid directly from your checking
account. To help, many banks are offering switch kits,
which provide some hand-holding through the process
of opening the new account and closing the old one.
Is it worth changing checking accounts? Look back
at all the fees you paid over the past year. The size of
that dollar figure will tell you.
Figure 2.1 shows averages for some of the most com-
mon checking-account fees.
$2: Most common ATM surcharge

$28.95: Average bounced check fee
$11.97: Average monthly service fee on interest-
bearing accounts
$3,461.84: Average balance needed to avoid fees on
interest-bearing accounts
Source: Bankrate.com survey 2008
FIGURE 2.1 Checking-account fees by the numbers

BANKING QUICK TIPS

• Fee-free cash. If you can’t find an in-network
ATM, look for a nearby supermarket that will
give you cash back on debit-card transactions.
Buy something small that you would have bought
anyway. Make the purchase using your debit
card, enter the PIN code and get your cash fee-
free.
• Cheap checks. Instead of ordering books of
checks through your bank for $25, order them
online for less than $10. See Walmartchecks.com,
Checksinthemail.com, CheckWorks.com, and
Checksunlimited.com.
2. Set Up at Least One High-Interest

Online Bank Account
This is where you might want to keep your emergency
fund, next-car fund, and other short-term savings. See
Chapter 7, “How to Save Money,” for strategic ways to
use these accounts.
The idea is to earn a little interest while the money is
parked for a relatively short time, for example, less than
five years. That’s as opposed to investing, where the
goal is long-term growth of the money.
You might want to set up more than one savings
account, each earmarked for a specific purpose. I have
one for an emergency fund and one for home improve-
ments, for example.
Good advice on savings is easy: Shop by rate as long

as the bank is insured by the Federal Deposit Insurance
Corp. (FDIC). However, you should determine whether
it’s an introductory rate that drops quickly after a cer-
tain number of months.
The highest rates are offered in money market
accounts and online-only banks. Bankrate.com has a
robust list. If you don’t want to do research from
scratch, go with EmigrantDirect.com, INGdirect.com,
or HSBCdirect.com. These online-only banks regularly
have among the highest savings rates in the country.
A minor drawback of these savings accounts is you
must transfer money into and out of the accounts elec-
tronically, which isn’t as scary as it sounds. It’s basically
providing a bank routing number, which is one of the
groups of numbers on the bottom of your paper checks.
The drawback is that it could take a couple of business
days for the transfer of money to go through. In most sce-
narios where you’ll be depositing and withdrawing money
from a savings account, that shouldn’t be a problem.
FDIC Rules: Is My Money Safe?
It’s unusual, but banks can fail, as we now

know all too well after the financial crisis.
However, if the bank is FDIC insured, your
money is safe up to $100,0001 per person on
the account at a single institution. If an account
is held jointly by a husband and a wife, they
each are insured for $100,000, for a total of
$200,000.
If you have a lot of money to sock in an

account, a good strategy is to deposit about
$90,000 per person per bank. That way, your
principal of $90,000 plus its interest will be
insured. Certain retirement accounts are
insured up to $250,000 per owner, per insured
bank.
For more information, see fdic.gov/consumers.
There’s so much competition among banks,
there’s no reason to get an account without
FDIC deposit insurance.
3. Join a Credit Union

Credit unions might be the perfect mix of favorable
rates and personal service. Credit unions, which are not-
for-profit, can offer good rates because customers are
the shareholders. Credit unions are affiliated groups of
people who pool their money and lend it to each other.
Unlike banks, they don’t have divided loyalties—trying
to serve a customer at the same time as boosting profits
and the stock price for shareholders.
Credit unions are exempt from paying federal
income taxes, which allows them to be very competi-
tive, despite being much smaller than the megabanks.
Of course, that makes the banking industry very
grumpy. It claims those advantages allow large credit
unions to compete unfairly with traditional banks. But
the advantages can be a boon for consumers.
Traditionally, the major catch was qualifying for

membership in a credit union, through your employer,
for example. But nowadays, more people than ever are
likely to qualify to join at least one credit union—and
probably qualify for several. A 1998 law loosened mem-
bership requirements for credit unions. So you might
qualify just because you live in a certain county or are a
member of a certain church. To find out whether you
qualify to join a credit union, ask your employer or
family members who belong to a credit union, or go
online to credit union search sites, such as
FindACreditUnion.com and www.ncua.gov/index-
data.html.
Most credit unions require a small savings-account
deposit—not a fee—to join. It could be as low as $5 for
a lifetime membership. That means you retain member-
ship even if you leave the employer, geographic region,
or association that qualified you to be a member.
Credit unions are probably best for borrowing. Auto
loans tend to be a great deal, and credit unions might be
the only place you can get a personal loan. But you
might find the credit union is a good answer for check-
ing and savings, too. Credit union deposits are pro-
tected by the National Credit Union Administration
with the same protections as FDIC-insured deposits at
banks.
Bill Paying
Now that we’ve gotten some big-picture stuff out of the
way, let’s drill down to the daily logistics of handling
money—more specifically, paying the bills. The first rule
of bill paying should go without saying. It is, well, to

pay your bills. If you’ve ever been slapped with a late
fee, you know how punitive they can be. And nowa-
days, missing payments can damage your credit rating,
which can make life more expensive in a wide host of
ways. So, pay your bills on time, every time.
That said, we can move on to how you pay bills.
The usual bill-paying process—waiting for a bill to
arrive, writing a check, and mailing off the payment—is
one of the worst methods of paying bills today. The old
method is more expensive, more hassle, and more sus-
ceptible to fraud and identity theft.
In short, efficient bill paying means moving from pen
and paper to keyboard and computer.
Bill Paying, 1-2-3

1. Use direct deposit.
2. Automate bill paying.
3. Prioritize in a crisis.
1. Use Direct Deposit

If you automate nothing else, at least have your pay-
checks and other regular income, such as Social Security
payments, deposited automatically into a bank account.
It cuts down on the time and hassle of going to a bank
or teller machine. And you don’t have to worry about
misplacing the check. Most important, it gets money
into your account quickly, which could help you avoid
fees for overdrafts.
If you work for an employer, your human resources

or payroll department can probably help you get signed
up for direct deposit. You’ll need the bank-routing num-
ber for the account you want money deposited into.
2. Automate Bill Paying

You can use three main ways to pay bills automatically.
Not only will you ensure bills are paid on time, you
avoid the hassle and expense of checks, envelopes, and
postage. The average consumer pays 11.5 bills per
month, according to a survey by Harris Interactive and
the Marketing Workshop. And we Americans spend
about 22 hours a year paying bills, according to the U.S.
Bureau of Labor Statistics.
The first way to pay automatically is for trusted pay-
ees, such as your mortgage company. And you don’t
even have to use the Internet. Set up an automatic
monthly withdrawal, or debit, from your checking
account. You supply the checking-account number and
the payee automatically withdraws money when the bill
is due.
You’ll have peace of mind knowing that important
bills are being paid—your lights won’t go dark because
you lost the electric bill. If you’re wary of direct debit,
dip your toe in the water by putting one bill on auto-
debit—your mortgage or cable TV bill, for example.
Once you see how easy and safe it is, you’ll want to put
as many of your recurring payments on automatic debit
as you can. Of course, you must make sure there’s
enough money in the account when this withdrawal is
made or face insufficient funds penalties. Maintain a
cash cushion in your checking account and sign up for
overdraft protection. That’s where a bank links your

checking account to a savings account, line of credit, or
credit card. Overdrafts, if they occur, are automatically
funded by these other accounts, avoiding a costly over-
draft penalty.
The second way to pay a recurring bill is with a
credit card, if the vendor will let you. This can be espe-
cially good when bills are charged to a rewards credit
card, which pays you back a small percentage of your
purchases in the form of cash, airline miles, merchan-
dise, or other perks. See Chapter 6 for details.
Automatic charges to a credit card are also good for
merchants you don’t fully trust. That’s because credit
cards offer more robust consumer protections than
direct-bank debits do if a dispute arises.
A big caveat with this method, however, is this: If
you don’t use credit cards wisely, meaning you pay off
the balance every month with no exceptions, don’t use
this method. You’ll end up paying far more in interest
charges than the convenience is worth.
Automation Drawbacks
A problem with automating your financial life is

the curse of recurring payments. That involves
regular charges for products and services you
don’t want or need anymore. They include gym
membership, video-rental club, wine-of-the-
month club, satellite-radio subscription, and
premium TV channels. Because those payments
are automated, it’s easy to do nothing and be
needlessly charged month after month for serv-

ices you don’t use. Even if the payment is auto-
matic, continue to review your bills monthly
and evaluate whether discretionary expenses are
worthwhile.
Similarly, you could become complacent about
checking monthly bills for errors. And if you
switch checking accounts, you’ll have to reset
automated debits. An expiring credit card might
mean you need to provide a biller with a new
expiration date, although card companies have
programs that allow participating merchants to
automatically get new expiration dates.
The third way of automatically paying bills is a little

less automatic: Using the Internet to proactively pay a
bill. Online bill paying takes a couple of different forms,
but each involves electronically authorizing money
transfers to a merchant. Some people like it more than
automatic debit because they feel like they have more
control over what gets paid and when. And it’s a good
method for infrequent payments.
You could log on to your own bank’s Web site and
direct the bank to make an electronic payment to a ven-
dor, such as your power company. You would have to
repeat this each month for each vendor, although often
you can set up repeating payments for fixed-amount bills.
Many banks offer online bill paying as a free service.
Another way is to log on to a vendor’s Web site to
pay your bill. You would pay by typing in a bank
account or credit card number. You would have to do
this each month and visit a variety of different vendor

Web sites, such as the power company, the phone com-
pany, and the mortgage company. That’s less convenient
than a one-stop bill-paying service.
Be sure to sign up for e-mail reminders about when
bills are due, a service offered by some merchants.
If automatic bill paying and electronic payments just
aren’t your style, you could continue the old-fashioned
way with some modifications. First, you have to stay
especially organized, knowing when payments are due
and regularly going through your bills, which you
should keep in a predetermined place. To avoid late
charges, you could pay each bill as it comes in. Any
bank-account interest you forfeit by paying early is rel-
atively minor compared with a potential late charge.
Of course, you’ll probably end up using a combina-
tion of these bill-paying methods, but the more you can
automate, the better. The important thing is to have a
reliable, low-hassle system.
3. Prioritize in a Crisis
At one time or another, most people have been caught
in a situation where there’s too much month left at the
end of the money. Job loss, divorce, unexpected auto
repairs, or a variety of other untoward financial strikes
could derail the best intentions.
During these times of stress, people can get so upset
at their money woes that they lose perspective about
who should get paid and who shouldn’t.
Here are the most important bills to pay: food, shel-

ter, utilities, and transportation. Take care of those, and
you can take a deep breath. They are your four pillars
of security. Clothing is a necessity, too, but most people
can get by temporarily with what they already have.
Health insurance is also especially important, as is
childcare for some working parents.
Notice credit card companies are not on the list. But
make no mistake, card collectors will scream the loud-
est to get their money. They will try to rattle you during
confrontational phone calls, hoping you will divert to
them money that should go to your four pillars of secu-
rity. Keep your cool. Yes, you owe money. But payments
for credit card bills, medical bills, and personal loans
can wait. Place student loans on hardship deferral.
Of course, you’ll damage your creditworthiness for
not paying all your bills. But during a money crisis, you
need to take care of necessities first so you live to fight
another day.
Endnotes
1. On October 3, 2008, Congress temporarily
increased FDIC deposit insurance from $100,000 to
$250,000 per depositor through December 31,
2009. As of this writing, it is uncertain whether the
raised limit will become permanent. Learn more at
www.fdic.gov.
Chapter 3
Get FIT (Food, Insurance,

Telecommunications)
I
n Living Rich by Spending Smart, I talked about
becoming financially FIT, which stands for food,
insurance, and telecommunications. These are per-
fect areas to start a spending makeover because they
involve tremendous spending and waste for the average
household. An American family of four spends about
$14,000 a year in these three areas alone.
These areas are also great for spending cuts because
you can save money painlessly. It’s not about depriva-
tion. It’s about spending smarter, so you can redirect
money to things you truly care about. They are the best
examples of spending smart.
These are also areas of repeat spending. That means
you’ll be spending in these areas—food, insurance, and
telecommunications—over and over again, every year
of your life.
In this chapter, I try to hone in on the absolute best
strategies to save you the most money—to make sure
you’re on your way to becoming financially FIT.
63
Food at Home
I call this category “food” at home, but I’m really talk-
ing about supermarket shopping. So, that includes
paper goods, such as napkins and toilet tissue. It
includes razor blades, shampoo, and other grooming
products. It includes some over-the-counter medications
you might pick up at the supermarket.
Food at Home, 1-2-3

1. Maintain a price list.
2. Stockpile sale items.
3. Match coupons to sales.
1. Maintain a Price List

You can’t save money at the supermarket unless you can
identify a good deal. The problem is that you buy so
many items during a shopping trip that it’s difficult to
remember more than just a few prices.
• Is $2 a box a good price for Cheerios breakfast
cereal?
• Is $1 each a great deal for Duracell AA alkaline
batteries?
• Is 2 for $6 a bargain on Oscar Mayer Bacon?
The solution is to maintain a price list. A price list is

just a simple list of items you buy regularly. A price list
helps you spot unadvertised sales. It helps identify fake
sales—“sale” items at the end of the supermarket aisle
that are really at regular prices or only lightly discounted.
Get FIT (Food, Insurance, Telecommunications) 65
It might also reveal sales cycles for a particular item. In

general, sales recur roughly every 12 weeks.
You can use anything from a small-ringed notepad to
spreadsheet printouts to a personal digital assistant
(PDA) to keep the list. Use whatever you’re comfortable
with. Set up several columns: store, item, brand, price,
and unit size (pounds, ounces, sheets per roll). You
might also want to note the date. Four-year-old prices
aren’t very helpful. As you expand the list, you might
want to rearrange it into categories, such as meat, dairy,
and beverages.
Don’t bother noting one-time purchases or items you
seldom buy. At first, just stick to items you use every
week. You can always expand the list from there. The
only way a price list works is if it’s not too time consum-
ing. After just a few weeks, you’ll have a pretty good
price list assembled, and it will start paying dividends.
The point is to have a benchmark for what a good
price is.
Is Organic Food Worth the Price?
As food prices rise, consumers might find it

tough to pay premium prices for organic prod-
ucts. But you can save money if you’re smart
about buying organics.
Organic means the food is produced without
pesticides, chemical fertilizers, or antibiotics
and generally emphasizes using renewable
resources and conserving soil and water.
Consumers frequently buy organic food for
environmental reasons and because they con-

sider it to be more healthful.
Organic produce typically costs 25 percent to
100 percent more than nonorganic. Especially
in challenging economic times, that has con-
sumers reexamining their choices. Here are
some do’s and don’ts when trying to save
money on organic food:
G Don’t settle for “natural.” The term natural
on packaging has a lot less meaning than
organic, a term highly regulated by the
Department of Agriculture. Don’t pay extra
for something called natural or all natural.
G Do pay for some fruits and vegetables. It’s
worth paying more for organic versions of
some fruits and vegetables that retain pesti-
cide residue, even after you wash them. Pay
for organic versions of peaches, apples,
sweet bell peppers, celery, nectarines,
strawberries, cherries, pears, grapes,
spinach, lettuce, and potatoes, according
to the Environmental Working Group, a
nonprofit organic research group.
G Don’t pay more for fruits and vegetables
with thicker skins that have far less pesti-
cide residue. You can skip organic onions,
avocados, sweet corn, pineapples, mango,
asparagus, sweet peas, kiwi, bananas, cab-
bage, broccoli, and papaya.
G Do buy organic protein-rich foods. Meats,

poultry, eggs, and dairy products are worth
buying as organics because they are free of
pesticides, synthetic growth hormones, and
antibiotics.
G Don’t buy highly processed organics.
Breads, oils, potato chips, pasta, cereals,
and other packaged foods, such as canned
or dried fruit and vegetables, are probably
not worth buying as organics unless price is
no object, Consumer Reports said. Much of
the health benefit has been processed out.
G Do buy organic baby food. Baby food tends
to be made from condensed fruits and veg-
etables, some of which might contain pesti-
cides. Or make your own baby food from
organic whole fruits and vegetables.
G Do buy local. You can find organic food
from local farmers’ markets and local
producers.
G Do try store brands. More supermarkets
and large discounters, such as Wal-Mart,
are offering private-label organics, which
are cheaper than name brands.
G Do use coupons. Look for coupons for
organic products in the Sunday newspaper
or go online to the free coupon database at
CouponMom.com and enter the search
term “organic.” Get coupons directly from
organic producers’ Web sites and sign up

for their e-mail newsletters, which contain
coupons. Examples are OrganicValley.com,
SCOjuice.com, ColemanNatural.com, and
Stonyfield.com. The site Healthesavers.com
has printable coupons for some organic
products.
G Do grow your own. If you are the garden-
ing type and have a back yard, grow your
own vegetables and receive the side benefits
of exercise and a regular hobby.
For more information, see GreenerChoices.org,
FoodNews.org, and OrganicConsumers.org.
2. Stockpile Sale Items

This gets to the heart of the spending smart strategy on
groceries: Each week, don’t buy what you need. Instead,
buy what’s on sale, and stock up.
This cherry-picking strategy sounds simple enough,
but it has a few moving parts.
• Loyalty cards. In most supermarkets, you’ll have
to sign up for a store loyalty card to qualify for
sale prices. Supermarkets nowadays don’t typi-
cally have sales that apply to everyone. Make no
mistake: The supermarket is tracking your pur-
chasing habits. That might give you the willies.
But in the end, it’s doubtful that anyone will ever
examine what you were buying. And who cares?
Someone could follow you around the store—a

public place—and collect the same information.
Anyway, a loyalty card is often the only way to
qualify for sale prices, and shopping the sales is
your best weapon to lowering your food spending.
• Sales flyers. Examine the weekly sales flyers for
advertised specials. They often come in the news-
paper or by mail. You can also go online to
mygrocerydeals.com, which has digital versions of
many sales flyers. Pay special attention to what’s
advertised on the front and back covers. They are
likely to be loss leaders, meaning the store is sell-
ing them so cheaply they’re actually losing money.
They hope to attract buyers into the store to pur-
chase more high-profit items, which compensates
for the loss leaders. I’m not going to tell you how
to plan your meals, but if you can plan dinners
around these loss leaders, you can save big dough.
• Unit prices. Some items are sold in different-sized
packages. Unless your supermarket lists the unit
price on the shelf, you’ll have to do the math your-
self. You could bring a calculator or reach for
your cell phone. Most wireless phones have a cal-
culator function. For each item, divide the price
by the number of units, such as ounces or pounds.
That allows you to literally compare apples to
apples.
If you go to the supermarket every week with a list

of what you “need,” you’ll be paying far more than you
have to. The idea is that when you “need” something,
you should go to your own pantry or freezer and fetch
the item, which you previously bought on sale.
QUICK TIP
Try supermarket store brands. They’re so much better
than the “generics” of a generation ago. In fact, many
store brands are made by the same manufacturers that
make name-brand food products.
How much can you save by stockpiling sale items?

Most experts put the savings at around 20 percent of
your entire food spending for a year. Considering the
average American household of four spends about
$7,000 on grocery food, housekeeping supplies, and
personal-care items, you’re talking about savings of
about $1,400 a year. And that excludes other categories
of supermarket items that go on sale, such as over-the-
counter medications.
That’s $1,400 in savings for buying the exact same
items, but buying them at ideal times.
There can be drawbacks to this strategy. Obviously,
perishables don’t stockpile well. Don’t buy more perish-
able food than you will reasonably use before it goes
bad, or your savings will be lost. Also, some people,
especially those living in urban areas, have less pantry
and freezer space to stockpile supermarket items. The
stockpiling system will only work on a smaller scale for
those people.
Freezing Times
Freezer Storage Chart (0 °F)

Note: Freezer storage is for quality only.
Frozen foods remain safe indefinitely.
Item Months
Bacon and sausage 1 to 2
Casseroles 2 to 3
Egg whites or
egg substitutes 12
Frozen dinners and
entrees 3 to 4
Gravy, meat, or poultry 2 to 3
Ham, hot dogs, and
lunch meats 1 to 2
Meat, uncooked roasts 4 to 12
Meat, uncooked steaks
or chops 4 to 12
Meat, uncooked ground 3 to 4
Meat, cooked 2 to 3
Poultry, uncooked whole 12
Poultry, uncooked parts 9
Poultry, uncooked giblets 3 to 4
Poultry, cooked 4
Soups and stews 2 to 3
Wild game, uncooked 8 to 12
Source: USDA
For more information on freezing food, go online

to www.fsis.usda.gov/FactSheets/Focus_ On_
Freezing/index.asp
Cherry-Picking Pays
Consumers who regularly visit multiple super-

markets and “cherry-pick” the best deals not
only save money, but also save enough to offset
the time it takes to do the extra shopping. This
is the conclusion of an academic study by
University of Pennsylvania Wharton marketing
professor Stephen J. Hoch and Edward J. Fox, a
marketing professor at the Cox School of
Business at Southern Methodist University.
How is this possible? First, these supershop-
pers’ advance preparation allows them to get
significant price reductions on a number of
items. Second, and more important, they com-
pound those savings by purchasing multiple
items when they’re cheap. Savings from visiting
a second store alone paid the equivalent of
about $16 per hour. Considering price inflation
since the study was conducted, that’s nearing
$20 per hour today.
QUICK TIP
Warehouse clubs, such as Costco, Sam’s Club, and BJ’s
Wholesale, are great for some items and not for others.
They can end up saving more than the membership fee
if you’re judicious about what you buy. For example,
paper goods are often cheaper at a warehouse club.
Your price list will advise you on what the best deals
are. Of course, you don’t want to buy perishable food
in such large quantities that you end up throwing out a
large portion that spoils.
3. Match Coupons to Sales

You can save significant money by doing the first two
steps and skipping coupons. But you certainly will be
leaving money on the table.
For the most savings, you’ll want to match a coupon
with a sale. This is the big secret for the most strategic
of shoppers. For those shoppers, about two-thirds of
their savings comes from shopping sales. An additional
one-third comes from using coupons.
However, the key with coupons is to avoid hassle. If
you have the time and inclination to clip coupons,
neatly file them in some type of organizer and weed out
expired coupons, go for it. Many people have their own
filing systems or use such products as the Couponizer,
found at www.couponizer.com.
One low-hassle way is the CouponMom system. Get
the coupon circulars from the Sunday newspaper, write
the date on the front and put them aside, perhaps in a
closet or drawer. In preparing to go shopping, go online to
CouponMom.com. It is free, although you must register.
CouponMom has two main tools. The first is
“Grocery Deals by State,” which each week lists the
best deals at your local supermarket, noting sales and
coupons. For coupons, it will tell you the date and the
circular to clip the coupon from. That way, you can
fetch the coupon circulars from the closet or drawer and
clip coupons only as you’re going to use them.
The Web site also has a listing of all current coupons
in its “Grocery Coupon Database.” If your supermarket
isn’t listed in “Grocery Deals by State,” you can choose
sale items you want in the weekly circular and look
them up in the database to determine whether there’s a

matching coupon.
A similar system is at TheGroceryGame.com. It has
a small fee, but has a free trial. Some users like it better,
especially because it includes unadvertised sales and
firmly advises you on what’s a good deal versus a great
deal. HotCouponWorld.com is another good site,
mostly for hard-core strategic shoppers. It has a robust
message forum where frugal denizens trade shopping
tips. It is free.
302 billion—Number of coupons offered in 2007

2.6 billion—Number of coupons redeemed in 2007
$150,000+—Household income for biggest users of
coupons
80%—Portion of coupon users who are female
Source: 2007 CMS Consumer Study
FIGURE 3.1 Coupons: by the numbers
If you’re looking for low hassle, just use Sunday

newspaper coupons. If you’re more enthusiastic, you’ll
want online printable coupons too. Besides some of the
Web sites already mentioned, get online coupons from
such sites as SmartSource.com, Coupons.com,
CoolSavings.com, and Eversave.com. There are literally
dozens of other sites you can find with an Internet
search engine, but after viewing a few, you’ll discover
they offer mostly the same coupons.
QUICK TIP
Pay attention to “Catalinas.” These are checkout
coupons handed to shoppers with grocery store
receipts. The coupons, named after Catalina
Marketing—the company that pioneered their use—
often lead to savings and free items.
The big-picture strategy here is to recognize a good

price on supermarket items. When you find one, you
pounce, by stockpiling and slapping a coupon on it.
Fun Tangent: Razor Blades
Razor blades are among those repeat purchases

at the supermarket or drug store that can tick
off consumers more than many others. That’s
because replacement cartridges on higher-end
shavers can be so expensive.
To save money, you could buy cheaper blades,
but many consumers claim the more expensive
new razors with more blades are, indeed, supe-
rior. So, the other way to spend less is to make
blades last longer.
How? Dry your razor blades daily.
Razor blade dullness occurs more from oxida-
tion—rusting—than from contact with whiskers.
Water resting on blades between shaves causes
the rusting. So keep your razors dry. After every
use, shake it vigorously to dislodge water

droplets, blot it on a towel and even give it a
brief blow-drying if a hairdryer is nearby. It’s
also a good idea to store your razor outside the
bathroom to avoid steam and humidity from
getting to blades. Or store the dry razor in a
sealable plastic bag.
My own test involved drying a Gillette Fusion
razor after every use. I used the same cartridge
for three months, compared with the usual two
weeks. And I’ve been drying my razors ever
since.
Food Away from Home

The first rule of dining out for less is to do it infre-
quently. By all means, go out to celebrate a wedding
anniversary or job promotion. But try to avoid loading
the family in the car and going to a restaurant because
you’re a poor meal planner. And when dining out, look
for reasonable ways to cut your tab without cutting
enjoyment.
Food Away from Home, 1-2-3

1. Make freezer meals.
2. Use coupons and discounts.
3. Skimp on what you don’t care about.
1. Make Freezer Meals

We’ve all done it. Dinnertime sneaks up on us, we don’t
have anything planned and don’t feel like cooking. The
easiest solution is takeout, delivery, or schlepping to the
nearest chain restaurant.
The simple solution is freezer meals. It’s different
from simple leftovers in the fridge. With freezer meals,
you make double and triple batches when you cook—
hamburgers, meatloaf, casserole, whatever. Then on
those harried evenings, you’re only microwave minutes
away from a quicker, more healthful, and less-expensive
entrée than you probably would get dining out. Whip
up a few quick sides, and presto! A meal.
A little meal planning goes a long way toward saving
money—and not just on dinner. Taking lunch to work
instead of buying is, admittedly, obvious and tired
advice. But do you brown-bag it every day? Ask your-
self why not. And what about that morning latte from
Starbucks that every money advice-giver wants to cut
from your morning routine? Well, that’s up to you, of
course. Just make sure it’s truly how you want to spend
your money. You might have seen the math before, but
I’ll repeat it here: Cut a $4 coffee and $7 lunch each
workday, and you save $2,750 a year. If nearly three
grand is no big deal to you and you don’t need to spend
it on something else, then eat out.
2. Use Coupons and Discounts

Granted, if a man is on a first date, he might not want
to whip out coupons when the bill comes, unless he
knows his date is of like-minded frugality. But coupons

and discounts can save significant money on dining out.
One secret method keeps anyone from knowing you’re
getting a discount. Sign up at RewardsNetwork.com. Tell
them what credit cards and debit cards you use to pay for
meals, and if you dine at a participating restaurant, you
get a discount automatically credited to your credit or
debit account. You do nothing—no coupons or gift certifi-
cates. Discounts are typically 5 percent to 10 percent.
Also check out Restaurant.com, OpenTable.com,
and the ubiquitous Entertainment book from
Entertainment.com. If you’re looking for a cheap way
to take the kids out, look for special deals at
KidsMealDeals.com.
3. Skimp on What You Don’t Care About

Sometimes, we’re on autopilot at a restaurant, ordering
a soft drink, appetizer, entrée, and dessert. Then we
wonder why we’re so uncomfortably full when we
leave. Cut out what you don’t care about.
Do you like free water just as well as a $3 soft drink?
Can you wait until you get home for a beer or glass of
wine? Can you skip the appetizer or eat an appetizer and
skip the entrée? Are the portions big enough to share an
entrée? What about skipping the tempting dessert and
coming back some other time for dessert only?
This isn’t rocket science, but it does take discipline
and a willingness to break your routine. Listen to your
body about how hungry you actually are and order less.
And look for reasonable substitutions that will cut your
tab without cutting your enjoyment.
Insurance
Insurance is a wide-ranging topic, and some people have
unique insurance needs. But here are three things almost
everybody can do to save money.
Insurance, 1-2-3
1. Say no to extended warranties and other
junk insurance.
2. Refinance your term life insurance.
3. Raise deductibles on home and auto
insurance.
1. Say No to Extended Warranties and

Other Junk Insurance
Keep things simple and don’t outsmart yourself. There’s
a lot of junk insurance out there that is way too expen-
sive for the risk it covers.
Extended warranties are at the top of the list. Just
don’t buy them. How’s that for simple? Don’t buy them
on electronics, computers, cars, appliances, or anything
else. Does anybody really think a $40 extended war-
ranty on a $200 camera is a good deal?
Are there examples of extended warranties paying
off? Of course. And there are examples at a casino
roulette wheel, when the ball falls into the number 8
slot. There’s also a chance you might die from a snake
bite this year. It’s just not very likely. The point is,
almost all extended warranties are a lousy bet.
Similarly, don’t sign up for a home warranty, or serv-

ice contract, which is essentially insurance on your
appliances and major operating systems, like a furnace.
You can skip many of these insurances if you main-
tain an emergency fund to pay for repairs. Here’s a sim-
ple concept: When stuff breaks, pay to repair it. Don’t
make it more complicated than that. You’ll save money
in the end.
Here’s an idea—self insure. Whenever you’re
tempted to buy an extended warranty, say no. Then put
the money you would have spent on the warranty into
a separate bank account. That will act as your repair
fund. Chances are that over time, you’ll put far more
into the account than you spend on repairs.
I’m not necessarily saying you should check your
brain at the door and blindly reject every offer. But
you’ll do well to make “no” your default answer and set
a high hurdle for saying “yes.”
2. Refinance Your Term Life Insurance

Term life insurance premiums have been plummeting
for years. So, if you have an old policy, it’s time to get a
new one, and then cancel the old one. In all likelihood,
you can either save a lot of money or get a lot more cov-
erage for the same money, even though you’re older
than when you first took out the policy.
I call this “refinancing” because it’s so similar to refi-
nancing your house mortgage to a better interest rate,
only replacing your life insurance is better because the
switch is free. It’s a no-brainer.
You can save literally hundreds of dollars a year,

which compounded over the life of a 15-year or 20-year
policy amounts to thousands in savings.
What exactly is life insurance? A life insurance com-
pany pays your beneficiaries a lump sum of money if
you die while the policy is in place.
A quick rule of thumb on whether you need life
insurance: If anyone depends on your income, you need
life insurance. So, single, childless people probably
don’t need it. An example of an exception is a stay-at-
home mom. If a surviving working dad would have to
hire childcare and other services the stay-at-home mom
performed, you might want a small policy on her.
A quick rule of thumb on how much life insurance to
buy: Get 6 to 10 times your income. This is a fuzzy num-
ber, like so much in financial planning is. So buy as close
to 10 times your income as you can reasonably afford.
Or, you can go through some laborious guestimate calcu-
lators online at Bankrate.com, Moneycentral.msn.com,
Insurance.com, and AccuQuote.com. Be aware you’re
likely to get wildly different estimates.
How do you refinance your term life insurance? In
short:
• Find a better price on guaranteed “level” term,
which means coverage is guaranteed throughout
the policy’s term and the premium will not change.
• Sign up and take a physical.
• Cancel your old policy or let it lapse by not pay-
ing the premium.
• Save money.
Be sure to get your new policy in place before cancel-

ing your old policy. That way, if the medical examina-
tion discovers some disease or condition that makes you
uninsurable, you can just keep the old policy.
Start by asking your existing life insurance company
what current premiums would be for the same coverage.
Then go online to life-insurance comparison sites, such
as AccuQuote.com, SelectQuote.com, Insure.com,
Efinancial.com and Intelliquote.com. Be aware that
some sites will give you an instant quote on life insur-
ance, while others simply pass your name on to
insurance brokers who will contact you. The sites listed
previously should give you an instant quote.
If you’re having trouble deciding on a site, use
AccuQuote.com, one of the oldest comparison sites on
the Web. It also offers help by telephone, 1-800-442-
9899. You get the same rate regardless of whether you
get a quote online or with help on the phone.
How do you know if the quote you received is from
a good insurance company? Only consider companies
rated A-plus or above. Many comparison sites list the
ratings along with the price quotes, or you could check
them out yourself at such rating sites as standardand-
poors.com, ambest.com and fitchratings.com.
QUICK TIP
Don’t buy child life insurance or specific-death insur-
ance. You don’t depend on a child’s income, so don’t
buy life insurance for a kid. And if you need life insur-
ance, it doesn’t matter how you die—cancer, heart
attack, or stepping off the curb and getting hit by the
proverbial bus. So don’t buy specific-death insurance.
Just get regular term insurance.
Don’t have term life insurance? Do you have whole

life, universal life, variable life, or some other cocka-
mamie cash-value life insurance policy with an invest-
ment component? You might do better to cash it in and
get regular term insurance. It will be far cheaper. Or
looked at another way, you could be getting a lot more
life insurance for the same money. The problem is that
permanent life insurance policies are so complicated,
they’re difficult to analyze. To help decide whether to
dump a cash-value policy, get an analysis of your policy
for a relatively small fee at the Consumer Federation of
America, at EvaluateLifeInsurance.org. An expert there,
James Hunt, a former insurance commissioner of
Vermont, will analyze your policy for a reasonable fee,
which at this writing was $70 or $80, depending on the
type of policy. He’ll recommend what you should do
with your policy.
Contact information: James H. Hunt, 8 Tahanto St.,
Concord, NH 03301-3835, [email protected],
603-224-2805. Okay to call on evenings and weekends.
3. Raise Deductibles on
Home and Auto Insurance
Insurance is to protect you from financial disaster, not
minor money annoyances. That’s partly why you want
high deductibles on your home and auto insurance.
Another reason is answered with a question: What do
you think will happen if you submit an auto insurance
claim for a few hundred dollars? That’s right. You
insurer might fire you as a customer and cancel your
insurance. So, if you’re not going to make small
claims—and you shouldn’t—you might as well raise
your deductibles. A deductible is the amount you have
to pay before insurance starts paying. When you raise
deductibles, the insurance company lowers the premium
you have to pay.
Consider deductibles of $500 or even $1,000 on
auto insurance, and $1,000 to $2,500 on home insur-
ance. You’ll save 15 percent to 30 percent off your
premiums.
QUICK TIP
Insurance for home and especially auto can vary dra-
matically from insurer to insurer. It pays to periodi-
cally shop around. Yes, it’s a pain. But, yes, it’s worth
it. Today, you can get quotes online at such sites as
www.insurance.com, www.instantquote.com, or
www.insweb.com.
Telecommunications
I’m going to lump several types of services together
under telecommunications because more and more,
that’s how consumers buy them. I’m talking about serv-
ices for your home phone, wireless phone, pay televi-
sion, and Internet access.
The big idea with telecommunications is to pay
attention. These services are evolving so quickly that
new services and new prices are offered all the time. It
pays to evaluate all your telecom services at least annu-
ally, if not quarterly. When it comes to telecom, paying
attention pays off.
Telecommunications, 1-2-3
1. Cancel your traditional landline phone
service.
2. Rightsize your wireless phone plan.
3. Regularly review TV and Internet service.
1. Cancel Your Traditional Landline

Phone Service
“No way! He did not just suggest dumping my house
phone line.”
Oh, yes, he did.
A dial tone to your home phone has become a com-
modity. That means it’s not special anymore. And it’s
definitely not worth paying $40 a month for service,
plus extra for long-distance calls. Today, unlimited, free
long-distance calls are a throw-in feature, like call-

waiting or caller ID.
You can get phone service so many ways nowadays
that traditional landline phone service from a Ma Bell
descendent has become a dinosaur. That’s why you
should consider dumping your traditional stand-alone
landline altogether. Here are a few ideas:
• Subscribe to a bundle. Phone and cable companies
are fighting over customers for their triple-play
services—TV, Internet, and phone. Landline
phone service has become such a commodity that
it’s not even the highlight of the triple play.
Bundled phone service often includes unlimited
long-distance calls and a wide host of features,
such as voice mail, call-waiting, and caller ID. If
you already subscribe to pay TV and Internet
access, you might save money by moving all your
services under one roof and buying a bundle.
• Use wireless only. The ability to place and receive
phone calls is no longer necessarily tied to the cop-
per phone wires running throughout your home.
That’s a mental hurdle to overcome, for sure.
But more people are dumping landline service and
using only a wireless phone as they get used to
calling people, not places. A generation ago,
callers would dial up a place, such as a home or an
office because phones were literally tied to build-
ings. Today, wireless phones are associated with
individuals, so people call other people, not build-
ings. As wireless phones become commonplace,
it’s harder to justify duplicate landline telephone
service.
Before cutting the cord, make sure you have ade-

quate reception throughout your home. New tech-
nologies are evolving. Some allow you to put a
small base station in your home to boost wireless
signals by some carriers. If you currently get poor
reception, keep an eye out for these new technolo-
gies, one of which is called femtocell. This refers
to adding a small base station in your house that
uses your broadband Internet connection to boost
your cell-phone signal and improve call quality.
The second caveat is to have enough minutes on
your wireless plan to handle calls at home and on
the go.
• Consider Voice over Internet Protocol (VOIP).
Consumers have many choices for using their
broadband Internet connection as a phone line,
using VOIP. Skype and Vonage are examples of
Internet-based phone services. Several traditional
phone companies also offer VOIP service. It can
be far less expensive than a traditional stand-alone
phone line. And if you have strong, reliable broad-
band Internet service, call quality can be quite
good.
The MagicJack Phone Solution
MagicJack, www.MagicJack.com, offers phone

service with unlimited long distance, voice mail,
caller ID, call-waiting, and other features for
$20 per year. That’s per year.
For an additional $20, you must buy a small,

matchbox-sized device that plugs into the flat
USB port on your computer. You plug a phone
line and phone into the other end of the device.
Software loads onto your computer automati-
cally and you get a dial tone. So, to get started,
the device plus a year’s service costs about $40,
and you never get a monthly bill.
You can use MagicJack as a landline by plugging
a cordless phone system base into the
MagicJack line and adding multiple handsets
throughout the house.
Drawbacks of MagicJack include not being able
to keep your existing phone number. You’ll get a
new one. And you must have the computer on
to place and receive calls. If it’s off, incoming
calls go to voicemail. The company is working
on solutions to both of those disadvantages,
MagicJack inventor Dan Borislow tells me.
And although MagicJack works flawlessly for
many people, including myself, others seem to
have problems. The service is only as good as
your broadband Internet connection. Voice
quality can range from as good as a landline to
as poor as a cell phone with a weak signal. Use
several online speed tests to measure your con-
nection speed. Find tests by entering into your
favorite search engine “VOIP speed test.”
Use the 30-day money-back guarantee to try
MagicJack before canceling landline service to
make sure it works for you.
2. Rightsize Your Wireless Phone Plan

I’m not going to tell you exactly what wireless plan to
get. For one thing, offerings seem to change almost
monthly. Second, people’s needs differ depending on
how they use the phone. Someone who uses the phone
for hours a day and has substituted it for their landline
phone needs a different plan than someone who has a
cell phone for emergencies.
But I can tell you how you should decide for your-
self.
The big idea in buying wireless service is not to pay
for more service than you actually use. That might
sound obvious. But consumers waste a tremendous
amount of money on wireless phone plans. Largely, the
waste comes in the form of paying for unused minutes,
month after month, year after year.
Consumers on a monthly plan used an average of
461 calling minutes per month in 2008, according to
J.D. Power and Associates. Considering most plans
include far more minutes than that, many people are
overpaying.
Here’s my big point on cell phones: Literally millions
of people on monthly contract plans would be far bet-
ter off using pay-as-you-go prepaid cell phones. They
can be the best choice now for light and even moderate
users. That’s especially true for those who use their
phone mostly for talking, rather than advanced features
such as texting and Internet access. How does prepaid
work? Each company is a little different. But generally,
you buy the phone. Some are very cheap, starting at $10
for the simplest phones. Then, you buy minutes to load
onto the phone. You can buy minutes online or in

stores, in the form of a card with a code that you enter
into the phone. Some of the better deals come from pre-
paid providers ranking high on a recent J.D. Power cus-
tomer satisfaction survey. See Figure 3.2.
Here are the three national providers of prepaid

service that rank above the industry average:
• Tracfone (and sister company Net10)
• Virgin Mobile
• T-Mobile To Go
Source: J.D. Power and Associates 2008 Prepaid
Customer Satisfaction Survey
Note: Cricket and MetroPCS also ranked above average,
but they don’t have nationwide coverage.
FIGURE 3.2 Above-average prepaid providers
Here’s a rule of thumb based on prices in 2008: If

you typically use fewer than 400 minutes each month,
prepaids are worth a look. Check your recent bills for
how many minutes you actually use. Many people could
cut their total cell service expense to about $10 per
month or less, all fees and taxes included. And prepaid
plans are getting so much better so quickly that as of
early 2009, Consumer Reports magazine says even
heavy cell-phone users might be able to save money
with a prepaid phone.
You can retain your current cell phone number by
“porting” it to the prepaid carrier. And call quality is
generally good because prepaids use the same wireless

networks as the traditional wireless carriers. Of course,
like with the big contract carriers, call quality varies by
region and even community.
Should you switch to prepaid? The math to compare
prepaid and monthly contract plans isn’t that difficult.
Look at recent bills to find the average minutes per
month you actually use.
Divide your total monthly wireless bill, taxes and
fees included, by your average minutes. This is your true
cost per minute. Compare that to the cost per minute of
a prepaid plan. One of the easiest prepaid plans to com-
pare is Net10, found at www.net10.com. It’s 10 cents
per minute, period. Taxes and fees are already included
in the price of prepaid minutes.
So, a traditional $39.99 monthly plan that costs
about $48 after taxes and fees and includes 450 minutes
would have a per-minute cost of about 11 cents, which
is close to the Net10 prepaid price. However, that
assumes you use all 450 minutes every month. If you
use only 125 minutes and lose the rest, your cost soars
to 38 cents per minute, which is a lousy rate.
Other advantages of prepaids are you have no con-
tracts, no early-termination fees, and no credit checks.
Of course, there are downsides. Prepaids tend to
offer older name-brand phones, which might not have
the most current features. And prepaid rules can be con-
fusing until you learn them. For example, prepaid min-
utes expire. The more minutes you buy, the longer they
last, typically up to a year.
QUICK TIP
If you’ll be sticking with prepaid for a while, add min-
utes that will last a year, so you don’t have to worry
about when they’ll expire.
Most prepaid services offer nationwide access, but

some charge for roaming outside a home region. A few
carriers charge an access fee of $1, for example, on days
you use the phone. But they might offer free calls to
other wireless users on the same network for unlimited
calls on nights and weekends.
Again, that complexity is why a simplified system
like Net10 is attractive.
If you’re uncertain, you can test-drive a pay-as-you-
go prepaid phone. Go to a store or online and buy a
prepaid phone that has some starter minutes on it. Test
the call quality in your home and around your region. If
you don’t like it, you lose little. You spent $10 or $20
to potentially save hundreds a year.
My Prepaid Phone Story
For years, my wife and I had one of those “fam-

ily plans” from a well-known phone company.
We use our phones frequently, several times a
week, but we don’t talk for many minutes. We
were using an average of just 150 minutes per
month but paying for 700 minutes, the least
you could get with a family plan.
I switched both of us to prepaid cell phones.

Savings per year: $800.
Bonus benefit: Call quality in my home is actu-
ally better with the prepaid than with the pricier
monthly contract plan. Go figure.
So, if prepaids are such a good deal, why aren’t more

Americans using them? Why are people making an
illogical choice to pay more?
Apparently, there is widespread uncertainty and
some damaging misconceptions that keep people loyal
to their contract plans, says a study in late 2008 by the
New Millennium Research Council.
Foremost among these myths is that more than half
of people think they are always under contract with
their wireless carrier and always must pay a fee to
switch, according to the survey. Of course, you might
have to pay a fee, especially if you continue to upgrade
your handset and accept two-year commitment
renewals of your contract. But more wireless carriers
are prorating the early-termination fee, which reduces
the fee to get out of your contract. Many others are on
month-to-month with no commitment, but they don’t
know it.
See Figure 3.3 for other myths about prepaid
phones.
• Nearly 6 out of 10 Americans (59 percent)

including 70 percent of 18–24 year olds—
mistakenly believe that prepaid phones “are
good only for people who rarely, if ever, use their
cell phones.” Less than one-third (32 percent) of
respondents knew that this is a myth.
• More Americans than not mistakenly believe
that prepaid phones are only available in
“very basic models.”
• Americans split evenly on whether this myth
was accurate: “Prepaid cell phone plans where
you pay for the minutes you use always cost
more per month than contract-based cell
phone plans where you pay a monthly fee.”
• Only half know that it is untrue that “prepaid
phones don’t get very good reception and only
work in certain places.”
• Less than half know that it is untrue that “you
can’t get voice mail, text, or take photos on a
prepaid phone.”
Source: “Prepaid Phones in the U.S.: Myths, Lack of
Consumer Knowledge Blocking Wider Use,” prepared for
the New Millennium Research Council by Opinion
Research Corp.
FIGURE 3.3 Prepaid phone myths
Of course, pay-as-you-go prepaids are not for every-

body. Here are your other basic choices:
• No wireless. Yes, this is an option. Today, half of
Americans consider a cell phone one of their
untouchable “necessity” expenses they can’t live
without, according to a 2006 study by the Pew

Research Center. A decade earlier, cell phones
didn’t even make the list.
If you truly “need” a cell phone for emergencies,
you can use any charged cell phone to dial 911,
even if it has no service plan. Ask around to fam-
ily and friends. Somebody will give you an old
phone for free. Any household typically has sev-
eral lying in a drawer somewhere.
And if you have a cell phone for work and your
company doesn’t care whether you make personal
calls with it—perhaps the work phone is on an
unlimited-minutes plan—it doesn’t make much
sense to get your own phone too.
• Regular monthly contract. If you use a lot of min-
utes each month, for example, 500 or more, a tra-
ditional plan might be the way to go. It’s also best
if you do a lot of texting and Internet access on the
phone. Or, if you must have the latest feature-rich
phones, like the iPhone by Apple that was so hot,
you’ll need a monthly plan.
Again, this is where you must assess what you will
really use. It might be cool to look up a stock
quote, sports score, or news story on your phone.
But if you’re the type who will try out such serv-
ices and never return to them, paying for such fea-
tures month after month will amount to a lot of
wasted money. Know yourself.
• Unlimited plan. Relatively new, unlimited plans
let you talk as much as you want. They came out
at $100 per month, which was about the price for
2,000 minutes per month. Think about that. The
allure of “unlimited” is that 33 hours a month on
the phone is simply not enough time?
But if you really talk that much, an unlimited plan

might be for you. Just be clear about what it
includes. Is that unlimited talking? Or unlimited
texting and data too?
Online comparison tools for choosing wireless plans
are fine to use. They might provide ideas about which
plans might be right for you. But, through 2008, I’m not
overly impressed with how good a job they do recom-
mending the right plan to fit each individual’s needs.
Some to try include MyRatePlan.com, Wirefly.com, and
LetsTalk.com. One other, BillShrink.com, is very slick
and has a lot of potential because it recommends the
very best plan for you, based on your actual use. It even
explains why it chose the plan based on your needs. It’s
worth checking out.
Note that I didn’t dwell on buying the phone itself.
First, your purchase decision on wireless should be
made based on the price and quality of service, not the
hardware. That’s because you’ll spend far more on serv-
ice, no matter what pricey phone you buy. Second, a
phone is a one-time purchase. It’s over and done with.
It’s a relatively small amount of money. However, a
wireless contract goes on and on, month after month,
costing big money in the long run. Information on
phones themselves can be found at such Web sites as
Cnet.com, PhoneScoop.com, ConsumerReports.org,
and ConsumerSearch.com.
3. Regularly Review TV and Internet Service

Like phone service, pay TV and Internet service con-
tinue to evolve. That’s good because consumers will
have more choices. And robust competition could drive

down prices. But it’s bad because the sheer number of
choices makes choosing a service more confusing—a lot
more confusing. Nowadays, many consumers can get
phone service from their cable TV company and pay tel-
evision service from their phone company.
If you must have pay TV and Internet service—and
unless you’re living in poverty or are deeply in debt, it’s
not unreasonable—the easiest move is to buy them as
part of a bundle from your cable or phone service
provider. The drawback is that although you might get
discounts compared with buying the same services sep-
arately, you’ll probably get services you don’t really
need or want, especially TV channels you will never
watch. However, to get services better tailored to your
needs, you would have to become an expert on each
service and try to cobble together services a la carte.
The point here, whether you buy services in a bundle
or not, is to regularly review them and keep an eye out
for new offers that might fit your life better. Offerings
and prices are changing all the time.
Television
The following are your basic choices for television serv-
ice, some you’ve heard of and perhaps a few you haven’t:
• Broadcast only. This option has become a much
better option lately. That’s because with a set-top
antenna, many people can pull in high-definition
broadcast television signals to display on their
newer HDTVs.
The best part? It’s absolutely free.
Your picture will be even better than that of pay-

TV customers who get high-definition signals
from cable, satellite, or fiber-optic. That’s because
signals snatched out of the air are less compressed.
People who live farther away from transmitting
stations might need a more powerful rooftop
antenna to receive signals.
In many areas, you can get digital broadcasts from
the major networks, including ABC, CBS, NBC,
FOX, CW, and PBS. As long as you have an
HDTV, the picture will be far superior to any ana-
log signal you’ve ever seen. However, those who
live in remote areas, in valleys, or in urban areas
with many tall buildings nearby might receive a
limited selection of stations or none at all, leaving
pay TV as the only option.
Of course, the big drawback of going with
antenna-only is you won’t get such cable channels
as HBO, ESPN, CNN, The Food Network, and
many others. You’ll need subscription TV to
receive them. That might be a deal breaker for
using an antenna only. As a hybrid move, you can
subscribe to a basic tier of pay TV service to get
cable channels and use your antenna to receive
digital and high-def broadcast networks—forgo-
ing high-def versions of cable channels. You’ll
save the cost of upgrading to the digital tier to get
HD programming.
If you have an older non-HD television, you can
still get reception with an antenna. But you will
need a converter box for each TV. The govern-
ment has been issuing coupons worth $40 to help
defray the cost of converter boxes, which cost
about $50. Learn more at www.DTV2009.gov

online or call 1-888-388-2009.
QUICK TIP
There’s no such thing as an HDTV antenna. An
antenna is an antenna. Slapping an HDTV label on
the box is just marketing. It’s actually easier to pick
up new digital signals than old analog signals. You
shouldn’t get the old “ghosts” or “snow” with digital
signals. It’s either perfect or unwatchably pixilated. To
choose an appropriate antenna, go online to anten-
naweb.org. It will help you select one.
• Pay television. Of course, you can pay for TV

through a cable or satellite company. And, increas-
ingly, phone companies are starting to offer pay
television as they roll out fiber-optic networks.
• QAM tuner with cable. Here’s a secret not many
people know: You can get free HDTV with the
most basic cable TV package and no cable box.
It’s a little techie, but it might save you money.
You’ll need a high-definition television with a
Quadrature Amplitude Modulation (QAM) tuner.
Newer TVs have QAM tuners, and your TV’s
instruction manual should specify if it does.
Alternatively, you could buy a stand-alone QAM
tuner. You’ll also need a cable TV package, even if
it’s the cheapest broadcast-only package.
Screw the coaxial cable wire directly into your TV.
Then, go into your HDTV setup menu. For the
source of the signal, select something like “digital

cable” or DTV. The exact term varies by TV man-
ufacturer. Then force your TV to automatically
search for channels. When it’s done, scroll
through the channels.
With digital channels, you’ll find multiple sub-
channels under the same number, labeled some-
thing like 87-2. The digital channels should look
noticeably better. And when a digital program is
broadcast in high-definition, it will fill the elon-
gated screen of your HDTV and look fantastic.
The channels will have weird-looking names with
lots of numbers in them, but your TV should
allow you to change the on-screen label to ABC,
CBS, CW, and so on.
How is this useful? If you use your HDTV in the
bedroom or den for limited TV watching and you
don’t want to pay for another HD cable box, you
can use this method to get broadcast digital and
HD channels for no additional cost. Or, if you
only need the broadcast channels, you can drop to
the lowest level of nondigital cable TV service and
still get digital and HD broadcasts.
Again, you will mostly get broadcast channels,
meaning no ESPN or Discovery Channel. Those
channels are encrypted and not accessible with the
QAM tuner. You also won’t get an interactive TV
schedule grid, and you won’t be able to pull up
“on-demand” content. Your QAM tuner doesn’t
work with satellite TV signals.
• Online. More and more television content is avail-
able online to those with high-speed Internet con-
nections. For example, many broadcast networks
offer full-length shows at their Web sites for free.
You can buy shows from Apple’s iTunes music

store and Amazon.com Video on Demand. Shows
and movies are free at aggregation sites, such as
Hulu.com, Joost.com, and even YouTube.com.
Older movies, too, are often available online for
free.
I don’t watch a lot of television, but my wife and
I often watch a show or two before bedtime.
During the television writers’ strike in late 2007
and early 2008, there was nothing new on TV. So,
at the nearby video store, we rented DVDs of the
television cop series, The Shield (which is a great
show but probably too violent and rough for
some tastes). Anyway, we watched all the seasons
of The Shield that the video store had, which
excluded the most recent one. So, we downloaded
that season from iTunes to a laptop computer. We
hooked the computer to a TV, and were able to
enjoy the missing season. Another time, we were
watching a recorded episode of The Unit when the
ending was cut off because the show’s start had
been delayed by a football game. We fired up the
computer and watched the last five minutes on
CBS.com.
Of course, most people want to watch shows on a
large television screen, not a small computer
screen. The easiest method to do that is to hook a
laptop computer to a television with a set of
cables. Which type of cables you need depends on
the outputs from your computer and the inputs to
your TV. I’ve found personnel at stores like
RadioShack can be helpful in getting what I need
in those situations, although the price of the
cables might not be the lowest.
Standalone devices can help you watch online

content on your television. Examples are a Roku
player, Tivo and such game consoles as the Xbox
360 and Playstation 3. Among the big drawbacks
of “going off the grid” with TV is the relative
dearth of free live sports programming available
online. Most streamed sports games are available
by subscription only or are illegal to access.
Internet TV might not have all the content you
want, but it could be a supplement. It might allow
you to cancel cable and go with free antenna recep-
tion or drop to a lower tier of pay-TV service.
Fun Tangent:
Don’t Overpay for Audio-Video Cables
One of the biggest rip-offs in electronics retail-

ing is overpriced cables. These cables travel vari-
ous routes, to and from the TV, cable or satellite
box, receiver, DVD player, and speakers.
Here’s a good rule: Go for digital over analog
when deciding among types of cables. But
among brands of cables, feel free to cheap out.
That could mean buying a $5 HDMI cable—the
best connection for a high-definition TV—
instead of a $100 HDMI cable.
Why? Because there’s no difference in the qual-
ity of sound and picture you get from pricey
cables. It’s true that high-priced cables are high
quality, made of good materials with good
connections, and they look nice too. They’re
probably even more durable. But, as counterin-

tuitive as it sounds, top-quality cables won’t
make your TV’s picture or sound any better
than cheap cables of the same type and gauge.
Don Lindich, a syndicated technology colum-
nist and creator of SoundAdviceBlog.com, puts
it this way: Buying expensive cables is like using
Evian bottled water to flush your toilet. It might
be top-quality purified water, but it doesn’t
flush the bowl any better than tap water.
For example, if you have a newer HDTV and
cable box that can use an HDMI connection, use
it. It’s higher quality than other connections. But
don’t spend $75 or $100 on a cord. Discounters,
such as Wal-Mart and Target, often sell reason-
ably priced cables. Perhaps the best combination
of price and quality is available at online retailers,
such as Monoprice.com, where I got a 6-foot
HDMI cable for $5.24 plus shipping. It works
great. Amazon.com too often has high-quality
but inexpensive HDMI cables.
The same goes for wires to speakers. For runs of
50 feet or less, 16-gauge electrical wire—even if
it’s lamp cord—is all you need. Gauge matters.
Brand does not. However, you can’t totally
cheap out on cables and speaker wire running
inside of walls. In many areas, building codes
require the wire to be rated for “in-wall use,”
a feature easily found on packaging or retail
displays.
Internet Access
You’ll notice many of the suggestions in this book are
tightly tied with looking up information on the Internet.
So having at least a slow-speed dial-up connection is a
good idea. Of course, you could use free Internet access
at a library or wireless Internet access at public “wi-fi
hot spots,” such as a coffee shop.
However, having Internet access at home is conven-
ient. Internet service can help with skillful shopping,
which will save far more money than access will cost.
You’ll need to evaluate what Internet service
providers (ISPs) are available to you. Generally, it will
be through your phone line or cable line, although plans
to roll out wide area wireless networks are in the early
stages. Internet access via cell-phone networks is also
becoming more common. You can get Internet access
via satellite, but that’s traditionally been an expensive
option, making sense only for those without other
choices, such as people living in very rural regions.
Availability of these Internet-access options varies
among communities. If you’re uncertain which to
choose, seek advice from a tech-oriented friend or rela-
tive who lives nearby.
This is one area I would not skimp on. Get the
fastest Internet service you can reasonably afford.
So, again, the big-picture idea with telecommunica-
tions is to stay informed about the new offerings and
prices. That way, you can rightsize your spending for
what you actually use.
Chapter 4
How to Buy Stuff
H
“ ow to buy stuff?” you might be asking yourself
when you read the title of this chapter. “Believe
me, I don’t need advice on how to buy stuff.
I’m great at that. I need to know how not to buy stuff!”
But the truth is this: Buying things well is difficult if
you don’t have specific routines and some practice at
doing it right. You’ll regularly be buying thousands of
dollars worth of goods and services for your entire life.
You’ll have needs, such as tires for your car, a plumber
for a leaky faucet, and new eyeglasses. You’ll have
wants, such as a new television set, a second fabulous
pair of black shoes, and a Caribbean vacation.
The point is to spend your money smarter on all of
those things.
That segues into a discussion of needs and wants. It’s
so easy to confuse the two things. But learning the dif-
ference is “how not to buy stuff.”
We need basic food, basic clothing, basic shelter, and
basic transportation. Upgrades to those things are wants.
Wants come in the form of dining out, name-brand
105
clothing, a 3,000-square-foot house, and a sporty new

sedan. All your entertainment spending is a want. Wants
include vacations, video games, music CDs, cable televi-
sion, and every piece of jewelry you own.
I’m not saying you should only spend money on
necessities and deprive yourself of wants. I’m just saying
you must be very clear in your mind about the differ-
ence. Then each purchase you make starts with an eval-
uation of the need and is upgraded with wants.
This reminds me of a business term, zero-based
budgeting. The problem with typical budgeting is that
the amount budgeted for future spending is strictly
based on how much you spent in the past. The only
debate is about whether your department’s budget gets
3 percent more or 5 percent more. It’s incremental
budgeting. There’s no examination of what you actually
need, only how much more you’ll spend in the future.
After a few years, how much you’re spending can be
completely divorced from what you need to spend.
Meanwhile, zero-based budgeting is starting from
scratch, or zero. All spending—the category of spending
and the amount—has to be entirely rejustified. It’s
about building up your expenses from zero, rather than
cutting down expenses from current levels. Or, as we’ve
talked about, it’s about whether a purchase is truly
needed or we’re just buying because that’s what we
always do.
That’s a long way of saying that it’s important to
stay grounded. Make conscious decisions about
whether you can get by with a functional brand or
whether it’s worthwhile to upgrade.
How to Buy Stuff 107
Some people say, “Well, I only buy the best for

myself and my family. We deserve the best.” Besides
being silly and immature, that statement is illogical.
Almost nobody outside of the likes of Bill Gates and
Warren Buffet has enough money to have the best of
everything. So we choose. Ideally, we choose by starting
with needs and judiciously adding our wants.
One of the great by-products of spending your
money smarter is that if you spend well on your needs,
you’ll have more money left for your wants.
Each section in this chapter gets straight to the point,
with each starting with “How to…” In total, they are
“How to buy stuff.”
How to Buy Products

Is shopping around for products worth your time? You
bet. And today it’s easier than ever because of online
reviews and price comparisons. Buying stuff breaks
down into the three Rs: Read reviews, research prices,
and reevaluate.
How to Buy Products, 1-2-3

1. Read reviews. Visit ConsumerReports.org,
ConsumerSearch.com, and Amazon.com.
2. Research prices. See Froogle.com,
MySimon.com, and Shopzilla.com.
3. Reevaluate. Wait a day before buying.
Granted, you don’t need a three-step process for one-

time purchases of less than $50, for example. But for
bigger purchases or purchases you make repeatedly, it’s
well worth it.
A recent search for a Garmin Nuvi GPS navigator,
like the one mentioned in the introduction of this book,
turned up a variety of prices. The exact same model
could cost anywhere from $345 to $900. That’s a heck
of a difference. How long did it take me to get that
information? Less than 10 seconds on MySimon.com. Is
10 seconds of your time worth a $555 savings?
I’m not saying you should necessarily buy the least-
expensive item for $345, especially if it’s offered by an
unfamiliar retailer with an amateurish Web site that
doesn’t pass the “smell” test for being legitimate. If one
retailer is offering a price far below all the others, there
might be something fishy. But after those well-invested
10 seconds, you’ll have an excellent idea about the
range of prices for that GPS system.
Armed with that knowledge, how likely are you now
to visit a retail store and pay $900, knowing the aver-
age price is half that? Unlikely.
Granted, that was a fun example using a “want”
item, a GPS navigator. But you can use this system on
needs too.
1. Read Reviews
Some people are born researchers of products, while oth-
ers are impulsive buyers of them. But if you’ll be spend-
ing significant money, whatever you determine that to
be, research can help you choose the right product.
The right product means one that fits your needs and
is likely to be high quality. Nobody can be an expert on
every purchase. You might know a lot about automo-
biles, but nothing about buying dishwashers. Perhaps
you know a lot about cell phones, but nothing about
buying a baby stroller.
Just as important, some quick research can reveal the
range of possibilities within a product line—which fea-
tures come with which model.
Just a generation ago, research was laborious.
Maybe you visited several stores and talked to salespeo-
ple about the product. But if you need to buy a lawn
mower, are you really going to visit a garden center and
ask the salesperson which model you should buy?
Salespeople can be very helpful, although it seems
nowadays far less so. A salesperson has conflicting
interests. He might have a genuine desire to do right by
the customer. But a commissioned salesperson makes
more money if he or she sells you a more expensive
model of lawn mower, regardless of whether it’s right
for you.
So you need objective advice, or at least a variety of
opinions, to make a smart spending choice.
Consulting a friend or relative is a good idea, as long
as you realize that’s just one person’s experience and not
the final word about the product. In the past, you could
subscribe to Consumer Reports magazine, which has in-
depth reviews. But you would have to wade through
dozens of saved magazines trying to find the review you
sought.
Because it was so difficult to find reviews, maybe you

heavily researched purchases of homes, cars, and a few
big-ticket items. And for the rest, you just winged it.
Today, because of the Internet, it’s all different. You
can research almost anything quickly.
For example, now, you can subscribe to Consumer
Reports’ online site and have instant access to reviews.
Rarely do I suggest spending money in order to save
it. But an online subscription to Consumer Reports,
found at www.consumerreports.org, is an exception. At
the time of this writing, a subscription is a mere $26.
That’s a small price to pay for the outstanding product
reviews and advice you receive. The advantage of the
Web site over the magazine is the site is easily search-
able. You can find the review you seek, even from years
ago, in mere seconds.
The Consumer Reports site also offers blogs on such
topics as cars, electronics, and products for babies and
kids. Blogs are brief news items stacked chronologically,
with the newest on top.
ConsumerSearch.com is another good resource. It’s
an aggregator of product reviews and gives a summary
of what all the reviews seem to be saying. It’s an efficient
stop on the Web to get a lot of information quickly.
Mega online retailer Amazon.com is a good place to
find reviews from actual users. Because Amazon.com
sells a wide variety of products, it’s worth a place in
your Web browser’s Favorites list, even if you never
make a purchase from the retailer. Read a sampling of
the good and bad reviews. But with user reviews, take
comments with a grain of salt. Pay more attention to

comments repeated in several reviews. Many retailers
have user reviews on their Web sites now. So, if you
were going to buy a particular model of LCD television,
you might check large electronics retailer Best Buy to
read reviews of the product on its site.
Another way to find reviews is to use your favorite
search engine, such as Google.com. Type keywords that
include the name and model of the product and the
word “review.” You’ll likely find several reviews.
After a while, you’ll find review sites that you like.
For example, I like Cnet.com for reviews of electronics
and software. Automobile reviews are available at such
sites as Edmunds.com and Cars.com.
But if you want to keep it simple, check reviews at
ConsumerReports.org, ConsumerSearch.com, and
Amazon.com.
2. Research Prices
The point of price comparisons is to know what a good
price is. Blindly accepting the first price you see is a con-
scious decision to be powerless as a consumer. In most
cases, it’s voluntarily paying more than you have to.
And, come on, that’s just plain dumb.
Again, we’ll turn to the Internet to compare prices
efficiently.
Among my favorite Web sites is Froogle.com, also
known as Google Product Search. If you type a specific
product into the main Google search window, a sampling
of the product search results will appear on top. You can
click through to view more. I also like MySimon.com and

Shopzilla.com. These are all shopbots, like robots that go
searching for prices on the Internet.
After visiting just a few shopbots, which literally
could take about one minute, you’ll have an excellent
idea about the range of prices an item is being sold for.
Be skeptical of prices that are far lower than others,
especially if you click through to the retailer and the
Web site looks amateurish. Included in some price com-
parisons will be refurbished products and listings on
auction site eBay.com. So view those listings differently
than new products from well-known retailers.
Speaking of eBay, that’s also a prudent stop in your
quest to find good prices. Many items are offered as
new on eBay and are worth considering if you’ll receive
a deep discount in return for taking the risk of dealing
with a person or merchant who might not be reputable.
I’ve had good luck buying new items on eBay.
Just because you’re searching online for prices
doesn’t mean you have to purchase online. You could
still purchase in person locally. But knowing what a
good price is before visiting a store arms you with
information.
Opt for shopbots that include taxes and shipping
charges. That way, you can get apples-to-apples com-
parisons on the total price of acquiring that product if
you decide to buy it online.
You might find shopbots you like better, but good
places to start are Froogle.com, MySimon.com,
PriceGrabber.com, and Shopzilla.com.
QUICK TIP
One promising service is Frucall. If you’re standing at
a store looking at an item and wondering whether it’s
being offered at a good price, you can find out. Pull
out your cell phone and call 1-888-DO-FRUCALL
and enter the product’s barcode number. The auto-
mated service will recite several prices from online
retailers. You can also get the information by text
message or by going to a Web site. Find out more at
Frucall.com.
3. Reevaluate
We Americans generally aren’t good at delayed gratifi-
cation. But try to wait a day or more between wanting
to make a purchase and actually making it. That delay
gives you time to reflect on the needs versus wants issue
I talked about earlier. Waiting helps mostly with
optional purchases. But it also gives you time to reflect
on a purchase you need but were thinking about
upgrading, by buying a brand name or a product with
more features.
QUICK TIP
As a rule of thumb, wait one day for every $100 the
purchase costs to avoid impulse buys. Of course, that
rule works less well with very expensive items, such as
a house or automobile. But for most purchases, it
works well.
I find that just the process of researching a product

sometimes satisfies a buying impulse, or at least damp-
ens it. Reading some negatives about the product,
whether in professionally written reviews or user
reviews, helps provide perspective that can also extin-
guish the buying desire.
Waiting allows that intense lust for acquiring some-
thing to subside. When you’re clearheaded, you gain
perspective about whether you really want it. Marketers
know that time works against them. That’s why high-
pressure advertisements always tell you to “Buy now!”
Infomercials entice you to buy, saying if you “buy now,”
you’ll get bonus merchandise of some sort. It’s why the
car salesman says, “What do I have to do to get you in
this new car today?”
There are very few purchasing opportunities that
will disappear if you wait a day and reevaluate.
QUICK TIP
If and when you go through with the purchase, you
might be asked if you want to buy an extended war-
ranty. Think about whether you want a warranty
ahead of time, so you’re prepared to answer the
question. Almost all the time, the answer should be a
flat-out, “No.” See Chapter 3, “Get FIT (Food,
Insurance, Telecommunications),” about insurance to
learn why.
Price Protection
After you leave a store or check out of an online

retailer, you’re not quite done with your smart
shopping. Even if you’ve done your due dili-
gence on shopping for prices, a product might
go on sale shortly after you purchased it. That
infuriates shoppers.
That’s why many retailers offer a price guaran-
tee. Often it states that if the retailer lowers the
price within 30 days after purchase—protection
periods vary—it will refund you the difference.
For example, if just before Christmas you
bought a $1,500 television and its price in early
January drops to $1,200, you could request a
refund of $300.
In part, a store’s price-protection guarantee is a
sales tactic. It can give a buyer peace of mind
and entice the shopper to buy immediately
instead of looking elsewhere or delaying a pur-
chase. It’s regret insurance.
But really, price protection is a by-product of a
retailer’s return policy. If an item’s price
decreases, a diligent consumer who recently
bought the item might return the old product
and buy the sale-priced one, pocketing the dif-
ference. For the retailer, accepting the return
and processing another sale involves hassle and
expense. To avoid that, the retailer offers price
protection, where it just refunds the money and
skips the hassle of a return and resale.
However, few consumers are conscientious

enough to review advertised prices after a pur-
chase and then claim a price-protection refund.
So, the retailer rarely has to make good on its
price guarantee.
Therein lies the problem: It’s up to you to watch
prices after you buy.
But now, some free Web sites will watch for
you, automatically notifying you when prices
drop. That allows you to quickly and easily
claim your refund. If you paid with a credit
card, often the refund will be credited to your
credit card account. Of course, price-protection
policies vary from store to store.
If you bought a big-ticket item at a well-known
retailer, you could monitor its weekly advertise-
ments, often in the Sunday newspaper or
online, for the duration of the price-protection
period.
Easier, however, is to log purchases into a Web
site, called PriceProtectr.com. PriceProtectr
watches prices on literally dozens of retailers,
such as Amazon.com, Best Buy, Circuit City,
Gap, Costco, Sears, Staples, Macy’s, Toys ‘R Us,
Home Depot, RadioShack, Target, and Wal-
Mart.
The big idea is to log purchases into
PriceProtectr, which will send an e-mail notify-
ing you if the price decreases within the price-
protection period. It’s up to you to actually
request the refund. Durations of price-protec-

tion guarantees vary widely by retailer—from 7
days to 90 days.
Obviously, this is a bit of a hassle. But at least
try it for major purchases, of more than $500,
for example. And log your purchases during
major buying sprees—holiday-gift shopping or
back-to-school shopping.
QUICK TIP
Yapta.com offers a price-protection service for airline
flights you already booked.
How to Buy Services

Many purchases we make today aren’t things, but serv-
ices. We hire and subscribe all the time: home contrac-
tors and plumbers, mail-order movie services, gym
memberships, airline flights, and hotel rooms.
How to Buy Services, 1-2-3

1. Seek reviews and references. Subscribe to
Checkbook.org or Angieslist.com.
2. Research prices by getting three price
quotes.
3. Reevaluate and review contracts carefully.
The three-step process for buying services is very

similar to that for buying products. But you have a few
different resources and tools available to you, along
with some concerns that are specific to services.
If you look carefully, the steps are basically the same
three Rs: Review, research prices, and reevaluate.
1. Seek Reviews and References

For products available nationwide, finding reviews is
relatively easy. But where do you go for reviews of local
service companies, such as plumbers, electricians, and
photographers? If you are new to an area, you will need
a slew of service providers, from a doctor and dentist to,
perhaps, a dog kennel and dry cleaner.
Trial and error is an inefficient, and potentially
expensive, way to find good service professionals.
Talking with neighbors and local friends can work, but
opinions come from a very small sample of customers,
often one. Or you can obtain referrals from related pro-
fessionals. For example, you could ask a lawyer to help
find a good accountant.
Listings in the phone book and online can give you
an idea of some of the providers available, as can adver-
tisements in local media. But they don’t give you objec-
tive advice on whom to choose and why.
Because choosing wisely means you might receive a
better price and better service, here are some better
resources:
• Consumers’ Checkbook. www.checkbook.org is
$30 or $34 for a one-year or two-year member-
ship, depending on region. Membership in the
nonprofit group Consumers’ Checkbook, estab-

lished in 1974, includes a semiannual magazine
with articles and ratings, as well as access to its
Web site, which has the most recent ratings of
local service firms.
This is perhaps the most credible resource for
unbiased reviews of local service companies. It
accepts no advertising and has no business rela-
tionship with firms it rates.
Consumers’ Checkbook doesn’t just collect user
reviews. It has a staff that does undercover price
shopping, so it has apples-to-apples price compar-
isons, rather than asking members for their
impressions about price. It also actively surveys
consumers about the quality of service firms,
rather than simply allowing anonymous posters to
comment about firms, as some free Web sites do.
Consumers’ Checkbook won’t officially list or
evaluate a business until it has 10 ratings.
When it rates hospitals, for example, it examines
risk-adjusted death rates and complications, based
on millions of discharge records. It not only sur-
veys patients about hospitals but doctors too.
The main problem—and it’s a big one—is that
Consumers’ Checkbook is available for only seven
metropolitan areas: Chicago, Boston, Philadelphia,
Seattle, San Francisco, Minneapolis-St. Paul, and
Washington, D.C. However, its ratings of doctors,
hospitals, and health plans are for metro areas
nationwide.
• Angie’s List. A nearly nationwide reviewer of serv-
ices is Angie’s List, found at www.angieslist.com.
Its subscription fees vary depending on home
region.
Membership to the service includes access to the

Web site, a monthly magazine, and a phone-in
service if you want a staffer to search the site for
you. It also offers a complaint-resolution service,
where Angie’s List personnel will try to help
resolve a dispute with a service vendor.
Whereas Consumers’ Checkbook is deep with
information, Angie’s List is wide, covering 120
metropolitan areas and 300 categories of service.
Angie’s List ratings are based on user reviews. It
lists every report online for you to read, rather
than only compiling results into ratings. The serv-
ice does not allow anonymous reporting, it
reviews reports that go into the system, and it lim-
its the number of times consumers can report on a
company.
A potential drawback is that Angie’s List has a
relationship with some service providers, includ-
ing allowing companies to respond to negative
user reports and selling highly rated companies
the right to offer discount coupons on the site. For
usability and credibility, though, Angie’s List is
superior to free Web sites that offer ratings of
service companies.
• Free Web sites. The upside of free-ratings Web
sites is they don’t cost anything. But they are prob-
ably the most unreliable too. That’s especially true
if reviews are anonymous and unregulated. That
makes it easy for companies to submit fake posi-
tive reviews about themselves or negative reviews
of competitors, for example.
Because they’re free, however, they’re worth
checking. But take ratings with a grain of salt.
Examples of sites are Yelp.com, CitySearch.com,
and AOL Yellow Pages. Service-specific sites

include TripAdvisor.com for travel-related
reviews, ServiceMagic.com for home improve-
ment, and WebMD.com for medical reviews.
• The Franklin Report. Franklinreport.com offers
recommended home-improvement providers in
New York, Chicago, Los Angeles, Connecticut-
Westchester County, N.Y., and Southeast Florida.
Other good resources include the Better Business

Bureau, state licensing agencies, and state and local con-
sumer affairs offices. For some national chain service
providers, try sites I already mentioned for products,
ConsumerReports.org and ConsumerSearch.com.
To keep it simple, subscribe to Consumers’
Checkbook if you live in one of the covered regions.
Otherwise, subscribe to Angie’s List.
2. Research Prices
Granted, this advice is as old as the hills, but you really
should get three price quotes, especially for expensive
services.
Is $18,000 a good price for re-siding your house?
You really have no idea until you get multiple quotes. Is
it reasonable to pay $80 a month for a gym member-
ship? It depends on what you get, right? Maybe for you
the YMCA is a better deal than Gold’s Gym, LA Fitness,
or Bally Total Fitness.
I could write a whole other book on finding travel
deals. But you should especially compare prices on the
staples of airline tickets, hotel rates, and rental cars—
and to some extent, cruises.
The Internet can help here too. Check the big online
travel sites such as Expedia.com, Orbitz.com, and
Travelocity.com. But you might find better flights and
fares at such aggregation sites as Kayak.com, which
searches 200 sites, and Mobissimo.com, which might be
better for international flights. Both sites also search
hotel and car-rental rates. If you don’t know whether to
book a flight now or later, check out Farecast.com,
which helps you predict whether ticket prices to your
route will be going up or down. You can bid for rates at
Priceline.com and Hotwire.com. For travel reviews, see
TripAdvisor.com.
The point of getting multiple price quotes is to know
what the range of prices is. That’s fundamental to being
a smart spender.
Be Afraid of Commitment
One of the biggest consumer traps comes from

subscription services. That includes a book-of-
the-month club, satellite radio service for the
car, a fitness club membership, or even your pay
television service.
Automatic payments—often monthly pay-
ments—are insidious because they use inertia.
Once you sign up for an automatically renewing
service, it’s way too easy to let it continue, even
if you don’t want the service anymore. Unless
you’re ultradisciplined, you probably have one
of these automatic-payment spending regrets in
your past—and probably, you have one on your
credit card bill right now.
It’s understandable. We’re busy people. But it’s

worth going through your credit card statement
and automatic bank debits to find some serv-
ices that you should eliminate. If a service is
worth it to you, by all means, continue it. But
chances are you’ll find something to cut out
that you won’t miss.
The problem is that we, as consumers, are far
too optimistic about how much we’ll use serv-
ices when we sign up. Marketers of services
know this about us. That’s why they always
break down payments into easy installments,
usually monthly. Sometimes, they go further,
citing the price as “less than a dollar a day,”
instead of $350.
When considering a service, be wary of long-
term commitments and choose a la carte or
per-use pricing at first—until you know how
often you’ll use the service. And convert the
monthly cost to an annual cost, which seems to
put it in better perspective. The $80-per-month
gym membership doesn’t sound so cheap when
expressed as nearly $1,000 a year.
By the way, automatic spending is bad for the
exact reason that automatic savings is good.
You do it without thinking.
3. Reevaluate and Review Contracts Carefully

As with products, you want to avoid impulse buys you
later regret. So, unless it’s an emergency, like a broken
pipe flooding your house, take your time.
Make the effort to read through contracts for bigger
jobs. If it’s an especially large project, like a major home
renovation, you might want to have an attorney review
the contract.
QUICK TIP
Try haggling. Especially with services, the price isn’t
always the price. Sometimes, you can get a better price
just by asking for a “best and final” quote. With
products, ask for a better deal if you’re buying multi-
ple expensive items at the same time, such as a refrig-
erator and dishwasher or a whole room full of
furniture. The more knowledgeable, firm, and aggres-
sive you are, the more likely you will succeed.
How to Buy Online

Buying online can be a great idea. What’s more conven-
ient than sitting at your computer in your pajamas,
clicking the computer mouse and having the item show
up on your doorstep a few days later?
Virtually all retailers that have brick-and-mortar
stores also have online stores. If you haven’t tried online
shopping, give it a shot, at least for a small purchase.
You’re likely to become hooked on how easy it is.
How to Buy Online, 1-2-3

1. Prefer commodities.
2. Consider shipping cost versus sales tax.
3. Use a credit card.
For those of you who are experts at shopping online,

I’m sure you’ll excuse me if I go over some basics for
people who have never tried it.
Online shopping is similar to catalog shopping, in
that you choose items you want, pay for them, and
they’re shipped to you. With online shopping, you usu-
ally identify items you want to order by clicking on a
“buy” button and placing them in a virtual shopping
cart. Then, as if you were in a real store, you proceed to
a “checkout” screen. There, you provide payment and
shipping information. And you’re done. Often, you’ll
get an e-mail that confirms the transaction.
Of course, the top question asked by shoppers who
haven’t made a purchase on the Internet is, “Is online
shopping safe?” To which, I’d have to respond,
“Compared with what?”
If some computer hacker were to somehow intercept
your credit card number in mid-transaction—highly
unlikely—so what? When the thief makes an illegal pur-
chase, you call your credit card company and cancel the
card. The bank will issue you a new card and waive any
fraudulent charges. You take just as great a risk every
time you hand a restaurant waiter your credit card and
he disappears with it to a backroom cash register. How
hard would it be for the waiter to copy down the num-

ber and use it elsewhere?
Most online transactions are encrypted, meaning
they’re secure. When checking out, look at the Web
address in your browser. It’s secure if it says https:
instead of http:. You can also look for a padlock icon in
your Web browser, which signifies a secure site.
If you’re worried about not getting merchandise you
paid for, you can stick with merchants you’ve heard of.
And, as discussed later in this section, if you use a credit
card, you probably have further consumer protections
offered by your card company.
If you’re worried about your name, address, and
telephone number being misused, well, you might be
shocked at how easy it is to get that information any-
way. I’m not saying that’s OK; just that online shopping
doesn’t add much to that risk.
1. Prefer Commodities
For the uninitiated, online shopping is best for products
that are commodities, in the sense that they are identi-
cal no matter where you buy them. They’re widely
available and it makes no difference which copy of the
article you buy.
Sure, you can buy shoes and custom-made furniture
online, but you don’t get to touch, try on, and thor-
oughly examine online products. That’s a drawback for
some purchases.
Early on in electronic commerce, books on
Amazon.com were among the first products sold. They
were ideal to purchase on the Internet because each
copy of a new book is exactly the same. The same was

true of music CDs.
In a narrower sense, the Internet can be good for the
opposite—finding uncommon things, such as antiques
and oddball merchandise. That’s because the market-
place is so much larger than you will find in any one
region of the country.
But especially if you’re just getting started with
online shopping, opt for commodities.
QUICK TIP
When buying from an unfamiliar site, look for an
“About Us” page, and do a quick Google search on
the retailer’s name, looking for other customers’ expe-
riences. Some comparison shopbots rate retailers. If
the retailer has a privacy policy, all the better.
2. Consider Shipping Cost Versus Sales Tax

The biggest drawback to ordering online is the item has
to be shipped to you. That means you’ll have to wait a
few days, which a lot of us aren’t very good at. More
important, you often have to pay shipping and handling
charges.
You’ll find some listings have a very low price for the
product, but exorbitant shipping fees. This happens a
lot on auction site eBay.com. Bulky and heavy items,
such as televisions, can cost more than $100 to ship.
In the end, all you should care about is the total
price. So, always add together both components of an
online purchase—the purchase price, plus shipping and

handling. Often, you’ll find online prices to be so much
lower that it’s still cheaper to buy online, even if you
have to pay for shipping and handling.
One advantage of online shopping is you won’t nec-
essarily have to pay state sales tax on the purchase. If
the retailer has no locations in your state, it is not
required to collect sales tax on checkout. Technically,
most states require you to pay sales tax on Internet pur-
chases, presumably by keeping track of purchases and
accounting for the tax on your state income tax form.
But almost nobody does that, which essentially makes
Internet purchases from out-of-state retailers cheaper.
I’m not saying that avoiding state sales tax on
Internet purchases is right or wrong. I’m just saying
that’s how it is. Still, this is a fluid issue, as state govern-
ments try to fill their coffers by collecting sales-tax
money from Internet sales. So, stay tuned.
3. Use a Credit Card

Use a credit card for online transactions because the
consumer protections are so much stronger than for
debit cards. This is especially true if you’re dealing with
unfamiliar sellers.
A big benefit of using a credit card is its dispute serv-
ice. If you have a problem with the Internet merchant
and can’t get it resolved, pass the dispute on to your
credit card company and allow them to battle the
retailer for you.
Further, if someone at that retailer misuses your card
and starts making purchases with it, you’re not liable for
them. By federal law, you’re liable for $50, but all the
major credit card companies limit your liability to zero.
Of course, these protections apply whether you’re
shopping online or in a real store. But online you have
a greater chance of dealing with an unfamiliar retailer.
Credit cards are a buffer between you and a strange
merchant.
For more about credit cards, see Chapter 6, “Credit
When Credit’s Due.”
One exception to this rule is if you don’t own a
credit card and don’t want to. Maybe you’ve gotten into
trouble before running up balances you had trouble
paying off. In that case, you’re left with using your debit
card that acts as a Visa or MasterCard.
Other intermediary forms of online payment, such as
PayPal and Google Checkout, can link to credit cards
and bank accounts. But they’re not widely available as
payment options.
QUICK TIP
Get an autofill program. These little computer pro-
grams will fill in your name and address information
and some even store your credit card information, so
you don’t have to fetch your card each time you buy
something online. Just as valuable, these programs
automatically fill in your logins and passwords to all
the different retailers you buy from. There are some
free autofill programs available, often as plug-ins for
Web browsers, such as Google Toolbar,
toolbar.google.com. I shop online so often, I bought
a robust form filler called RoboForm Pro,
www.roboform.com (Windows only).
Coupon Codes and Rebate Portals
Consider these two shopping scenarios that

illustrate ways to save money while shopping
online.
Coupon Codes
Imagine standing at a store checkout. To get 10
percent off your order, all you would have to do
is step away from the cashier for a moment and
look on a nearby shelf for a coupon. Would you
bother?
That’s essentially what you can do while shop-
ping on the Internet. Get in the habit of search-
ing for discount codes, also called promotional
codes or coupons.
When buying online, you place items in a virtual
shopping cart and then go through a checkout
procedure. While checking out, the Web site
often will ask if you have a discount code to
enter. These codes are generally a series of num-
bers and letters that unlock goodies, such as a
percentage discount on your order, dollars off
your purchase, and discounted or free shipping.
If you don’t have a discount code, don’t just
ignore the promotional code box. Go code
hunting.
Open a separate window in your Web browser.
Call up a few of your favorite Web search engines
to find codes. Type in the retailer’s name, the
word “code” and other terms such as “promo-

tional,” “coupon,” and “discount.” You can also
try code aggregators, such as CouponMom.com,
CouponCabin.com, FlamingoWorld.com, and
CouponMountain.com. If you find a code, return
to your checkout browser and type or paste the
found promotional code into the box. The code
might have expired, but there’s no harm in trying
it. The worst that happens is the retailer rejects
the code. If you type in a correct code, the dis-
count will be applied to your order.
A few minutes of searching could yield worth-
while savings, such as 10 percent off, free ship-
ping, or $15 off an order, for example.
Rebate Portals
Imagine you’re standing at the threshold of a
retail store, but you can get a 10 percent dis-
count if you walk through another entry door.
Would you do it?
That’s what you can do by shopping through
rebate portals.
A shopping portal, or entrance, is a separate
free Web site that has an arrangement with
retailers. Retailers pay a commission to portal
operators in return for sending Internet con-
sumer traffic to the retailer’s site—a kind of
referral fee. When the consumer makes a pur-
chase, the retailer pays the portal a commis-
sion. A “rebate” shopping portal goes a step
further and shares its commission with the

consumer.
To use a rebate portal, sign up for free at the
portal’s site. Then, instead of making a pur-
chase directly at a retailer’s Web site, go to the
portal to see whether it is affiliated with that
retailer. If so, click the link to enter the retailer
through a side door, of sorts. Then, proceed
through the online checkout as you normally
would.
Behind the scenes, the retailer knows the portal
sent you. It pays a commission to the portal.
Then the portal shares the commission with you
by crediting your portal rebate account. It’s all
electronic and automatic, akin to a rewards
credit card.
A typical rebate to you would be about 5 per-
cent of the purchase price, but it can vary
widely, even surpassing 10 percent for some
retailers. Opt for cash rebates instead of points
or other rewards.
Popular rewards sites include FatWallet.com,
Ebates.com, Jellyfish.com, and QuickRewards.
net. Portals that donate your rewards to college
savings plans include Upromise.com, BabyMint.
com, and LittleGrad.com. If you’re having trouble
choosing, go with Ebates.com. Learn more at
CompareRewards.com.
Fun Tangent: Eyeglasses Online
You can buy almost anything online nowadays.

One of my favorites is eyeglasses. Weird, right?
The short story is my first pair of glasses pur-
chased online cost me $8. Actually, with ship-
ping and a clip-on sun shade, they cost $16.90
delivered. I see great with them and they look
good too. In fact, it’s a toss-up which I like
more, these glasses or the ones I paid about
$300 for from a chain-store optician.
I ordered them from ZenniOptical.com.
Granted, there are no frills with ordering glasses
this way. They arrived in seven business days in a
padded envelope in a simple hard-plastic case.
There are a few minor drawbacks:
1. My written prescription from my eye doctor
did not include a measurement for PD,
pupillary distance, which is basically the
distance in millimeters between the centers
of your eyeballs. You need this measure-
ment to order online. I measured my PD in
a mirror. I’m sure that’s not the way the eye
doctor would recommend, but it seems to
have worked.
2. You might have to have the nose pads and
arms of the glasses adjusted if they don’t sit
right on your face. This might cost you a
few bucks, but many optometrists will do it
for free.
3. The clip-on sun shade isn’t custom-made

for the glasses, but it fits and covers the
lenses well.
The cheap glasses have thinner metal and might
not last as long. However, doing the math, I can
buy 16 pairs of ZenniOptical glasses for the
price of one discounted pair at a popular
retailer. At these prices, you can own several dif-
ferent styles of eyeglasses for a fraction of the
usual retail price.
I was so pleased I followed up by ordering rim-
less bifocals with every option available, includ-
ing antireflective coating. That surely would
have cost $500 at an optician or eye doctor. My
cost: $68. My 10-year-old son now refuses to
wear his $300 eyeglasses, and insists on wearing
his $8 Zennis. He says he just likes them better.
Go figure.
By the way, a different Web site, EyeBuyDirect.
com, also sells eyeglasses for about $8.
How to Buy Used Stuff

Buying used stuff can elicit extreme opinions, usually
from people who rarely, if ever, buy anything second-
hand. But buying every item in your life as new just isn’t
being smart with money.
Maybe nowhere is the argument for buying used
items more persuasive than in buying cars. New cars
can lose 30 percent of their value in the first year of
ownership. So, if you’re talking about a $30,000 vehi-

cle, the difference between a new car and 1-year-old car
is $9,000. If $9,000 is a lot of money in your world, this
discussion about buying used stuff is for you.
How to Buy Used Stuff, 1-2-3

1. Get over the “yuck” factor.
2. Evaluate price and quality.
3. Keep it simple.
1. Get Over the “Yuck” Factor

The first step in saving money with used items is to
break through a mental barrier. It might not be pleasant
to read it in black and white, but some people think
used merchandise is:
• Broken/tattered
• Dirty/smelly
• Not worth my time/Only for poor people
So, I’m here to tell you that buying something used

doesn’t make you an inferior person. I don’t think of
myself as generally inferior, and I’m not poor. But I reg-
ularly stop by a local consignment shop to see what
men’s clothing they have. I bought a suit for $25 that I
wear during television appearances. I bought a pullover
windbreaker for $2. I splurged on two pricey silk neck-
ties, $8 each.
How do you get over a mental barrier about buying
used? Just do it.
This is another of the rare occasions where I advise

you to spend money to save money. Go to a local thrift
store or consignment shop and buy a used piece of
clothing that you will wear, even if it’s only a scarf or
belt. Alternatively, buy a set of drinking glasses or
plates. The point is to buy something used that you have
a very personal interaction with. This way, you can con-
front your fears about buying used merchandise. If you
have a pleasant experience, your aversion to buying
used stuff will dissipate, if not disappear. You will get
over the “yuck” factor.
Then a whole new world of retail opens up to you.
You can consider used items from eBay.com,
Craigslist.com, Freecycle.org, garage sales, flea markets,
thrift stores, and newspaper classified ads.
QUICK TIP
Add to your barrier-breaking errands a stop by a local
dollar store. The merchandise isn’t used, but it is
cheap. Dollar stores can be ideal outlets for junk
food, such as cookies, pretzels, and chips. I’ve bought
such things as an iPod case, calculator, greeting cards,
and printer USB cord at a dollar store. Just avoid
cheap electric or electronic items for fear of a fire
hazard.
2. Evaluate Price and Quality

Buying something used might mean settling for a prod-
uct of lower quality than you can get new. That’s fine
for many purchases. Nobody can reasonably expect to
buy the best of everything.
On the other hand, buying used might mean you can
afford something of higher quality. If you have $500 to
spend on a living room sofa, which do you think is
higher quality: a new one from Ikea or an Ethan Allen
model purchased used? So buying used sometimes
means you can get a superior product.
Similarly, buying used might get you a luxury brand
with more features. Go back to the automobile exam-
ple. Would you rather have a 2009 Chevrolet Cobalt
subcompact or a 2-year-old Honda Accord? Or, for that
matter, a 2003 Lexus ES 300 or BMW 3 Series? They all
cost the same.
But, it’s true, buying used items can be more of a has-
sle than buying new. So, it’s always important to evalu-
ate prices and quality.
3. Keep It Simple
Some items are not functionally different whether new
or used, assuming they are undamaged. These include
movie DVDs, music CDs, video games, and, yes, even
books like this one. A simple garden shovel or hammer
is preferable to buy used, rather than a rototiller or cir-
cular saw. The simpler, the better—fewer things to go
wrong.
Other examples of great used purchases include kids
clothing, toys, and musical instruments—considering
they might be used for a short time. Consider simple

sports equipment, such as golf clubs, assuming you’re
not worried about custom fitting.
Of course, automobiles don’t exactly fit into the cat-
egory of a “simple” machine. But cars are so reliable
nowadays. Many go 150,000 miles with only routine
maintenance. So a corollary of the “simple” rule is to
favor used items when they’re reliable.
QUICK TIP
An often overlooked source of free used items is your
local public library. Besides books, many have a wide
variety of periodicals, movie videos, and music CDs.
Refurbished Electronics
One way to purchase electronics cheaper is to

buy them as “refurbished.” Contrary to its
name, refurbished often does not mean the
item is used, repaired, or inferior in quality. In
fact, it might undergo tighter quality control
than a new item because someone has checked
to make sure the machine works.
The reason an item is classified as a “refurb”
could be minor, such as marred packaging. Or,
maybe a previous customer bought the item but
returned it because he didn’t like the color or
couldn’t figure out how to use it.
Consumer savings from buying refurbs can be

significant, 10 percent to 50 percent off retail
price.
I’ve done even better than that. I bought a refur-
bished universal remote control that operates a
TV and several related components. It’s a fancy
remote—definitely falls in the “wants” category.
It typically costs about $150. I got a refurbished
one for $80. Works great. The only difference is
the refurbished remote came in plain packaging
instead of the colorful blister-pack the new item
comes in.
However, before buying a refurb, investigate
how the retailer defines “refurbished.” And find
out about the return policy and what warranty
you’ll get.
The safest place to buy a refurb is from a man-
ufacturer. Such major makers as Dell, Apple,
HP, Sony, and Epson sell their own refurbished
electronics. The easiest way to search for and
buy refurbs is online, often at a manufacturer’s
own site. Some third-party online retailers, such
as TigerDirect.com and NewEgg.com, also do a
robust refurb business. Major retailer Target
has started selling “pre-owned electronics,” and
Amazon.com sells refurbs at a companion Web
site, Warehousedeals.com.
How to Teach Kids about Money

Teaching children to be good spenders and savers is a
topic that can befuddle even the most well-intentioned
and well-informed parents. The main tool is an
allowance system, which can teach skills kids will use
for the rest of their lives.
As those children mature into adults, they will have
to resist almost constant marketing pitches from adver-
tisers on TV, Web sites, billboards, magazines, and
newspapers. And they’ll probably have credit available
to them, allowing them to buy even when they can’t
afford it.
Money troubles await children who don’t learn that
money is finite, and they have to make trade-off deci-
sions with purchases. They’ll have to distinguish
between needs and wants.
How to Teach Kids about Money, 1-2-3

1. Give children an allowance.
2. Don’t tie allowance to chores.
3. Make rules.
1. Give Children an Allowance

Customize allowance amounts to what you can afford
and what you think your child can handle. But don’t
give too little. The child needs to be able to save enough
money in a relatively short period to buy something he
or she wants.
A suggestion: Beginning around the ages of 5 to 7,

give 50 cents per week for each year old the child is. At
age 10, give $1 per year old. A less-accelerated plan is
$1 weekly for each school grade level.
2. Don’t Tie Allowance to Chores

Don’t confuse money lessons. Learning how to spend
smart as a consumer is a different lesson than “you have
to work for a living.” You are not paying your children
a salary; you’re giving them money as a tool for learn-
ing, like you would give them a piano to practice on or
flash cards with which to memorize multiplication
tables.
So don’t tie allowance to chores. Chores are to be
done by the child for free because he or she is part of the
household and has a responsibility to help operate it. If
a child decides she doesn’t feel like doing chores and
will forgo the allowance, the allowance system crumbles
and the lessons are lost. How will you respond when
you tell her to make her bed and she asks, “How much
are you going to pay me?”
To instill a work ethic and entrepreneurial spirit,
offer a list of optional jobs a child can choose to com-
plete for extra money.
If you disagree with this philosophy, go ahead and
tie allowance to chores—after all, you’re the parent. But
regularly talk to the child about both lessons—spending
and earning—separately.
3. Make Rules
Require the child to earmark money each pay period for
three accounts: spending, saving, and giving. For
younger children, it’s easy to place equal amounts into
three containers or envelopes, labeled with each cate-
gory. Identify types of purchases the child will be
responsible for. Don’t give loans or advances.
The “spending” account is where all the action is,
and some of the best lessons. Money in this account
should be spent regularly.
Allow children to make mistakes with this money.
You want them to buy things impulsively that they later
regret. You want them to buy a poor-quality item that
breaks. You want them to run out of money, forcing
them to save for several weeks to buy the next thing.
You want them to choose among similar items with dif-
ferent prices.
Children need the repetition of buying things and
witnessing the consequences of the decisions. Of course,
parents should retain veto power over types of pur-
chases, such as candy or dangerous toys.
Regularly talking to children after money decisions,
especially poor spending decisions, is crucial. Talk about
your own money life, too, such as why you’re using
coupons at the supermarket and how credit cards work.
With the “saving” account, the point is to show how
money adds up over time. This money is not to be spent
but to be counted and monitored. When you dismantle
the allowance system in the child’s late teens, the money
can be used for college expenses or a car, for example.
Earmarking money for “giving”—weekly church

donations or periodic donations to a charity—provides
a deeper lesson about what money can be used for.
Of course, you can adjust the allowance plan to fit
lessons you are trying to teach. Here are examples:
• Include lunch money in older children’s allowance
and offer a deal: The children can keep the lunch
money for each day they make a lunch at home
and brown-bag it.
• Switch to a monthly allowance for older children,
forcing them to budget their money over a longer
period.
• Make saving optional but offer to match the
child’s contribution to their savings dollar for
dollar.
Details of an allowance system aren’t as important as

making the effort to start one, adjusting it over time and
teaching the lessons.
Chapter 5
Green Means Green
B
y now, we all know the “inconvenient truth”—
the Earth’s environment is endangered. But here’s
a convenient truth: You can help Mother Earth
while saving money.
Links between environmentalism and spending
smart are undeniable. You don’t have to look hard to
see that going green means more green in your neigh-
borhood and in your wallet. It’s a realization corporate
America is just now waking up to. Such terms as sus-
tainability and carbon footprint have entered the board-
room lexicon.
For consumers, the primary misconception is that
making an environmental effort will cost you money or
convenience. That can be true in some cases. But today,
there are many examples of how you can save green
while going green.
This chapter gives just a few examples of the easiest
and most worthwhile steps to take.
145
Gasoline
No other price fires up Americans more than gasoline
prices. Maybe it’s because we have no control over
prices and feel helpless. Maybe it’s because it’s a neces-
sary expense, especially in suburban and rural areas. Or
maybe it’s because we see the prices flaunted in huge
numbers at every commercial traffic intersection.
Whatever the reason, you can probably spend less on
gas. That not only puts more money back in your
pocket but helps the environment and America’s
dependence on foreign oil.
Gasoline, 1-2-3
1. Don’t spill the coffee.
2. Take it slow and steady.
3. Pump it up.
A discussion about saving on gas centers on two

main areas: What you drive and how you drive.
Let’s start with what you drive.
Many people think they can fix their gas-spending
problem by trading in their gas-guzzler for a new fuel-
efficient car. That’s often false. The reason? Hidden
costs.
We won’t get into all the math here, but depreciation
of a new vehicle and the cost of financing that vehicle
often far surpasses any gasoline savings you’ll reap. So,
unless you’re accounting for those hidden costs, you
can’t accurately assess the value of swapping vehicles.
Green Means Green 147
Other hidden costs include higher insurance rates for

a newer car and sales tax that you’ll have to pay if you
live in a state that levies sales tax. Let’s look at sales tax
alone. At 6 percent, you’ll pay $1,500 in sales tax to
buy a $25,000 vehicle. $1,500 buys a lot of gas for your
gas-guzzler.
Now, if you were going to replace your current vehi-
cle anyway, it makes sense to buy a fuel-efficient one. Of
course, the best idea is to buy a late-model used car,
which allows someone else to take the tremendous first-
year depreciation hit of a new car.
So, for saving money on gasoline, that leaves us with
how you drive.
1. Don’t Spill the Coffee

While driving, imagine you have a cup of coffee, uncov-
ered, in your cup holder. You don’t want that coffee to
slosh out of the cup and onto you or the car floor. So,
what do you do? You try to drive as smoothly as possi-
ble, with gradual acceleration, more coasting, and grad-
ual braking. If you’re accustomed to being aggressive
with the accelerator and brake pedals, this tip will
improve your gas mileage considerably, making your
gas dollars go further.
When automotive Web site Edmunds.com set out to
prove which gas-savings tips saved the most money,
they found aggressive driving was the number one
money drain. Moderating your driving habits with
slower acceleration and braking saved up to 37 percent
on gas, with the average savings at 31 percent. Could
you imagine saving one-third of the money you spend
annually on gasoline? If you normally spend $50 a week

to put gas in your car, that’s a savings of $858 a year.
Two cars? That’s more than $1,700 saved.
Smooth acceleration, cornering, and braking extend
the life of the engine, transmission, brakes, and tires,
too, saving even more money.
2. Take It Slow and Steady

Here’s another visualization that might work. Imagine
that as you press down on the accelerator pedal, money
leaks from your wallet. The harder you press, the more
money leaks out. It’s like at the gas station when you
begin fueling up your vehicle: The tighter you squeeze
the trigger of the fuel pump, the faster the price-readout
advances.
The point is to drive slower.
Consumer Reports tested a Toyota Camry. By
increasing the highway cruising speed from 55 mph to
65, the car’s fuel economy dropped from 40 miles per
gallon to 35. Speeding up to 75 mph cost the car
another 5 mpg. One reason, Consumer Reports says, is
that aerodynamic drag increases exponentially the
faster you drive. It simply takes more fuel to power the
car through the air.
And use cruise control when you can, even on sub-
urban roads at 40 mph. It’s a surprisingly effective way
to save gas, up to 14 percent, Edmunds.com found.
Cruise control smoothes out the driver’s accelerator use,
preventing surges. It also makes the driver take the long
view of the road, rather than reacting to every change in
traffic around them.
3. Pump It Up
OK, I’ll concede that keeping your car tires properly
inflated is a common tip and it won’t save you tons of
money or gasoline. But it’s so cheap and easy.
Consumer Reports found a Toyota Camry experi-
enced a 1.3 mpg loss in highway fuel economy when
tires were underinflated by 10 pounds per square inch
(psi). Maybe more important, underinflated tires com-
promise handling and braking and wear faster.
Underinflated tires also run much hotter, which can lead
to tire failure.
Check the pressure of your vehicle’s tires at least
once a month with a tire gauge. The correct pressure
usually can be found on a label in your vehicle’s driver-
side door jamb. Of course, you’ll want to keep an eye
out for a service station that doesn’t charge for using its
tire pump.
Gasoline Myths
Some bad information gets passed around

about saving money on gas. Here are a few
examples:
G Air conditioning versus open windows.
This has been a long-running debate, but
the short answer is there’s no significant
difference in fuel economy. Do whatever
makes you more comfortable.
G Additives and devices. Don’t bother with
fuel-tank additives and devices that attach
to your vehicle. They claim to improve your

gas mileage. But they don’t work. The U.S.
Environmental Protection Agency and
Consumer Reports have tested them. None of
these additives and devices makes much dif-
ference in fuel economy.
G Morning fill-ups. A common tip is to fill
your gas tank in the morning, when the fuel
is cool, rather than in the heat of the day.
The theory is that the cooler gasoline will be
denser, so you will get more for your money.
But the temperature of the gasoline coming
out of the fuel nozzle changes very little, if
at all, during any 24-hour stretch. Any extra
gas you get will be negligible, Consumer
Reports says.
Home Heating and Cooling

Most energy savings in your home will come in one
of two ways: You can take steps that allow you to
adjust the thermostat and use less energy or, keeping the
thermostat the same, you need your furnace and air
conditioner to turn on less often, mostly by keeping
your paid-for air indoors longer.
Those sound like simple concepts, but they are fun-
damental to saving money and energy.
Home Heating and Cooling, 1-2-3

1. Make a thermostat plan.
2. Seal leaks.
3. Avoid big-ticket fixes.
1. Make a Thermostat Plan

Many of the usual tips about home heating and cool-
ing are useless unless they allow you to do one simple
thing: Adjust the thermostat to use less heat and air
conditioning.
Call a meeting of everyone in your household and
devise a plan for controlling temperature in your home.
Agree on what times of day you can set the thermostat
really low in the winter—without risk of freezing pipes,
of course. While you’re home, can you set the tempera-
ture at 68 degrees instead of 72 if everyone in the house-
hold agrees to wear sweaters and slippers around the
house? Can you be comfortable at 66 degrees? Will
flannel pajamas and an extra blanket on the bed allow
you to lower the temperature into the 50s at night? If
someone is home all day, make it a routine to open
drapes to let the sun’s heat in and otherwise close drapes
to help further insulate windows.
The opposite is true in summer. When can you use
less air conditioning and allow the house to get
warmer? Will everybody agree to wear light clothing to
reduce the need for cooling? Will everybody be con-
scious about when it’s bearable to open windows to get
a breeze rather than use air conditioning?
These steps seem obvious to me and they might to

you too. But ask yourself why on so many gorgeous
spring or fall days at perfectly comfortable temperatures
so many of your neighbors have their windows closed
and heat or air conditioning running? Somebody is not
getting the message or there are a lot of people who
close up their homes because they suffer from outdoor
allergies.
If your household is undisciplined about turning the
thermostat up and down and has a routine schedule,
buy an Energy Star-rated programmable thermostat.
This device is easy to install and costs about $100. It’s
basically just a timer that sets your thermostat to a pre-
scribed temperature at various times during the day and
night. For example, you could let the house get warm in
the summer while you’re at work and start cooling it
before you arrive home. You could make back the cost
of the $100 programmable thermostat in one year’s
worth of energy savings. However, if you’re diligent
about controlling temperature the old-fashioned way—
by walking over to the thermostat and setting it by
hand—you don’t need a programmable thermostat.
This adjusting of the thermostat won’t work unless
people in the household—or at least those who control
the temperature—are on board with the plan.
2. Seal Leaks
This too seems like obvious advice, but you have to
actually take the time to find and seal leaks. That’s so
you can keep your paid-for air indoors longer.
Walk the exterior perimeter of your home to look for

cracks and unsealed seams, not only around windows
and doors, but in pipe cutouts to the outdoors, chim-
neys, and the foundation.
Indoors, carefully hold a candle, stick of incense, or
other flame near seams in your windows and exterior
doors. If the flame and smoke blow, you know you have
a leak. Caulking, weather-stripping, and foam sealant
will plug those leaks.
Also check recessed lights, baseboards, electrical out-
lets to exterior walls, and unfinished spaces behind cup-
boards and closets.
Seal leaky air ducts at joints, starting at the furnace
air handler, and insulate ducts that run through
unheated basements or attics. In a typical house, about
20 percent of the air that moves through the duct sys-
tem is lost due to leaks and poorly sealed connections,
according to the federal government’s Energy Star pro-
gram. But duct tape isn’t the answer. It’s actually a poor
way to seal duct cracks and seams. Use a mashed
potato-like sealant called mastic. Or use the water-
based kind. You paint it on duct joints and tiny holes,
and it hardens. You could also use metallic duct tape
with a UL-181 rating. Search the EnergyStar.gov site for
the online brochure, “Duct Sealing.”
Use appropriate insulation for your climate. It can
increase your comfort and reduce your heating costs up
to 30 percent. Start with attic insulation, followed by
exterior and basement walls, floors, and crawl spaces.
Learn more about insulating at www.simplyinsulate.
com. Also, see the publication “A Do-it-Yourself Guide
to Energy Star Home Sealing” by the Environmental

Protection Agency. Call 1-888-782-7937 or get it online
at EnergyStar.gov.
3. Avoid Big-Ticket Fixes

Always calculate the breakeven point for any energy-
savings effort. For example, replacing old windows will
save energy, but they’re so expensive it might take
decades before you earn back enough in energy savings
to pay for the windows. The same goes for replacing a
functioning furnace or central air-conditioning unit.
If you’re upgrading or replacing for other nonmone-
tary reasons, such as the attractivness of the windows or
because you want to help preserve the environment,
that’s fine. Just know what it’s actually costing you.
Little Things Mean a Lot

So much of what we can do to save money and the
environment doesn’t come via grand one-time efforts,
but through our daily habits.
Little Things Mean a Lot, 1-2-3

1. Replace your five most-used bulbs with
CFLs (compact fluorescent lamps).
2. Buy rechargeable batteries.
3. Don’t buy bottled water.
1. Replace Your Five Most-Used Bulbs with CFLs

I was watching a TV rerun of the sitcom Friends when
the inferiority of the traditional incandescent light bulbs
struck me. The character Monica, a chef on the show,
was reminiscing that as a child she cooked with an
Easy-Bake Oven.
The child’s toy Easy-Bake Oven bakes cookies and
cakes with a 100-watt incandescent light bulb. Think
about that. The Easy-Bake Oven is possible because tra-
ditional light bulbs are actually small heaters that hap-
pen to give off some light. They are wildly inefficient
ways to illuminate a room. It’s 130-year-old technology.
Meanwhile, compact fluorescent lamps, CFLs, are so
much better than they used to be. They’re definitely
worth a try.
Each CFL will save you $30 to $50 over its life, com-
pared with an incandescent bulb. That’s because CFLs
use one-quarter of the electricity. The energy savings
more than make up for the higher purchase price. And
they last 10 times longer than incandescents. I bought
CFLs that say on the package they are guaranteed to
last nine years—not nine months—nine years.
How’s the quality? Quite good, actually. Problems
with flickering, humming, and giving off poor color
light have all been remedied. Lights might turn on a lit-
tle slowly and take several seconds to get to full bright-
ness. But I don’t find that to be a big problem. In fact,
it’s less jarring than having immediate brightness.
The important point here is to at least try them. Start
by replacing bulbs in your five most-used lights. The
best deals are buying multipacks of CFLs at warehouse
clubs and home centers.
Avoid putting CFLs in lights with dimmer switches.

Though some CFLs are made for dimmable lights, the
bulbs lag behind in quality compared with incandes-
cent. The biggest problem is the range of dimming,
which is narrow. It’s like having a dimming range of
full, half, and off, rather than all the brightness levels in
between.
A minor environmental drawback of CFLs is they
contain a tiny amount of mercury. It’s best not to throw
them in the trash. Instead, go online to Earth911.org to
find out where to drop them off for disposal. As of this
writing, a few national retailers, such as Home Depot
and RadioShack, will take them.
CFLs are really just a transitional technology, until
we get LED (light-emitting diode) bulbs, which use even
less power, last longer, give off better light, and don’t
have the mercury problem. But we’re not there yet.
Until we are, CFLs are a great way to go.
QUICK TIP
Another way to save electricity is to kill the vampires.
Vampire appliances are neither fully on, nor fully off,
existing in a kind of undead state. Examples of vam-
pires are computers, DVD players, VCRs, TVs, bat-
tery chargers, and cable and satellite TV boxes.
They secretly suck electricity, day and night, even
when powered off. This “standby loss” bleeds dollars
from your wallet and wastes electricity. Did you know
that over its life, a microwave oven consumes more
energy powering its clock than it does cooking food?
For electronics grouped together, use a power strip,

which allows you to flip a switch on the strip to cut
all power to the components.
2. Buy Rechargeable Batteries

Like CFLs, rechargeable batteries have gotten a lot bet-
ter recently. They’re worth trying because you can save
money and avoid a lot of AA and AAA batteries and
their packaging ending up in landfills.
Rechargeable batteries are more expensive up front, but
far cheaper over the long run, even factoring in the cost
of the charger and minimal electricity used. And today,
rechargeables last longer on a charge than a regular dis-
posable alkaline.
The big drawback had always been that traditional
rechargeable batteries lose battery power while idle. So,
if your digital camera has been sitting in a drawer for a
few months, its rechargeable batteries could be drained
when you need it to capture an unexpected great
moment.
Enter the new breed of rechargeables, called hybrids or
precharged batteries. These nickel metal hydride
(NiMH) cells come already charged and lose power at a
slow rate, maintaining 85 percent of their charge, even
after sitting idle for a year. You can recharge batteries
literally hundreds of times.
Here’s how four rechargeable AA batteries could save
you nearly $2,000.
Four AA rechargeable batteries that yielded 500 charges

each would cost $50, including the cost of the charger.
Electricity cost for charging is negligible, literally a few
pennies.
The equivalent would be buying 2,000 disposable bat-
teries. At $1 each, that’s $2,000.
Net savings is $1,950.
I bought a brand that was one of the pioneers in the
hybrid rechargeables, the Sanyo Eneloop. They work
quite well. They’re especially good for devices that eat
through batteries, such as computer mice, video-game
controllers, and cameras.
You should recycle rechargeables. Fortunately, it’s easy.
You can drop them off at such retailers as Sears,
RadioShack, Home Depot, Lowe’s, Staples, and
OfficeMax. See call2recycle.org for a list of battery
recyclers near you.
QUICK TIP
Whether you use disposables or rechargeable batteries,
it makes sense to invest in a battery tester. Some are as
cheap as $5. A voltmeter or battery tester can deter-
mine which in a group of batteries is the dud, so you
don’t have to replace all batteries in a multibattery
device.
3. Don’t Buy Bottled Water

There’s only one beverage for humans that literally falls
from the sky for free. It’s water. Water is the only bever-
age that’s so common and inexpensive that you can
drink as much as you want from a public fountain and
nobody cares.
Yet, somehow beverage companies persuaded
Americans to pay good money for a free product, all
because they put it in a bottle for you. Mind you, this is
a product that requires you to go to the store, load
heavy cases into your shopping cart, pay real money for
a virtually free product, and lug it home.
Test after test shows that bottled water does not taste
better than tap water, nor is it safer from contaminants.
Tap water in most parts of the United States is very high
quality. In fact, much of the bottled water sold, includ-
ing from brands Aquafina and Dasani, comes from
municipal tap water, not mountain springs or glaciers or
whatever else is pictured on the bottle’s label.
If your home tap water has an off taste, filter it. A
cheap pitcher-style filter works great.
If you want to spend money to drink water and
make a social statement, consider drinking tap water or
filtered tap water from a fancy water bottle. A quick
Internet search finds several water-bottle retailers
including Mysigg.com and kleankanteen.com. Bottles
from NewWaveEnviro.com are made from corn and
biodegrade in 80 days. Bottles from Aquamira.com and
thewatergeeks.com have filters built into the bottle.
Not only is paying for bottled water hard on your
pocketbook—some households spend more than
$1,000 a year—it’s hard on the environment. There’s

making the bottle in the first place, which requires oil.
Then there’s emissions and fuel consumption by trucks
that transport the bottled water. And then there’s dis-
posing of the bottle, many of which are not recycled.
QUICK TIP
Part of the hazard of bottled water is throwing the
disposable bottle “away.” The problem is: There is no
“away.” That points to a broader issue about usable
stuff ending up in landfills. Profit from your would-be
junk by selling it on eBay.com or Craigslist.com. Give
it away via freecycle.org or get a tax deduction by
donating to local charities or thrift shops.
Really, this advice about bottled water is a metaphor

for all kinds of unnecessary spending on disposable
products—plates, cups, napkins, paper towels, and a
wide host of other products.
Choose to reuse. You wallet and Mother Earth will
thank you.
For more energy-saving tips, go online to the Alliance
to Save Energy, ase.org; the U.S. energy department’s
energy-efficiency site for consumers, www.eere.energy.
gov/consumer; the American Council for an Energy-
Efficient Economy, aceee.org; and the Energy Star pro-
gram, www.energystar.gov.
Should You Buy Carbon Offsets?
A popular exercise nowadays is to measure your

carbon footprint. That estimates how much
you are emitting in greenhouse gases by heating
your home, driving your car, and flying on air-
planes, for example.
The antidote, some say, is to buy carbon off-
sets. A carbon offset is essentially a promise
that your money will help pay for projects that
reduce greenhouse gases.
The average person who puts 10 tons of carbon
dioxide into the atmosphere a year might offset
that impact by buying $150 worth of carbon
credits. Prices vary widely. The money goes
toward such projects as planting trees, building
wind-power projects, and capturing and
destroying methane from landfills and dairy
farms. The idea is to pay for the emissions dam-
age you cause so your existence on the planet is
carbon neutral.
But as a consumer, is buying carbon credits
spending smart?
I’m not a fan.
First, critics are right to fear that some people
will throw money at the problem to alleviate
their guilt without changing their behaviors—
write a check and hop in the Hummer to go to
work. Second, there are too few good ways to

be sure your money is being used wisely.
Far more effective than purchasing carbon off-
sets is reducing your personal consumption by
using some of the tips in this chapter.
PART II
Spending Smart Yesterday
Chapter 6 Credit When Credit’s Due . .165
163
Chapter 6
Credit When Credit’s Due
C
redit is an increasingly important component of
money management nowadays, whether you
borrow money or not. That’s why it’s important
to care about your credit reports, your credit scores,
and your credit cards, if you use them.
This has never been truer since the whole financial
world started to reexamine the loose lending standards
that led to tumult in the financial markets in late 2008.
The days of easy credit, given to anybody who can fog
a mirror, are gone.
Credit scores are intended to define how creditwor-
thy you are. Can lenders trust you to pay back bor-
rowed money on time? That’s all creditworthiness is.
The more trustworthy you are, according to a credit-
scoring formula, the more likely you’ll get a loan in the
first place and the more likely you’ll get a lower interest
rate than less trustworthy people.
165
Your Credit
Unless you’ve been living under a rock, you have heard
about credit reports and credit scores. They’re not par-
ticularly new. But in recent years, the companies you do
business with use reports and scores a lot more. And,
though credit reports were once-secret dossiers about
your money life, consumers today have more informa-
tion gathered and stored about them than ever before.
Your Credit, 1-2-3

1. Get your credit reports. Go online to
www.AnnualCreditReport.com and retrieve
your free credit reports. Dispute errors.
2. Get your credit scores (optional). If you’ll be
applying for an important loan soon, pay to
get your “FICO” credit scores at
www.MyFico.com.
3. Improve your scores. Review what goes into a
credit rating and take steps to improve your
FICO score.
What Is a Credit Rating?

Basically, credit reports work like this: Companies you
owe money to regularly report on you to three credit
bureaus named Experian, Equifax, and TransUnion.
Did you pay your bills or didn’t you? They report
good stuff, such as on-time car payments, and bad stuff,
such as failing to pay your cell-phone bill. Information
Credit When Credit’s Due 167
on those reports translates into point values. Those

points go into a math formula that spits out a three-
digit number, your credit score. Lenders and others can
look at that score and decide whether they want to do
business with you. If they do, the scores might deter-
mine how good a deal they’re willing to offer.
The process is more complicated than that, but that’s
the basic idea.
Today, it’s a bit shocking how vital your credit infor-
mation is. Consider that raising your credit scores from
the low 600s to the high 600s could save more than
$5,000 a year on a 30-year, $300,000 mortgage.
Meanwhile, the same rise in scores on a three-year,
$25,000 auto loan could save $700 a year, according to
examples from the Consumer Federation of America.
That’s a huge amount of money for most people.
The problem is many consumers find credit reports
and credit scores confusing—and for good reason. Some
of the details seem illogical.
Did you know?
• You could earn $1 million a year and have lousy
credit. Credit scores don’t even consider your
income, your net worth, or how much money you
have in the bank.
• People who pay their credit cards off in full every
month and never miss a payment could have
lower credit scores than people who have late pay-
ments and collections.
• Credit bureaus and other credit companies try to
trick you into buying fake scores and near-worth-
less monitoring services.
Unfortunately, consumers still don’t seem to know

much about the topic of credit reports and scores,
according to annual surveys by the Consumer
Federation of America. Recent survey results are shown
in Figure 6.1.
According to a survey of consumers by the

Consumer Federation of America:
• 31 percent of consumers know what a credit
score means.
• 74 percent of people incorrectly think
income affects credit scores.
• 79 percent incorrectly believe they can get
their credit scores for free once a year. (They
can get credit reports annually for free.)
Source: Consumer Federation of America survey, 2007.
FIGURE 6.1 Understanding credit: by the numbers
Why Your Credit Matters

Paying more than you have to because you don’t under-
stand the basics of credit scoring is just wasteful.
Plugging that leak of wasteful spending will allow many
people to redirect money to other priorities.
Minding your credit is important for two basic rea-
sons: You can save a lot of money, and you can discover
identity theft early.
Saving Money
As I said at the start of this chapter, credit scores
attempt to define whether lenders can trust you to pay
back money you’ve borrowed. It’s not a judgment about
your personal integrity. It’s solely about how the credit-
scoring formula tries to predict whether you’ll pay back
loans or pay bills on time.
Your credit scores—the only ones that matter are your
three FICO scores—might even help lower your rates on
home and auto insurance, or land you a job, an apart-
ment, or a cell-phone contract. That’s because insurance
companies, wireless carriers, and even some employers
and landlords use credit scores in their evaluations of you.
So, even if you never borrow money, your credit rat-
ing is important.
Figure 6.2 shows how much lower your monthly
mortgage payment might be if you have a good credit
score. A person with a lousy score would pay about
$11,000 a year more than someone with a great score.
Higher FICO credit scores mean lower payments.
FICO® score Interest rate Monthly payment

760–850 5.82% $1,764
700–759 6.04% $1,807
660–699 6.33% $1,862
620–659 7.14% $2,024
580–619 9.45% $2,512
500–579 10.31% $2,702
Note: 30-year fixed mortgage rates for $300,000 loan in October 2008.
Source: MyFico.com
FIGURE 6.2 Credit counts.

Identity Theft
You want to know early on if a thief has stolen your
identity and opened new credit accounts in your name.
That’s the most serious type of identity theft. As we’ll
discuss later, having your credit card number ripped off
isn’t really that big a deal.
Monitoring your credit reports lets you catch the
presence of fraudulent accounts early. You might not
lose a lot of money with identity theft because you have
some consumer safeguards. But cleaning up the mess
with banks and other creditors can be a huge hassle.
1. Get Your Credit Reports

By federal law, you’re allowed to check your three credit
reports for free, but generally not your credit scores.
Reports are more important because they are what
scores are based on. You can get a report once a year
from each of the three main credit bureaus. Some state
laws give you the right to get them more often.
The three credit bureaus are Experian, Equifax, and
TransUnion.
Accessing Your Report

Go online to AnnualCreditReport.com, which is the
only official site to get free credit reports.
Beware: The heavily advertised FreeCreditReport.com
is an unconscionable attempt by the credit bureau
Experian to confuse you and sell you services you don’t
need. Don’t use that site.
Get all three reports, one from each of the three

credit bureaus, if you meet the following criteria:
• This is the first time you’re accessing reports.
• You will need an important loan soon.
• You have reason to believe your identity was
stolen.
If this is routine credit checking, access just one

report. It doesn’t matter which one. Then check back
every four months and access a different report. By stag-
gering access to reports, you can check three times a
year for free. Mark your calendar.
As of this writing, the procedure goes like this: Go to
AnnualCreditReport.com and choose your state. Fill
out the form with your personal information. You’ll
have to provide your Social Security number. If that
makes you nervous, that’s a good thing. You should be
wary of giving it out. But in this case, it’s OK.
Then, you’ll encounter a security test—a short mul-
tiple-choice quiz involving your credit history. It might
ask which bank holds your mortgage or ask you
to identify a previous address. After that, skip adver-
tisements for getting your credit score. View your report
and print it. Or, save the report to a file on your
computer.
Getting reports online is easiest. But you can do it by
phone by calling 1-877-322-8228 or print an online
form, fill it out, and mail it to: Annual Credit Report
Request Service, P.O. Box 105281, Atlanta, GA, 30348-
5281.
Reading the Report

The report might appear intimidating at first, but read
your way through it. After a while, it will seem like an
episode of the 1950s TV series This Is Your Life, a diary
of where you’ve been financially. It will have long-ago
addresses, loans for cars you forgot about, department
store charge cards you barely remember, and, maybe,
late payments from a rough patch you went through
years ago.
Don’t be surprised that the bureaus have slightly dif-
ferent credit information in their reports. Some credi-
tors don’t report to all three bureaus.
Dispute Mistakes
If you find serious mistakes that will affect your credit-
worthiness, such as credit accounts that aren’t yours
and incorrect negative information, follow the online
instructions on how to dispute them.
If you see accurate negative information that is more
than seven years old, you can dispute that too because
negative information is supposed to expire off the
report in that time. Bankruptcy is an exception. It can
stay on credit reports for 10 years.
Don’t worry too much about minor inaccuracies,
such as typos or misspellings in former addresses. They
don’t figure into your credit score.
2. Get Your Credit Scores (Optional)

The only scores you need to worry about are your three
FICO scores, which grade you on a scale of 300 to 850.
Higher is better.
Others scores, some being sold by credit bureaus, are

fake scores of dubious value. Some experts derisively
call them FAKO scores. If the score you’re retrieving
doesn’t specifically say it’s a FICO score, it’s probably
not. Most lenders don’t use anything but FICO-based
scores. Alternative scores to FICO might become the
standard in the future. But for now, FICO is all that
really matters because the company that sells that score,
Fair Isaac, has a virtual monopoly.
For routine monitoring, accessing your credit scores
is optional. That’s because scores are just based on
what’s in the report, and reports are free. Meanwhile,
you’ll probably have to pay for FICO credit scores.
But if you want or need scores, the easiest way to get
them is to go online to MyFico.com and pay to view
them. Two FICO scores are available, from Equifax and
TransUnion. The third credit bureau, Experian, discon-
tinued public access to its FICO credit score in early
2009. At the time of this writing, consumers no longer
had access to their Experian FICO score. But they can
still get their Experian credit report.
Remember, scores change all the time. You’re just
seeing a snapshot of your credit rating at that moment.
It’s like an outdoor thermometer reading that
changes from day to day. Unless something unusual
happens, like a heat wave or snowstorm, the tempera-
ture reading will fluctuate within a relatively narrow
range. Similarly, you won’t have the exact same score
every day because you’re constantly using your credit,
which affects the information being fed into the credit-
scoring formulas. Unless something unusual happens,
such as a late payment or bankruptcy, your credit score

will fluctuate within a relatively narrow range.
If you’ve already seen your credit reports and the
information is redundant, your scores will be similar. In
that case, you can just retrieve one score because the
others are likely to be similar.
Before you pay for scores at MyFico.com, do a quick
search-engine query with the keywords “myfico.com”
and “coupon code.” You might find a discount code to
get 10 percent to 20 percent off your order at
MyFico.com.
If you don’t want to pay for scores, you can get a
general idea about your credit rating for free. Granted
these are FAKO scores, but they can give you an idea of
where you stand. Visit such Web sites as Quizzle.com,
CreditKarma.com, Credit.com, and Bankrate.com.
These sites offer free non-FICO scores and score
simulators.
Get a CLUE: Your Insurance Report
Did you know you also have the right to get an

insurance report about yourself? It’s what
insurers will look at when deciding whether they
want to insure you. It details your claims history
for home and auto insurance. In other words, it
notes the instances when you’ve filed a claim to
get money from an insurer. It’s called a CLUE
report. The acronym stands for Comprehensive
Loss Underwriting Exchange.
You’re entitled to a free report once a year. Go

to www.choicetrust.com and sign up to see
your claim history. If you haven’t filed claims in
the past five years, you might not have a CLUE
report. If you have filed claims, you might have
two reports, one for home insurance and one
for auto insurance. Be sure to request both.
Of course, you want to check for errors in your
report that could result in being rejected for
insurance or paying higher premiums than
necessary.
For more information, see Fact Sheet 26 at the
Privacy Rights Clearinghouse, found at
www.privacyrights.org.
3. Improve Your Scores

To spend smarter, which means getting the best deals
and lower borrowing rates, you will have to raise your
FICO scores into the 700s and ideally, beyond 750.
It helps to know what goes into a FICO score. The
exact formula for calculating FICO credit scores is a
secret, but we know that the biggest factor is your pay-
ment history. Paying your bills and loans on time affects
35 percent of your credit score. The amounts you owe
account for 30 percent. The length of your credit his-
tory is 15 percent. Applying for new credit counts for
10 percent, as does the different types of credit you
have. See Figure 6.3.
FICO Score Breakdown
Types of
Credit
Used 10%
New
Credit 10%
Payment History 35%
Length of
Credit
History 15%
Amounts Owed 30%
Source: MyFico.com
FIGURE 6.3 Paying your bills on time is the most important com-
ponent of your credit score.
Notice that your FICO score only includes the credit

lines you have open and how you use them. If you’re a
cash-paying billionaire, you probably don’t have good
credit scores. Your maid and gardener might have bet-
ter scores.
The following sections discuss ways to improve your
scores.
Fix Mistakes
Because credit scores are based on credit reports, make
sure your reports don’t contain inaccurate negative
information.
This is a good place to talk about so-called “credit

repair,” as you might have heard advertised. There’s no
way to really repair your credit other than to correct
mistakes. And you don’t need to pay a company to do
that for you. Disputing incorrect negative information is
free and, in most cases, easy. As we talked about, dis-
pute mistakes while accessing your reports for free once
a year at AnnualCreditReport.com. Some credit repair
companies will dispute all the negatives on your report,
hoping creditors won’t respond in the required 30 days.
If creditors don’t respond within 30 days to confirm
that the information is correct, the negatives will be
temporarily removed from your reports, raising your
credit score. Of course, if a creditor responds after 30
days, the negative mark goes back onto your report.
Creditors and credit bureaus are wise to this strategy,
so filing batches of disputes won’t necessarily work. If
you want to use this ethically questionable tactic of dis-
puting any bad mentions on your reports, at least do it
yourself rather than paying a credit-repair service.
Pay Bills
Paying your bills on time, every time, won’t raise your
score, but it will keep it from dropping. View due dates
on bills as critical, and aim to pay a few days early.
Remember, it doesn’t matter if your bill somehow got
lost in the mail—you still owe the money on time.
And think twice about taking a hard-line stand in a
dispute with a creditor. Of course, you shouldn’t allow
companies to treat you unfairly, but protesting what
you view as an unjust $39 charge by refusing to pay
could ding up your credit report for the next seven
years. Once the black mark is on your report, it could

stay there for the full seven years, even if you give up
and pay the bill.
Sometimes it’s better to pick your battles and choose
some to lose.
Find Your Ratio

Besides correcting mistakes and paying bills on time, the
best thing you can do for your credit rating is to contin-
ually use credit but use very little of your available limit.
If you have several credit cards that have a combined
$5,000 limit, carrying a combined balance of $4,000 is
hurting your score. That’s because you have an 80 per-
cent “utilization ratio.” Calculate your ratio by dividing
your combined balances by your combined limit.
Credit ratio = Combined credit balances

Combined credit limits
Aim to get that ratio down to the 30 percent range.

To optimize your score, aim for less than 10 percent.
Remember, you score doesn’t care whether you pay off
the balance, only how much of your available credit
limit you’re using at any given time. If you’re always at
zero percent, meaning you don’t use the cards at all, the
cards won’t contribute to your credit score after a while.
Improve Your Ratio

Paying off debt so you’re carrying smaller balances will
help your ratio—and your overall financial health.
Carrying balances does not help your scores.
And don’t close accounts. Keep open your old or

unwanted accounts, even if you paid them off and don’t
use them. The more available and unused credit, the
better for your score. Besides helping your ratio, the old
accounts help to increase the average age of your credit
lines. Remember that your length of credit history is a
significant factor in the FICO score.
One exception: If you know that you will spend
more on unnecessary purchases just because you have
the available credit, close the accounts. You’ll do more
damage to your overall financial health than the rela-
tively minor improvement to your credit score.
Cautiously raise credit limits. It helps to have a lot of
available credit to help your ratio. But opening a lot of
new credit accounts at once will likely hurt your credit
score in the short term. A strategy to help your score
without hurting it would be to regularly ask your cur-
rent credit card company to raise your current limit
“without pulling a credit report.” Applying for new
credit cards is problematic because you have to use
those new cards a little to show them as active accounts,
but not use them so much it hurts your ratio. All that
assumes you can have open accounts and not use them
irresponsibly by charging things you can’t afford.
You can also improve your ratio by double-paying
your credit card bill, by making two credit-card pay-
ments a month. This artificially lowers your balance
reported to credit bureaus. Make a payment in the mid-
dle of your billing cycle, which will lower the amount
the creditor reports to the credit bureau on the state-
ment closing date.
WARNING
Be sure to make the second payment after the closing
date and before the due date, so you aren’t socked
with a late payment, says Liz Pulliam Weston, author
of Your Credit Score. Some billing systems need to see
a payment made between the statement closing date
and the due date to register you as paid on time, even
if you made more than the minimum payment earlier
in the month.
Type “A” personalities, take note: Forget perfect. If

your FICO score is 780 or above, don’t bother trying to
improve it. Lenders already view you as perfect. You
gain very little—and potentially nothing at all—by suc-
cumbing to a perfectionist personality and trying to
improve your score to 800 and above. In fact, many
actions you take might end up hurting your score. Just
keep on doing what you’ve been doing.
Establishing Credit
Establishing credit, or reestablishing healthy

credit after a bankruptcy, can be a challenge.
G Establish credit. If you’re new to credit or
recovering from a bankruptcy, you might have
to apply for a secured credit card, which
requires you to pay money into an account
and then draw on it with the credit card. Make
sure it converts to a regular credit card after a
reasonable period of time, for example,
18 months. You can also apply for installment

loans, such as an auto loan, which will help
build credit by adding a different type of loan.
The problem is, without a high credit score,
you’ll pay a high interest rate. And if, because
of that high rate you default on the loan,
you’re back to having terrible credit.
G A note on credit for college students. Oddly,
college students, with or without jobs, can get
credit easily by getting a credit card.
Applications literally litter college campuses.
Credit card companies have learned that
when college students can’t pay their credit
card bills, mommy and daddy usually step in
and pay. That makes students a pretty good
credit risk. Whether your college student
should have a credit card is a different matter.
A college student can apply for a card without
a parent’s approval. So, have a conversation
before the first trip to campus about whether
your child should get a card.
How You Pay

Spending smart isn’t just about what you buy, but
how you pay.
The ultraorganized and responsible consumer might
gain advantages by using mostly credit cards, while
those struggling with money management should stick
with mostly cash. For those in between, the decision lies
in the details—although, everybody should be writing

as few personal checks as possible.
One reasonable strategy for consumers who fall
between the ultradisciplined and financially challenged
is to use cash and debit cards for everyday purchases.
Then use credit cards for big-ticket purchases and
online transactions to ensure you get the added con-
sumer protections credit cards provide.
Noncredit Payment Methods

Setting aside credit cards for a moment, here is a good
preference for cash payment methods.
Noncredit Payment Methods, 1-2-3

1. Consider cash as king.
2. Do debit right.
3. Limit use of checks.
1. Consider Cash as King

Paying with cash has a few drawbacks. For example, it
might not be convenient to pay for very expensive items
with paper bills and coins. You’ll get no rewards points
or fringe benefits when paying with cash. If you haven’t
chosen a bank wisely, you might have to pay ATM with-
drawal fees. You receive no automatic record of spend-
ing like you get with credit card bills, canceled checks,
and bank statements. And, of course, there’s the some-

what remote possibility you’ll be mugged and lose your
cash that way.
But using cash can be a fabulous idea. For one, it
could help you curb impulse spending. Studies show
that consumers spend about 20 percent more when
using plastic, rather than cash. That’s because people
suffer a psychological pain when handing over bills and
coins. It feels much more real than swiping plastic.
That’s because the transfer of funds is right in front of
you, rather than occurring in some invisible transfer of
electrons among banks. The transfer is proximate
enough to feel the loss.
Just as important, cash never has finance charges or
overdraft fees or many of the negatives of paying with
plastic.
A related and profound point is this: When you use
cash, you can spend the money you have but no more.
If you don’t have the money, you can’t buy it. You must
stop consuming when the money runs out. If you have
$200 in cash to spend at the supermarket, you could be
forced to place items back on the shelf if you don’t have
enough money.
Surely, these points are not news to you, but you
might not have thought about them in a long time. For
these reasons, cash is still a great form of currency.
QUICK TIP
Nowadays you can actually withdraw more money
from an ATM than you have in your account. Banks
call it “courtesy overdraft protection.” They give you
more money than you have in your account and then
slap you with an overdraft fee of $20 to $40 and
impose high interest charges on the money they have
advanced. This also is offered for overdrawing your
account by personal check or debit card. To avoid
overdraft fees and interest charges, keep track of
spending and obtain real overdraft protection, where
you instruct the bank to dip into another account,
such as savings, when a checking account is over-
drawn. And keep a cushion of about $500 in your
account at all times.
2. Do Debit Right
In general, using debit cards is a fine alternative to using
cash and credit cards. Also known as a check card, a
debit card is more convenient than cash or personal
checks. You use it like a credit card, but the money
comes immediately out of your bank account. Most
double as an ATM card to make cash withdrawals.
They also provide a record of spending and avoid the
risk of finance charges. Some debit cards provide
rewards.
The big drawback of debit cards is they are not
afforded the same fraud protections under federal law
as credit cards. With a stolen credit card, you can lose
no more than $50 out of pocket. That’s federal law. But
federal law is weaker when it comes to debit cards.

With a debit card, you must report it within two busi-
ness days to receive the $50 liability limit. Otherwise,
you’re on the hook for $500, or after 60 days you could
lose everything a thief steals from your bank account.
Individual card companies, such as Visa and
MasterCard, have policies that promise to limit your
debit-card liability to zero, but these policies are not as
strong as federal law and could change. And even if the
bank eventually puts money back in your account—and it
doesn’t have to for at least two weeks—you could strug-
gle to pay bills while you and the bank sort out the mess.
You’ll have to decide for yourself whether less fraud
protection under federal law is a reason to avoid carry-
ing debit cards in lieu of credit cards. If you don’t want
the direct-debit feature of your card, you can ask your
bank to replace your debit card with an ATM-only card,
so you still have ATM access to cash.
Another drawback of debit cards arises from mer-
chant blocking. Blocking is when a merchant, at a gas
station or hotel, for example, routinely withholds an
amount on a debit card until the transaction is fully
processed. That blocked amount is temporarily unavail-
able, meaning you could overdraw your account if you
don’t have an adequate cushion. That can result in over-
draft fees.
And debit cards don’t help your creditworthiness,
like credit cards do. For these reasons, the Privacy
Rights Clearinghouse, a privacy advocacy group, rec-
ommends consumers never use, or even carry, debit
cards.
That’s a hard-line stance against a potentially useful

money tool. Even considering all the potential negatives
about debit cards, I like them as a cash alternative
for people who have trouble handling credit cards
responsibly.
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When using a debit card, choose to provide a signa-
ture rather than PIN—choose “credit” rather than
“debit”—if your bank charges for PIN transactions or
grants rewards points only for signature transactions.
Either method subtracts money directly from your
bank account.
3. Limit Use of Checks

In short, checks are a lousy form of currency.
It’s true that you won’t incur finance charges with
checks, like you might with credit cards. And you can
track spending in the checkbook register. But the advan-
tages mostly stop there.
Checks are the most inconvenient form of payment
because it takes time to fill out a check, you have to pay
for and reorder blank checks, and some merchants
don’t accept them. Any “float” time you receive
between writing the check and money being taken from
your account has shrunk dramatically with electronic
processing of checks.
More problematic is that checks are at the most risk

for fraud and identity theft. Most everything a thief
would need to steal your identity is on your check,
including your name, address, and bank account number.
So, regularly paying bills by check just isn’t a good
idea anymore.
One of the few occasions when checks are more con-
venient than other payment methods is when you’re
paying another individual and don’t want to use cash—
if you’re paying back your sister for splitting the cost of
dad’s birthday gift, for example. If you are mailing
checks, be very wary of putting a check in your mailbox
for outgoing mail. Again, a thief only needs to pluck it
out of the box.
QUICK TIP
Check washing is a scam in which a thief steals a
check and chemically erases—or washes—the payee
and amount, fills in new payment information for
himself, and cleans out your bank account. You can
avoid check washing by using special pens, such as the
Uni-ball 207 gel pen, which retails for about $2. Its
ink cannot be chemically erased.
Layaway and No-No-No Sales
The hallmark of a bad way to pay is one that

allows or entices you to buy stuff you cannot
afford. By “afford,” I mean having money to
pay for it before you make the purchase. Timing
is crucial. The right way is: money first, then
buy. That’s as opposed to the typical way: Buy
first, and then figure out how to pay later.
That’s the biggest reason to avoid layaway and
sales featuring “no down payment, no interest,
no payments.”
G Layaway. Layaway isn’t evil. It’s just illogical
and unnecessary.
Layaway is when you select items you want to
buy, take them to a special layaway depart-
ment, and place a down payment on the pur-
chases, usually with an additional service fee
of $5 or $10. You leave items at the retailer
and periodically return to make payments on
the items. When they’re paid off, you take
them home.
Some shoppers are fierce supporters of lay-
away. A segment of customers were furious at
Wal-Mart in 2006, when it discontinued its
layaway program.
Layaway can be useful for nabbing hard-to-
get items, such as a hot-selling toy while it’s
in stock and locking in a sale price that won’t
be available later when you have the cash. A

potential third reason comes during the holi-
days when you need to hide gifts from nosy
children. You can leave them in the layaway
department at a store rather than risk discov-
ery in your home.
But for any other reason, layaway is among
the worst of purchasing scenarios—the
retailer has your money and the merchandise.
You leave the store with nothing. If you fail to
finish making your payments, you don’t get
the goods and you often incur an additional
fee.
A predominant attitude among layaway
lovers is that it’s a better idea than paying by
credit card and incurring interest charges. But
that’s based on a false premise because it dis-
regards two better choices: saving the money
first or not buying it at all.
Instead of making payments on your layaway
merchandise, what if you shoved cash for
those payments under a mattress or into a
cookie jar? The outcome would be the same.
You return to the store when you have enough
money and buy it. It takes no more time—you
get the merchandise just as quickly—and you
avoid the layaway fee. If you have the disci-
pline to use layaway, you should certainly
have the discipline to stash away some cash,
which takes less effort.
And in some cases, layaway is mathematically

worse than charging on a credit card.
Imagine you pay a $5 fee for a 30-day layaway
on a $100 purchase. If you instead used a
credit card with an annual interest rate of 18
percent, it would charge 1.5 percent for that
same 30-day period, or $1.50. In that sce-
nario, layaway costs three times more.
G No-no-no sales. Take a hint from the name,
and consider these a no-no. “No down pay-
ment, no interest, no payments for 12
months” sales usually feature a fine-print
gotcha. In some cases, the slightest slip-up in
payment, such as missing a payment or not
paying the balance by the end of the promo-
tional period, means you’ll be back-charged
exorbitant interest from the date of purchase.
In addition, many no-no-no sales require you
to apply for a store’s charge card, which is
likely to lower your credit score, at least
temporarily.
Granted, diligent and savvy consumers can
use no-no-no sales to their advantage by
earning bank interest on their money for the
duration of the no-payments period. But
why? The interest you’ll earn is miniscule and
the penalty for a minor mistake is harsh.
Don’t outfox yourself. When you buy some-
thing, pay for it.
Credit Cards
“Guns don’t kill people, people kill people,
and monkeys do too—if they have a gun.”
—Comedian Eddie Izzard
A credit card is like a loaded handgun. It’s not the tool

that makes it good or bad. It’s the user. That’s why
credit cards, as a payment method, deserve their own
section in this book. They can be a convenient and even
lucrative form of payment, or they can be disastrous.
They are, at once, good and evil.
Maybe the single-biggest advantage to credit cards is
being able to use somebody else’s money—that of the
bank issuing the card. Think about it. When paying
with cash, checks, and debit cards, you’re putting your
money at risk in the transaction. With credit cards, you
put the bank’s money at risk. You can dispute a charge
and the bank has to fight with the vendor. Meanwhile,
you don’t pay. If a card is stolen, you just report it. Your
cash is not vulnerable.
Used well, the credit card is the only form of pay-
ment that builds your credit history so you can obtain
lower rates on other products such as auto loans and
insurance. Credit cards also provide rewards, such as
cash, airline miles, or merchandise points. Some offer
extended warranties on products purchased with the
card and other perks that vary among cards.
At the same time, credit cards carry the biggest
downsides of any payment method. Namely, consumers
frequently spend more when they charge purchases, as
we said previously, and many incur outrageous finance

charges that sometimes top 30 percent. Late-payment
and over-the-limit fees are also punitive. Those disad-
vantages, if they apply to you, dwarf any advantages of
credit cards.
If you are philosophically opposed to credit cards, I
have no problem with that. Don’t use them. Just realize
you’re forgoing some convenience, consumer protec-
tions, and rewards that credit cards provide. But if you
spend less as a result of using cash only, you could be
adequately compensated for your philosophical stand.
Here’s how to get the most out of your credit cards.
Credit Cards, 1-2-3

1. Never carry a balance.
2. Know your perks.
3. Maintain your card.
1. Never Carry a Balance

Never is a strong word. But carrying balances on credit
cards from month to month is so destructive to your
finances that it’s worth using strong language.
For those who carry a credit card balance from
month to month, credit cards can be downright evil.
Interest rates can easily top 20 percent and push toward
30 percent, which is outrageous. You could be in big
money trouble if you’re paying only the minimum pay-
ment each month. It’s wildly expensive. See Figure 6.4.
What if you made only the minimum payment of

$200 on a balance of $8,000?
Credit card balance: $8,000
Interest rate: 18%
Minimum payment: $200
Years to pay off: 30
Interest paid: $11,615.
FIGURE 6.4 Minimum payment predicament
So, paying high interest on credit cards, if you can

possibly avoid it, is foolish. If you regularly carry bal-
ances, you have already figured that out.
Yet, nearly half of American households carry a bal-
ance from month to month, according to the Federal
Reserve. You can view this statistic a couple of different
ways. First, it’s shameful that almost half of American
households are borrowing money on their credit cards,
with many paying outrageous interest rates. That’s even
truer if much of the balance includes dinners out,
unnecessary electronic gadgets, and other highly
optional charges.
The second way to look at the statistic is that half of
Americans carry no balance at all. So, if you justify hav-
ing a balance “because everybody does,” it just ain’t so.
Also, don’t take comfort in reports that say the aver-

age balance on credit cards is $10,000. MSN Money
columnist Liz Pulliam Weston is the foremost crusader
against this so-called fact, which originates from
CardWeb.com. It has been reported by the media liter-
ally hundreds of times in recent years. CardWeb.com
reported that in 2007 outstanding credit card debt was
$9,840 per household. Weston points out that the num-
ber only includes households that have a credit card,
which eliminates from the average all those households
with zero balances because they don’t have cards. The
stat also includes business credit cards, which can have
huge balances, especially with business travel. What
business credit card balances have to do with household
debt, I have no idea. Just as important, it reports the
total balance as a snapshot, regardless of how many of
those people paid off the balance before incurring
finance charges.
The point is, not everybody is carrying credit card
balances, and you shouldn’t either.
As I alluded to earlier, part of the reason people run
balances on credit cards is because credit cards don’t
seem like real money. Handing over plastic to a cashier
doesn’t stimulate the same emotional pain as handing
over a fistful of twenty-dollar bills. Indeed, studies have
shown that consumers spend more with credit cards
than cash, which explains the growing presence of card
readers at every retail cash register. Retailers want you
to overspend.
So, even people who pay off balances every month
could be overspending just by virtue of the payment
method they’re using.
2. Know Your Perks

Despite all those negatives, credit cards have advan-
tages—for “deadbeats.” You would think credit card
“deadbeats” is a term for people who don’t pay their
bills. But, in fact, deadbeats are what credit card com-
panies call customers who pay off their balances each
month. These customers don’t pay the issuer any inter-
est or fees. In essence, they give themselves a free ride by
enjoying all the advantages of credit cards and suffering
none of the downsides. Don’t feel too sorry for credit
card companies, though. They still make money from
the merchants you buy from.
Being a credit-card deadbeat is a good thing.
One of the advantages of credit cards is they help
establish and maintain your credit rating, which trans-
lates to real money. You can get less-expensive mort-
gages and car loans when you have a better credit
rating. And you might even get cheaper auto insurance,
as some insurers now use credit ratings in determining
your premiums.
Another huge benefit is putting the credit card com-
pany between the merchant and your cash. That’s why
it’s best to use a credit card for online and mail-order
purchases in case a dispute arises.
Cards have many fringe benefits too. Most people
overlook these perks. They include purchase protection,
extended warranties, merchandise discounts, travel
insurance, rental car insurance, price protection, lost
luggage help, favorable exchange rates on foreign cur-
rencies, and others.
I won’t go into details about these offerings because

they vary by card. But make a note on your to-do list to
investigate all the perks of credit cards you carry in your
wallet. You can read about the benefits online at the
card-issuer’s Web site or call the phone number on the
back of your card and ask, “What are my card perks?”
QUICK TIP
Merchants can’t require a minimum purchase for
using a Visa or MasterCard credit card. A provision in
their agreements with card companies requires them
to accept charges of any amount. Of course, there’s
not much you can do about a merchant refusing to
make a small sale, except report them to the credit
card company.
3. Maintain Your Card

Maintaining your card doesn’t mean keeping the card
free of fingerprints or making sure the signature on the
back is legible. It means continually negotiating better
terms on your credit card account.
One secret of the credit card industry is this: As bad
as card issuers sometimes treat their customers, they
hate to lose them.
It’s very expensive to acquire new customers. So,
threatening to stop using the card—or better yet threat-
ening to transfer your balances to another card—can be
effective with customer service representatives on the

phone.
The point is you have leverage. And you should use
it at least annually to improve the terms of your deal
with the bank issuing the card. This remained true, even
after the credit crunch that began in 2008.
The first thing to do is ask your card issuer for a bet-
ter interest rate, even if you don’t carry a balance. That’s
because, for better or worse, credit cards are a short-term
source of funds. You never know when you might have
to break the cardinal rule of “never carry a balance.”
Call the number on the back of the card, and just
ask. If you’re unsatisfied with the answer, ask for a
supervisor. Still not satisfied? Call back in a few weeks
and do it again. The better payment history you have,
the more likely you’ll succeed.
The next thing to do is call back and ask for a higher
credit limit. This is a tactic discussed earlier about how
to improve your credit score. Be sure to ask, “How
much can you raise my limit, without pulling my credit
report?” That’s because an official inquiry into your
credit report could temporarily lower your credit score.
You’re looking for something for nothing here. The
point of raising your limit is to improve your credit
score by lowering your ratio of credit used to your
credit limit. A secondary reason for raising your limit is
to avoid over-the-limit penalty fees, if you’re the type of
person who nearly maxes out your credit cards.
QUICK TIP
Speaking of maxing out, if you’re at the video store
wondering which blockbuster to rent next, head over
to the documentary aisle and check out the 2007
movie, Maxed Out. It’s a disturbing and enlightening
exposé on how credit card companies prey on the
weak in society. In fact, their profits depend on it.
The final thing to ask your credit card company is

for fees to be waived, even if it’s your fault. If the card
company hits you with a $40 late-payment fee or over-
the-limit fee, call up and just ask for them to waive it.
If you’re a good customer and it’s your first slip-up, they
will almost certainly waive the fee. It’s worth a phone
call.
How to Choose a Rewards Credit Card

In choosing any credit card, the primary question is:
Will you carry a balance? If so, get the lowest interest
rate you can and pay off the balance. Forget rewards
cards, which typically have higher interest rates.
But if you’re what the industry calls a deadbeat,
meaning you pay your credit card bill in full every
month, you probably want a rewards card.
How to Choose a Rewards Credit Card, 1-2-3

1. Go online.
2. Choose cash back.
3. Get more than 1 percent.
A rewards card gives you something back based on

your purchases. Some give frequent flyer airline miles,
some merchandise points, others cash. Some give you
greater rewards based on where you shop, boosting
rewards at gas stations and supermarkets, for example.
There’s something so alluring about getting some-
thing for nothing. Assuming you have a high enough
credit score to qualify for rewards cards, here’s how to
choose.
1. Go Online
A number of Web sites will help you choose a rewards
card, or, at least, you can survey the choices. Among the
Web sites are CardRatings.com, IndexCreditCards.com,
and LowCards.com. The previously mentioned
BillShrink.com is also worth using. And, watch your
mailbox. Some card deals are only offered directly by
mail to certain potential customers. And check with your
credit union. If you don’t have a credit union, you prob-
ably qualify to join one. See www.findacreditunion.com.
2. Choose Cash Back

Although you can choose among a wide range of credit
card rewards, choose one with cash back on all your
purchases. The problem with points and airline miles is
the card issuer can change the value of those “curren-
cies” anytime it wants. It can require more points for the
same merchandise or more miles for the same airline
ticket. Never mind the hassle of trying to cash in points
or miles—fat chance you’ll be able to use those frequent-
flyer miles during a holiday, for example. Frequent-flyer
miles can expire, and many miles cards will charge you
an annual fee, which cuts into whatever benefit you get.
Curtis E. Arnold, author of How You Can Profit from
Credit Cards, points out that it could take three years to
earn a free ticket purchased with frequent-flyer miles
from your card, assuming annual spending of $8,000. If
that card carries an $80 per year annual fee, your “free”
ticket just cost you $240 in fees, compared with the many
no-fee credit cards available. At the same level of spend-
ing, you might have earned enough with a simple 1 per-
cent–back cash rewards card to pay for a ticket.
QUICK TIP
If you already have airline miles, use them soon. With
a struggling airline industry, airline miles will proba-
bly become less valuable. Airlines are charging larger
fees for cashing in frequent-flyer miles for supposedly
“free” flights. And airlines are cutting flights, which
might make it harder to use miles. Experts also
believe major carriers will start requiring flyers to use
more points for flights.
The card issuer can’t change the value of cash.

Moreover, guess what you can buy with cash?
Anything, including merchandise and airline tickets.
So, cash is a far superior currency than points and
miles because it gives you more options. And cash pro-
grams are also easier to use. The real dollar value of
points or airline miles should have to be far higher than
cash to persuade you to voluntarily lose the flexibility of
cash and accept an inferior form of rewards payment.
Be wary of charity rewards credit cards, too. The
good part about a card that donates your rebate to a
charity is it makes your contributions automatic. The
bad part is most cards donate just 1 percent of your
spending or less to the charity. A better plan is to use a
cash-back card and write an annual check to the char-
ity for the amount of your yearly rebate. The charity
will get more, and you can take a tax deduction.
Once you get a cash-back rewards credit card, throw
as many charges on it as you can. Even middle-income
households are likely to get back several hundred dol-
lars a year, with big spenders getting back more than
$1,000.
3. Get More Than 1 Percent

You can do better than a cash rebate of 1 percent on all
your purchases. Many cards offer 2 percent to 5 percent
on certain types of purchases, such as gasoline and gro-
ceries, and 1 percent on everything else.
As of this writing, a great card for big spenders—
charging well over $1,000 a month—is the American
Express Blue Cash card. With a tiered reward system,
bigger cash rebates kick in after charging $6,500.

Details are at AmericanExpress.com.
There’s no clear choice for smaller spenders. Find a
card that gives you at least 1 percent right away, gives
you the most rewards for your spending patterns, and
will cut a check or credit your account at $25 or $50
increments.
Offers for rewards cards change regularly.
Besides getting more than 1 percent back, here are
other considerations:
• Avoid cards that charge an annual fee.
• Give preference to cards that automatically send
you the rewards payment as a check or credit the
amount to your account. That’s better than having
to remember to request a check when your points
accumulate to a certain cash-out level.
• Choose a program with no rewards limit, or at
least one you’re not likely to max out.
• Look for a bonus reward for signing up.
• If you choose an American Express or Discover
card as your primary card, you’ll need a rewards
Visa or MasterCard backup because they are
accepted in more places.
One final warning: Don’t get so infatuated with

rewards that you end up spending more than you would
otherwise just to earn more rewards. It’s likely to be a
net loss for you.
How to Get Out of Debt

Here’s a newsflash: The first step to getting out of debt is
to stop adding to it. You do that by saying “no” to a series
of payments with interest and, instead, paying in full.
The TV show Saturday Night Live a few years ago
aired a skit with comedian Steve Martin, who was
guest-hosting. It was a spoof on an infomercial promot-
ing a revolutionary get-out-of debt plan. The “unique
program” was titled, “Don’t buy stuff you cannot
afford.”
The skit opened with a discouraged couple sitting at
their kitchen table wondering how they’ll ever get out of
debt. Enter the author of a one-page book, Don’t Buy
Stuff You Cannot Afford.
Woman reads aloud from the book: “If you do not
have any money, you should not buy anything.”
Woman to husband: “There’s a whole section here
on buying expensive things using money you save.”
Couple looks thoroughly confused.
Woman: “What if I want something but I don’t have
any money?”
Author: “You don’t buy it!”
Man: “Let’s say I don’t have enough money to buy
something. Should I buy it anyway?”
Author: “No!”
Woman: “What if you have the money, can you buy
something?”
Author: “Yes!”
This skit goes on, but you get the idea. The spoof
infomercial says if you order now you can receive the
additional book, Seriously, If You Don’t Have the
Money, Don’t Buy it, along with a 12-month subscrip-
tion to Stop Buying Stuff magazine.
The point is to stop the buying and borrowing
behavior that got you into debt in the first place.
How to Get Out of Debt, 1-2-3

1. Quit borrowing money.
2. Quit saving money.
3. Pay small debts first.
1. Quit Borrowing Money

If your debt is growing, there are only two explana-
tions. You’re spending too much money, which this
book should be able to help with. Or, you have an
income problem. You’re charging necessities on the card
because you don’t make enough money to cover bare
living expenses. Figuring out the reason for running up
credit card debt is the first step toward making sure it
doesn’t happen again.
The culprit of debt is often credit cards. If you can’t
trust yourself with credit cards, stop using them—cut
them up, freeze them in a block of ice in your freezer,
whatever. Just don’t close accounts because that will
hurt your credit score.
Well-meaning people will advise you to transfer bal-

ances to lower-rate cards or continually surf the balance
from low introductory rate to low introductory rate.
Card surfing is not inherently bad, but it’s not nearly as
effective as actually paying down the card balances.
Surfing merely shuffles debt around. And you might
even add to debt by incurring transfer fees.
For people in deep debt, it’s like the old metaphor of
rearranging deck chairs on the Titanic. It doesn’t
address that sinking feeling.
So, unless you have a credit card at more than 20
percent interest and can get a substantially lower rate,
focus your energy on paying more and surfing less.
This is one case where “throwing money at the prob-
lem” actually works.
2. Quit Saving Money

This might be surprising advice. After all, saving money
is a good thing, right?
The problem is your debts are probably costing you
more than your savings are earning for you. For exam-
ple, you might be paying 18 percent interest on your
credit card debt and earning less than 5 percent on sav-
ings. That’s a huge net loss.
In a simple-interest example, depositing $5,000 in a
5 percent savings account earns you $250 a year, which
the government then taxes. But if you used that $5,000
to pay down an 18 percent-interest credit card, you save
$900. And you pay no tax on that kind of savings.
In fact, after you have a starter emergency fund of

$2,500, you can use other saved money to pay off high-
interest debt. Again, it makes no sense to have a certifi-
cate of deposit earning 5 or 6 percent while paying
double-digit interest on debt.
A possible exception to the “Quit Saving” rule is if
you have an automatic retirement savings plan, such as
a 401(k), 403(b), or automatic deposits to a Roth IRA.
If that kind of plan is already on autopilot with 10 per-
cent or less of your income, you can leave it alone. A
definite exception is if your employer matches your con-
tributions in a retirement plan. You want to capture all
of that free money you can.
However, if you can get intense about paying off
your debt, stopping retirement savings for a short time
will get you out of debt faster.
3. Pay Small Debts First

How do you prioritize which debts to pay extra on? The
biggest debt or smallest debt? Highest interest rate or
lowest?
I like a hybrid plan that goes like this:
• Pay off debts of less than $1,000 first, from small-
est to largest, while paying minimums on other
debts.
• Then, pay off debts greater than $1,000 from
highest interest rate to lowest, while paying mini-
mums on others.
Each time you kill off a debt, you apply that pay-
ment to the next debt. When that’s done, you roll the
combined total into the next debt, and so on. That’s the
debt snowball.
This debt-repayment plan is a modified version of a
plan espoused by Dave Ramsey, a radio-show host and
author of The Total Money Makeover. He didn’t invent
the idea of paying debts smallest to largest and snow-
balling them, but he’s best known for it.
Of course, mathematics says you should pay the
highest interest-rate debts first to avoid paying the most
interest. This is easy to understand and logical.
But getting out of debt is a lot like dieting. It’s diffi-
cult and takes a huge helping of self-discipline. By pay-
ing off small debts first, you can wipe out a number of
them and feel like you’re gaining traction and succeed-
ing. It’s the atta-boy or atta-girl to help you keep going
and pay off more debt, just like losing a few pounds
during the first days of a diet. It gives you encourage-
ment to continue.
So much with money has more to do with what’s
between our ears than what’s in our wallets. The emo-
tional lift from wiping out small debts is well worth
whatever small amount of interest you might have saved
by paying first on a huge high-interest debt that takes
years to eliminate. Just make sure to get rid of those
small debts quickly.
Once you get to your large debts, you’ll be better off
paying more attention to the interest rate. For example,
you would pay off a $10,000 credit-card balance at
18 percent before paying off a $9,000 auto loan at
7 percent.
Here are answers to some other common debt

questions.
What about My Mortgage?

Your mortgage, especially if it’s at a favorable fixed
rate, is the one debt you can relax about. It comes far
down the priority list. You don’t need to pay it off early
until you have your other financial goals achieved, espe-
cially retirement savings.
The reason is you’re probably paying a relatively low
interest rate. If you can take a mortgage-interest deduc-
tion on your income taxes, your interest rate is effec-
tively even lower.
I’m not saying never pay your mortgage off early.
Just have retirement planning, kids’ college savings, and
other essential financial goals well under way first.
Should I Use a Home Equity Loan to “Pay Off”

My Credit Card Debt?
The good news is you can get a lower interest rate by
using the stored value in your house to pay debt. But
this debt swap can be dangerous for a couple of reasons.
First, you must realize you’re not “paying off” any-
thing. You’re just moving your debt. If moving your
debt makes you feel better, that might be a bad thing.
That’s because you haven’t addressed the fundamental
problem: spending more money than you could afford.
To solve a debt problem long-term, you’ll have to dig
into that question. Either your income is too low or
your spending is too high.
Second, you’re moving unsecured debt to secured

debt. In English, that means if you don’t pay your credit
card bill, the bank can’t do much to you, except to bug
you with phone calls and damage your credit score. If
you don’t pay a home-equity loan, on the other hand,
the bank can take your house. I think losing your house
is a bigger deal.
So, if there’s any chance you won’t be able to pay,
keep the debt on credit cards. If you discovered the rea-
son you’re in debt and have permanently addressed the
problem, shifting to a lower interest rate with a home
equity loan will probably save money.
Is Credit Counseling Worthwhile?

Credit counseling can be a good idea or a bad one. But
it’s a more complicated decision than you might think.
Often, you will pay money for the service, and your
creditworthiness might be trashed in the process.
Though these agencies might be technically nonprofits,
it doesn’t mean they are charities offering free or even
legitimate assistance. You could end up paying high fees
and getting bad advice. In fact, one thing to look for is
the free education and advice an agency is willing to
provide. It might hint at a good counselor.
These warnings don’t mean you shouldn’t seek credit
counseling—and if you’re filing for bankruptcy, you’re
required to get it. But you should know that hiring a
credit counselor is an important spending decision, so
you should treat it like you’re hiring a contractor to ren-
ovate your kitchen. That means interviewing multiple
credit counselors.
First, determine whether you’re a good candidate.

Often a credit-counseling agency doesn’t do anything
you couldn’t do for yourself. Evaluate all of your
options before entering credit counseling, including
developing a better spending and savings plan, and
negotiating with creditors by yourself.
Enlisting a credit counselor will be noted on your
credit report. It will damage your ability to borrow
money at good interest rates because future creditors
will see a notation that you are in credit counseling.
However, credit counseling doesn’t directly affect your
three-digit credit score. Of course, many distressed peo-
ple seeking counseling have already badly dinged up
their creditworthiness, so an additional bad mark is
only incremental.
If you feel overwhelmed, you’re using credit cards
for daily living expenses, and you’ve considered tapping
your home equity or retirement plan to pay debts
because you don’t know what else to do, you might be
a good candidate for counseling.
If you decide to go through with credit counseling,
beware of an agency that says it can eliminate your debt
quickly and erase your bad credit history. The agency is
not reputable. The same goes for debt-settlement com-
panies, which are not really credit counselors. Many
advise you to stop paying your bills and become a true
deadbeat, in hopes you can settle your debts for less
than the amount owed. This tactic can work for some
desperate people who have the right types of creditors,
but it can be expensive, and results are not guaranteed.
You could end up owing more than before you started.

Even if successful, you’ll have a ruined credit score and
probably owe taxes on the amount forgiven.
When you sign up with a credit counseling agency,
find out how it makes money. Be dogged when asking
about how the fee-structure works. Reasonable one-
time fees and monthly fees are in the $25 to $75 range.
If total fees are measured in hundreds or even thousands
of dollars, you’re in the wrong ballpark.
Many agencies will try to get you on a debt manage-
ment plan, or DMP. It allows the counseling agency to
work with creditors on your behalf. It often can get
lower interest rates on some of your debts, get more
flexible repayment schedules, and potentially get extra
fees waived. You pay the agency regular lump sums, and
it distributes the money to your creditors, according to
the repayment plan, which often lasts three to five
years. DMPs are generally for unsecured debts, such as
credit card debt, not auto loans and mortgages.
But know that DMPs are how counseling agencies
make most of their money. They get paid by creditors,
such as banks that issue credit cards. That establishes a
dicey relationship about whom the counselor works
for—you or the banks. If counselors are paid on com-
mission for setting you up with a DMP, look elsewhere
for help. If a counselor is pushing a debt management
plan within the first 20 minutes of learning your finan-
cial picture, you might not be dealing with a reputable
agency.
A counselor’s affiliation with industry groups, such

as the National Foundation for Credit Counseling,
found at www.nfcc.org, raises your chances of dealing
with a good counselor. Many NFCC members go by the
name Consumer Credit Counseling Service, or CCCS.
Another certifying group is the Association for
Independent Consumer Credit Counseling Agencies,
found at www.aiccca.org.
PART III
Spending Smart Tomorrow
Chapter 7 How to Save Money . . . . . .215
213
Chapter 7
How to Save Money
A
s I talked about in Chapter 2, “First Things
First,” goals give you direction and can provide
peace of mind. They even have application in
daily life. With all the marketing bombarding us every
day and fueling our wants, a set of goals helps us to say
no. They remind us there’s something we want more
than the tempting purchase right in front of us.
Even when you have written savings goals, it takes a
lot of willpower to consciously stash away money each
month. We humans are hardwired to consume immedi-
ately. So, saving for future needs and wants goes against
our nature.
That’s why saving toward goals must be automatic.
It could be an automatic 401(k) deduction from your
paycheck to fund retirement or an automatic draft from
your checking account that adds to your “snorkeling in
Bahamas fund.”
You put money toward priorities first, and then
you’re free to spend what’s left on daily living. In that
215
way, having goals is freeing. You don’t have to be con-

stantly wondering if you’re doing all the right savings
things and feeling guilty about indulging in small daily
purchases.
You might have heard this called “Pay yourself first”
because you stash away money for your goals before
paying everybody else. It’s also an alternative to a full-
fledged household budget. By saving first, you create an
artificial environment of money scarcity in the house-
hold. It erects boundaries to our spending. Specifically,
it cuts down on the cash we have around, so we don’t
spend as much. It’s based on the idea that we’ll spend all
that’s available to us unless there’s a darned good rea-
son not to. This is why increasing your retirement con-
tribution is relatively painless. It’s true, you’ll have less
money to spend each week, but you unconsciously
adjust your spending accordingly. Unless it’s a huge
jump in savings, you won’t even notice the difference.
Automatic savings leads automatically to lower
spending.
Erecting these artificial boundaries for money is use-
ful. In America, we get very used to abundance and
“unlimited.” Do you remember when we used to pay
for a certain number of hours each month for Internet
access? Now, most Internet access is unlimited. We used
to pay by the minute for long-distance phone calls.
Today, many calling plans include unlimited long
distance.
For decades, gasoline seemed unlimited because no
matter how much we used, the price was always about
$1.25 per gallon. Of course, it only seemed unlimited,
How to Save Money 217
as we found out in recent years, as demand grew and

prices fluctuated wildly.
Diamonds aren’t rare, and aren’t intrinsically valu-
able. They only cost a lot because diamond companies
restrict the supply and constantly advertise that dia-
monds are special. And somehow they became a
mandatory element of marriage proposals. Producers of
diamonds create an artificial environment of scarcity.
You can do the same thing with your household
finances.
Of course, the big problem with the artificial scarcity
plan is the availability of credit. Whether credit cards or
a home-equity line of credit, that ability to borrow
money easily removes the scarcity boundaries you arti-
ficially set up. It makes no sense to pay yourself first and
save money earning 3 percent interest but exceed your
boundaries by spending on credit cards and pay 18 or
29 percent interest. So, to use the artificial scarcity plan,
you must not borrow money for consumer purchases.
It’s like being on a diet and throwing away all the
cookies and potato chips, creating a scarcity of junk
food in the kitchen. The only thing to eat is healthful
stuff, so you do. But such a diet plan is doomed if you
regularly stop by the convenience store for donuts and
Doritos, in effect sidestepping the scarcity boundaries
you artificially set up. (In case you got lost with that
analogy, credit cards are the convenience-store Doritos.)
In the end, paying yourself first is voluntary self-
deception, like setting your clock ahead 10 minutes so
you won’t be late. If you are committed to the decep-
tion, it works great.
Short-Term Savings
Don’t be shy about opening separate bank accounts for
each of your short-term goals. Of course, you want
accounts that won’t charge you any fees. It’s true that
opening more accounts slightly complicates things
because you have more accounts to keep track of. But
it’s well worth it because you’ll be very clear about what
your short-term spending goals are and how you’re
funding them. It’s similar to the simple envelope system
for daily spending, with one envelope containing money
for food, another for clothing, and so on.
Short-Term Savings, 1-2-3

1. Emergency fund.
2. Car fund.
3. Seasonal fund.
If you’re going to be stashing cash in separate

accounts, it would be nice to earn a little interest on the
money. That’s why an online savings account is a great
choice. For years, among the best choices for online sav-
ings accounts have been:
G EmigrantDirect.com
G INGDirect.com
G HSBCdirect.com
Frankly, it doesn’t matter much which one you

choose. Go with whichever account happens to be pay-
ing a higher interest rate than the others at the time you
look at them. Rates change often, but historically, they

have been in the same narrow range. You’ll drive your-
self crazy always trying to get the absolute highest inter-
est rate. Remember the concept of “good enough?”
Deposits at all three banks are insured by the Federal
Deposit Insurance Corp. (FDIC), up to $100,0001 per
depositor. And they are all good enough.
Opening an online account is fairly easy. Follow
instructions on the Web sites, and fill out forms. You
will have to electronically link a personal checking
account to the savings account to make automatic
deposits. You will also have to provide your Social
Security number.
1. Emergency Fund
Whether you call it a rainy-day fund, an emergency
fund, or a cash cushion, having cash available for when
bad things happen is fundamental to financial planning.
What exactly constitutes an emergency fund? The
typical advice is also the most conservative definition:
cash equal to three to six months of living expenses. I
would modify that to be three to six months of “bare-
bones” expenses, meaning enough money to pay rent or
mortgage, food, utilities, transportation, insurance, and
so on.
Why? Because in a financial crisis—think, losing
your job—you should immediately cut back on
nonessential spending—no going out to eat, no clothing
purchases, and no golfing. You could even start cancel-
ing your gym membership, your cable TV service, and
your fancy hairdresser appointment. The point is you
need a cushion to pay for necessary expenses, a total far

less than expenses during flush times.
How do you decide on whether to save three months
of expenses or six? It depends on your circumstances.
For example, two-income families have less of a need
for a large emergency fund, especially if both earners
make about the same amount of money. That’s because
a job loss, among the most serious of emergencies, does-
n’t wipe out the entire household income. A one-income
family needs a larger contingency fund. The size of the
emergency fund can also depend on your financial com-
mitments. People with a paid-off house and no car pay-
ments might get by with a smaller cushion. This, by the
way, is yet another reason to keep debt at a minimum.
Why have an emergency fund? We talked about the
most serious scenario, having cash to live on if you lose
your job. Other reasons include life’s expected-but-
unexpected cash drains. We don’t know when they’re
coming but cash outlays for such expenses as car
repairs, medical bills, and plumbing leaks are coming
sooner or later. Without the cash to pay for these,
you’re likely to put them on a credit card and rack up
finance charges. That just makes those “emergencies”
more expensive.
Other reasons to have an emergency fund are less
obvious. It can actually save you money. Think about it:
With a cash cushion, you can feel comfortable saying no
when a salesperson offers you an extended warranty.
Why? Because you have the money to pay for the
repairs if the item breaks. You can call your insurance
agent and raise deductibles on your home and auto
insurance, which will save you money on premiums.
Why? Because you have the cash to pay a higher

deductible if you file a claim.
Maybe an emergency fund’s greatest value is provid-
ing peace of mind, which any financially stressed-out
person will tell you has a real dollar value.
Creating a rainy-day fund can be a two-step process.
Although the long-term goal is a fund equal to three to
six months’ worth of bare-bones living expenses, a
shorter-term goal might be to stash away $2,500. At
that point, you haven’t protected against job loss, but
you have given yourself financial breathing room when
the car and the clothes washer break down at the same
time. Make the $2,500 emergency fund a high-priority
goal. Fully funding the cash cushion can be balanced
among your other financial priorities. For example, it
would take a backseat to paying off high-interest debt.
That’s especially true if you take a few steps to grow
your emergency fund through noncash means. A cash
horde is ideal, but in a crisis you simply need quick
access to money, whether it’s your own or someone
else’s.
Here are a few temporary moves to make in lieu of
a fully funded emergency fund. These are in addition to
your $2,500 in cash:
G Establish a home-equity line of credit.
Homeowners could count home equity as part of
their temporary emergency fund. A home-equity
line is an open credit line against the equity you
have built up in your house. It’s cheap or free to
open a line of credit, and you pay no interest
unless you use it. If you use it, the interest you pay
is likely to be tax deductible. With most HELOC

accounts, you tap the line of credit by writing
checks on the account or using a debit card to
access the credit line. Apply for an equity line
before a crisis occurs. Once disaster hits—you lose
your job, for example—you might not qualify to
open a HELOC. All that said, however, a home-
equity line is not a good choice for compulsive
spenders who will use the credit line for nonemer-
gencies. And lenders have tightened requirements
for getting a HELOC since the 2008 financial cri-
sis. Improving your credit score will increase the
chances of being approved for an equity line.
G Raise your credit card limits. Using high-interest
credit cards is a very common but lousy way to
address a financial emergency. If you’re responsi-
ble with credit cards and rarely carry a balance,
however, it couldn’t hurt to ask your card com-
pany to raise your limits if you do it the right way.
You must ask them to raise your maximum charge
limit “without pulling my credit report.” That
way, the request will not damage your credit rat-
ing, as I said in Chapter 6, “Credit When Credit’s
Due.” In fact, it could help your credit rating if
you’re successful because part of the credit score is
based on the amount of used credit compared
with the amount of available credit. A second
advantage is the higher limit gives you a source of
cash during a temporary cash-flow jam. There are
more details about your credit cards in Chapter 6.
Once you’re already in a money crisis with no emer-

gency fund to tap, more desperate measures might be
necessary. None of these options is an ideal solution:
G Consider nonretirement investments. Your regular

investments outside of retirement plans might be
mostly held in volatile stocks or in accounts that
might charge an early withdrawal penalty, but
these can be sources of emergency cash. True,
using these funds in an emergency might force you
to take an investment loss, but addressing a true
crisis is usually more important.
G Evaluate the bank of mom and dad. Borrowing
from relatives or friends is dicey at best, and
should probably be among the last resorts in a cri-
sis because it has ruined many relationships. But
it could be a source of emergency money. One idea
is to formalize such a loan by writing down the
terms. Consider using loan documents from a
place such as LawDepot.com or using a com-
pany such as CircleLending.com to formalize the
paperwork.
G Borrow or withdraw from a 401(k). I hesitate to
mention this option because unless you’re desper-
ate, it’s a really bad idea. But you can borrow and
withdraw from a 401(k) retirement account.
There can be huge tax penalties and you’ll lose
growth on the money, which was supposed to go
toward retirement. In the case of borrowing,
you’ll withdraw pretax money and pay yourself
back with interest by using after-tax money. Then
in retirement, you’re taxed on withdrawals. So,
you’re being double-taxed on that money. Review
with your plan administrator all the disadvantages
of loans and withdrawals before going ahead. All
that said, it is a source of cash if you’re desperate.
But consider this my attempt to nudge you away
from this option.
In short, you need a rainy-day fund and a plan to

access cash in a financial storm. It will, indeed, rain. It’s
just a matter of when.
2. Car Fund
Just like you will have financial emergencies, you will
replace your vehicle. It’s just a matter of when. Maybe
no purchase gets consumers in more trouble than buy-
ing a car or truck. It’s a two-headed problem.
First, people lust after cars they can’t afford, which
leads to five-year loans or longer and ridiculous leases
(which is redundant because almost all leases are a
ridiculous choice for people concerned with spending
money smarter). People concentrate too much on the
monthly payment, instead of how the purchase fits into
their financial life. For the record, I’m obligated by all
that’s good and true in personal finance to urge you
once again to buy a slightly used vehicle. That way, you
avoid much of the new-car depreciation.
The second big mistake many people make is not
putting down much money when buying a vehicle—or
worse, rolling the payment of a previous vehicle into the
loan on a new one. This leads to the brutal situation of
actually owing more on a car than it’s worth, or being
“upside down.” You can’t sell the vehicle—or, if you get
in a bad accident, you can’t total the car—without los-
ing thousands of dollars.
I don’t want to get all ridiculous on you, but what if
you paid cash for your next vehicle? In fact, I would
argue that if you can’t pay cash for a vehicle, you can’t
afford it.
Here’s how to pay cash for your next vehicle: After

you pay off your current vehicle, continue making the
same monthly payment to yourself. Do that by making
an automatic payment to a separate car-fund account.
Then when you go to replace your vehicle, you’ll have
the trade-in value, plus cash saved in this account. That
total becomes the purchase price of your new car, which
you can now buy for cash. At the very least, you’ll have
a sizable down payment.
Here’s just one example of how it would work: Keep
your vehicle for four years after paying it off. If you
were paying $400 a month, you would accumulate
$19,200, plus interest, in your car fund. For simplicity,
let’s call it 20 grand. This, by the way, requires no addi-
tional sacrifice on your part. You’ve already been pay-
ing this $400 a month for several years.
If you get $5,000 by selling or trading in your old
car, you can now pay $25,000 for a lightly used luxury
car of your choosing.
How cool is that?
3. Seasonal Fund
This is an intentionally vague account. Customize it to
fit short-term savings goals in your life. For example,
you could use it for three major seasonal expenses,
which happen to be spaced apart on the calendar. That
means you can fund and deplete the account continually
throughout the year. These seasonal expenses are as
follows:
G Holiday spending. Gifts, travel, decorations,
parties
G Spring vacation. Airfare, hotel, car rental

G Back-to-school. Clothing, school supplies, tuition,
computers, textbooks
Another good idea is to have a separate account

when you’re saving for a house down payment. If you
already own a house, you might create an account for
home improvements, whether that’s new siding, new
furniture, or a kitchen remodel.
The running theme with any of these short-term sav-
ings accounts is to fund them regularly and automatically.
That way, you’ll have no trouble achieving those goals.
Retirement
Retirement investing for individuals is relatively new. A
generation ago, most people had defined pensions,
which meant that when you retired, you got a check
every month. It was someone else’s job to invest that
money. Today, you’re responsible, like it or not.
Retirement, 1-2-3
1. Invest automatically. Invest 10 percent of
your income into a retirement plan, such as a
401(k) or Roth IRA.
2. Diversify. Invest all the money in a target-
date retirement fund closest to when you’ll
retire.
3. Hold on. Never touch the money until you
retire.
“Come on,” you’re thinking. “Entire books are writ-

ten on retirement investing. How can it be this simple?”
It can. For the vast majority of people, this simple
plan will work wonderfully. It’s “good enough” to
ensure you’re saving for a respectable retirement. Of
course, you can tweak this simple plan along the way,
and probably should. But not doing these steps, or ones
very similar, could mean you’re in for a rough time in
your golden years.
Just because it’s simple, doesn’t mean it’s unsophisti-
cated. And it certainly doesn’t mean it’s inferior. In fact,
with investing, the more complicated things get, the
more likely you’ll be railroaded and some money man-
ager is going to get rich off you.
Getting started with retirement saving is as easy as
visiting your human resources department at work or
going online to sign up for a retirement plan. If you
started a new job, your employer might have enrolled
you automatically. If you already have a retirement plan
started, you can still use these steps by modifying your
contributions and allocations.
How big of a retirement nest egg do you need to
build? Whatever number you come up with is simulta-
neously supremely important and utterly meaningless.
You could assume you’ll spend the same amount of
money you do now, adjusted for inflation. But how rea-
sonable is that, especially if you’re in the wildly expen-
sive raising-a-family stage of life?
Expenses in retirement often decrease. For example,
you won’t be funneling money into a retirement plan,
child expenses are gone, and perhaps you paid off the
home mortgage. On the other hand, you might need

more money for traveling, recreation, and medical care.
Online calculators are a help in determining what
you need because the math is complicated to do by hand.
The more detailed—and unfortunately, tedious—the
online questionnaire, the better your estimate will be.
Examples of online calculators include the following:
G www.Fidelity.com/myPlan
G www3.troweprice.com/ric/RIC
G www.dinkytown.net
G www.choosetosave.org/ballpark
G www.aarp.org
Financial software, such as Quicken, also has retire-
ment tools.
But realize that any dollar figure you come up with
is just an educated guess. The best professional financial
planners can only speculate about what the total dollar
figure for your nest egg should be and what you need to
be saving along the way to accumulate that dollar fig-
ure. That’s because of the unknowable assumptions.
These include everything from how long you’ll live, to
inflation rates, to what return your investments will
earn. But an informed estimate is far better than none at
all. It will give you a ballpark figure, so you know
you’re striving for either $750,000 in retirement savings
or $4 million.
Focus on what you can control; that is, stashing
away money automatically, keeping it diversified, and
keeping your hands off it. The retirement goal might
seem like an absurdly large number. But the only way to
eat an elephant is one bite at a time.
1. Invest Automatically
As discussed previously, making retirement contribu-
tions automatic is fundamentally important. Employer
retirement plans are great because the money disappears
from your paycheck before you get it. The other good
way is to fund a retirement account with automatic
monthly transfers from your checking account.
Here are some basic questions and answers about
investing for retirement:
G Why should I save for retirement? Because you’ll
reach an age where you don’t want to work any-
more, or physically (or mentally) can’t. If you
don’t have savings earmarked for your retirement
years, you’ll be destitute or a burden to family
members who will have to care for you.
G Why make it automatic? Retirement sounds like a
long way off for many people. That makes it
extremely difficult to make it a priority when the
bustle of everyday life puts numerous demands on
our money. With most people, if they have to
write a check every month to their retirement
plan, life will get in the way and they’ll skip some
months, or many months. But if you make it auto-
matic, by contributing through a regular paycheck
deduction or a regular draft from your checking
account, you’re more likely to succeed in saving
regularly.
G Why invest at least 10 percent? Besides being a
nice, round, easy-to-remember number, it’s
enough to start you on the path toward building
retirement wealth. It also works well with the typ-
ical 401(k) plan, in which an employer matches
the first 6 percent of whatever you contribute.

You’ll be guaranteed to capture all of that free
money. And 10 percent is a good start toward 15
percent, a contribution goal many financial advis-
ers suggest.
QUICK TIP
One painless way to get to 15 percent is to raise your
contributions by 1 percent or 2 percent every time you
get a pay raise. That way, you won’t notice a reduc-
tion in your take-home pay.
G Why use a retirement plan? You could just squir-

rel away money in regular mutual funds for retire-
ment. But when you use the umbrella of a
retirement plan, you can shield the money from
taxes, either now or later. If you pay less tax,
you’ll have more money in retirement.
G Which retirement savings vehicle should I use?
This is where many people get bogged down.
First, know that it’s less important which retire-
ment plan you choose. It’s more important that
you automatically contribute to a retirement
plan—any retirement plan. That said, the follow-
ing are brief descriptions of some of your choices:
G 401(k) and 403(b). If you qualify for a 401(k)
retirement plan at work that matches your con-

tributions, join the plan and contribute 10 per-
cent of your income. This is the easiest solution.
The 403(b) and 457 plans are similar. These
plans have such complicated-looking names
because they refer to part of the federal tax
code. Considering it involves the IRS, what else

would it be except complicated?
A 401(k) allows retirement money to grow tax
free. The pain of contributing is reduced because
less tax money will be deducted from your pay-
check. So, contributing $100 to your 401(k)
reduces your net pay by less than $100. The
exact amount depends on your income-tax
bracket and several other factors. With a
401(k), Uncle Sam gets his cut when you with-
draw the money in retirement. It will be taxed at
your regular income tax rate, whatever it is at
that time.
QUICK TIP
If your employer matches your contributions, don’t
miss out on that free money! I’ve alluded to this previ-
ously, but it’s worth emphasizing. Often an employer
will contribute 3 percent of your pay if you contribute
6 percent. This is a fantastic deal. That’s a 50 percent
guaranteed return on your money. You can’t get that
anywhere else. Even if you dislike your employer plan,
contribute at least enough to get the full matching
contribution.
G Roth IRA. For those who don’t have a 401(k) at

work, open a Roth IRA and sign up to make
regular contributions. With a Roth, you con-
tribute money but get no up-front tax break.
The benefit comes when you retire. That’s when
you can withdraw all the investment earnings
contributed over the years, tax free. That’s a
huge advantage. The downsides are that higher-

income people don’t qualify to use a Roth and,
if you do qualify, you can’t stash away a ton of
money—$5,000 a year in 2009 ($6,000 if you’re
age 50 or older). The earnings limits in 2009
were $120,000 if you’re single and $176,000 if
you’re married. If your so-called “modified
adjusted gross income,” a line on your tax form,
is larger than those limits, you can’t use a Roth.
And if your income is close to those limits, you
might be allowed to make only a partial contri-
bution of somewhat less than $5,000. Find
updated limits and how to calculate modified
adjusted gross income in IRS publication 590 at
IRS.gov.
You can open a Roth IRA with many investment
companies. Look for a place where you can
make automatic contributions and one that has
target-date retirement funds (more on that next,
when we talk about diversifying your invest-
ments). You’ll do well if you first check out
Vanguard at www.vanguard.com, T. Rowe Price
at www.troweprice.com, and Fidelity at
www.fidelity.com.
Again, there are many ways to open a Roth
IRA, including using a planner or broker and
using a different family of mutual funds. But
they probably will be more expensive because of
broker commission and funds with high, built-in
expenses.
G What if I’m self-employed? If you’re self-

employed, you probably have an accountant—or
you should. Unless you’ll make a hobby out of
poring over income-tax strategies, taxes are often
overly complicated for busy business owners. So,
when it comes to investing for retirement, seek
advice from your accountant. He or she will
explain such retirement options as the individual
401(k), the SEP, and the SIMPLE IRA.
2. Diversify
So, once you have decided on a retirement account and
resolved to invest automatically, which individual
investments should you choose? You’ve probably heard,
“Don’t put all your eggs in one basket.” You might have
heard of “diversification.” They both mean the same
thing—spread your money around to different types of
investments. Good diversification has been shown to
reduce volatility and improve investment returns over
time.
Again, this is where people get bogged down and
confused. So, here’s some simple advice that will be
more than “good enough” for most people:
Put all your retirement money in a “target-date”
fund closest to when you’ll retire.
That’s it, you’re done.
“No way. It can’t be that easy,” you’re thinking.
“Yes way. It can,” I say.
Let’s back up and talk about these “target-date”
funds, sometimes called lifestyle funds. You’ve heard
the phrase “the best thing since sliced bread?” Target-

date retirement funds, at least the good ones, give sliced
bread a run for its money. This is a one-stop-shop
investment, a set-it-and-forget-it tool for retirement
money, whether you’re still working or already in retire-
ment. Pick a year you’ll probably retire, say 2030, and
put all your retirement money into a 2030 target-date
fund. Then you’re on autopilot. Most employers nowa-
days offer these target-date options in 401(k) plans,
and, of course, almost any mutual fund investment—
including target-date funds—are an option in a self-
directed retirement plan, such as an IRA or Roth IRA.
Everybody should know the basics of retirement
planning, so following is the shortest primer on retire-
ment allocations you’ll ever see. But I contend that it
suffices for most people.
G Spread your money around. Divvy up your money
among major asset classes, typically U.S. stocks,
foreign stocks, and bonds. Stocks, which refer to
investing in private companies, are the higher-
risk/higher-reward portion of your retirement
bundle. Bonds are the safer portion. If one asset
class grows quicker than the others, you have to
“rebalance”—shift money around in your invest-
ments—to get them back in line with your tar-
geted allocations.
G Adjust your portfolio over time. When you’re
younger, you can afford to take more risk because
you have time to wait out any prolonged down-
turn in the market. Therefore, portfolios for
younger people have a greater portion of stocks
and less of bonds. Conversely, as you approach
retirement or after you retire, you can’t afford to

take as much risk because you’ll need the money
soon. That’s why you want more bonds and less
stocks.
That brings us to target-date funds. Target funds

do both of those things—diversify and rebalance—
automatically.
How do you choose a good target-date fund? If
you’re in an employer-sponsored retirement plan, you
probably only have one brand of target-date funds, so
go with it. If you’re choosing among all investments—
in an IRA or Roth IRA, for example—choose one from
one of these three companies:
G Vanguard, www.vanguard.com
G T. Rowe Price, www.troweprice.com
G Fidelity, www.fidelity.com
Of course, other companies offer good target-date

funds too, but I’m here to make things easier. And these
three companies offer excellent choices in target-date
funds.
If you want a nudge in a specific direction for open-
ing a new account, check out Vanguard. It has the low-
est built-in expenses, which is a good thing and
arguably, over the long haul, the most important thing.
If you have the minimum $3,000 to open an account,
put all of it, including future contributions, in the
Vanguard Target Retirement fund with a year closest to
when you’ll retire. It will have a name like Vanguard
Target Retirement 2030.
QUICK TIP: TWEAKING TARGET-DATE FUNDS

What if you want to take more risk than the average
person with your retirement portfolio, or less risk?
Simply choose a different target-date fund. If you
want to take on more risk for the opportunity to get
larger returns, choose a target-date fund with a date
that’s further away. It will have a higher portion in
stocks. If you want less risk, choose a nearer target
date. Don’t know if you’re a risk-taker? Take a quiz
developed at Rutgers University, at http://njaes.
rutgers.edu/money/riskquiz/. How freaked out did
you get in 2008 when the stock market tanked?
That’s a very accurate measure of your risk tolerance.
What If Your Employer Doesn’t Offer a

Target-Date Fund?
If your 401(k) or other employer plan does not offer a
target-date fund, retirement investing gets considerably
more complicated. Get started by putting 60 percent in
a broad stock index fund, such as a “total stock” index
or “S&P 500” index. Put 20 percent in a foreign-stock
index fund, and 20 percent in a bond index fund. But
that’s a generic and conservative allocation. You’ll want
to tweak that to fit your age and risk tolerance. One
broad rule of thumb is to subtract your age from 120.
That’s the percentage of your retirement money that
should be invested in stocks. The rest goes in bonds.
So a 40-year-old would have 80 percent overall in
stocks (60 percent U.S. stocks, 20 percent foreign) and
20 percent in bonds. If you’re conservative, your stock-

allocation percentage might be 100 minus your age.
You’ll have to rebalance the allocations yourself,
which again, refers to shifting money out of good-per-
forming investments and putting the money into poorer
performing ones. That’s counterintuitive. But when you
rebalance, you’re essentially selling high and buying
low, the most basic and best investing strategy.
Rebalance at least once a year—on your birthday, for
example—or when investment allocations get out of
line by, say, 2 percent.
Why Index Funds?
An index mutual fund holds investments, such

as stocks, that simply mimic an established
index, such as the Standard & Poor’s 500 Index.
Index funds don’t go searching for undervalued
stocks ready to take off. In fact, index funds are
dull and boring. And, oh yeah, they’re superior
to most funds you’ll ever buy. Over time, index
funds beat two-thirds to three-quarters of
actively managed funds.
How can that be? It’s because almost nobody,
including the most brilliant minds on Wall
Street, can consistently pick winning stocks over
the long term. If some succeed over a short
time, it’s just as likely to be dumb luck as bril-
liance. Index funds are cheaper to operate
because they don’t have to pay for a big-salary
stock picker. And they incur less tax costs
because they trade less than actively managed

funds. Therefore, more of the gains from the
fund are passed along to you, the investor.
If you’re going to invest in mutual funds,
whether inside a retirement account or outside,
choose index funds. In fact, the target-date
retirement funds I’m so fond of are the
Vanguard ones. Why? You guessed it: It’s a bun-
dle of index funds.
This notion about index funds being superior to
stock-picking funds is a fascinating topic. A
famous book that lays out why it’s true is A
Random Walk Down Wall Street by Burton G.
Malkiel.
QUICK TIP
The amount of retirement contributions to put in your
company stock should be zero percent, nada, nothing.
You rely on this company for your income. That’s
plenty of your financial life tied to a single company.
If you want to invest some “gambling” money in
company stock, go for it. Another exception might be
if a generous company match is doled out in company
stock. But do not invest retirement money that you’re
counting on in company stock.
Already have retirement money in company stock?
Sell it—gradually, if you prefer—and invest the money
in a target-date fund or well-diversified portfolio of
funds. Hope I wasn’t unclear on this point.
3. Hold On
Study after study shows that retirement investors are
lousy at timing the financial markets, especially the
stock market. They get out of the market when it’s low
and everybody is scared and discouraged. Then, they get
in when the market is high and everybody is euphoric
and optimistic.
Of course, their returns are far worse than they
would have been if those investors just stayed the
course. Keeping your money out of the market and
missing just a few days of the best run-ups can have
long-lasting effects—meaning you’ll retire with signifi-
cantly less money than if you had just held on.
Richard Thaler, the professor of behavioral science
and economics at the University of Chicago whom I
mentioned in the introduction, had this to say during
one depressed period in the stock market:
“I have not looked at any of my holdings and don’t
intend to. I don’t want to be tempted to jump because I
think I’d be more likely to jump in the wrong direction
than the right one. My advice has always been to choose
a sensible diversified portfolio and stop reading the
financial pages. I recommend the sports section.”
401(k) Rollovers
It’s a good idea to transfer money from the

retirement plan of an old employer—or several
old employers—into an IRA, where you have
more investment choices, including target-date
retirement funds. That involves some paper-
work with your previous employer’s human
resources department and the fund company
you’ll use for your IRA. Again, Vanguard, T.
Rowe Price, and Fidelity are good choices for
IRAs because they are low-cost. It’s important
to use a direct transfer for the rollover money.
The HR department will know how to do this. If
the old employer sends you a check, you risk
suffering a huge tax hit because the IRS will
assume you withdrew all the money for nonre-
tirement use.
Saving for College

The most important thing to know about saving for
kids’ college expenses is to realize it’s not your top
financial priority. You’re not a bad parent if you don’t
save 100 percent of the money needed to send your
child to an Ivy League college. Eliminating high-interest
debt, creating an emergency fund, and regularly con-
tributing 10 percent or more of your income to a retire-
ment plan come first.
Why retirement savings first? Because you can get
grants and low-interest loans for college. No bank is
going to lend you money for retirement. And how much

are your kids going to appreciate having their college
paid for if at age 75 you have to move in with them
because you didn’t save enough for retirement?
Saving for College, 1-2-3

1. Open a 529 college savings account online.
2. Select an age-based plan.
3. Contribute automatically.
If you look at projections for college costs, you

might start feeling ill. You can find costs and use calcu-
lators at the College Board Web site, found at www.col-
legeboard.com. Others are at Savingforcollege.com,
Dinkytown.com, and FinAid.org.
For a newborn, you’d have to save about $180,000
to pay the cost of sending the child to a state university.
A private university? About $367,000. But those are the
scare-you-to-death numbers that stray from reality.
Relatively few students pay the full “sticker price”
for going to college. Besides growing college savings
over the years, you’ll potentially have scholarships,
loans, grants, and other forms of financial aid. In fact,
the average yearly cost of a four-year public school in
2008–09 was just $6,585, according to the College
Board. Over four years, that’s about $26,000, or about
the cost of a modest new car.
Another problem with those scary numbers? It’s

probably not even wise to save 100 percent of college
costs. What if your child doesn’t end up going to col-
lege? What if through new government programs the
costs for college decline? What if your savings grow
faster than expected and you have too much saved?
All that said, college is expensive and the sooner you
can start saving, the better.
The biggest problem with saving for college is it can
be complicated. There seem to be a million and one
details, some of which don’t seem to make much sense.
That’s why I’m going to simplify it for you and give you
one, single suggestion.
Go to www.uesp.org and open a 529 college savings
plan, called the Utah Educational Savings Plan. You
don’t have to be a resident of Utah to participate and
your child does not have to go to school in Utah. It’s just
a cookie jar to stash the money so you get a huge fed-
eral tax break when you withdraw the money.
In the Utah plan, choose age-based plan No. 8,
called Diversified-B. Contribute at least $50 per month,
raising regular contributions when you can. You can
always transfer to a different plan later if you have a
good reason. It’s more important to get started than to
pick the absolute best college savings plan. In fact, there
are good reasons for choosing other plans. But choice
No. 8 in the Utah college savings plan is “good enough”
for almost anyone. Just get it started.
Here are the details on college savings.
1. Open a 529 College Savings Account Online

You have many ways to save money for college, but
only one is a clear choice for almost everybody. Just like
401(k) and 403(b) retirement plans, the best college sav-
ings vehicle has a weird name, derived from the federal
tax code that allows it. It’s called a Section 529 college
savings account.
The basic deal with a Section 529 account is you put
money into investments within the account over the
years, in lump sums, monthly installments, or both. The
money is usually invested in a mix of investments, such
as stocks, mutual funds, and bonds. That way, the
money is likely to grow so you can pay more and bor-
row less when it’s time to pay—or help pay—for col-
lege. Of course, you could do that in regular mutual
funds. The big benefit of investing within a 529 account
comes when you take money out to pay for college costs
at any accredited school. Growth on that money
through the years—the gain—is free of federal tax.
That’s a huge advantage, likely to amount to literally
thousands of dollars that go to paying for your kid’s
tuition, rather than funding Uncle Sam’s kitty.
Another advantage of 529 plans is you can con-
tribute a lot of money. It varies by state, but caps are
typically around $300,000. And anybody can con-
tribute, including grandparents and other relatives. The
money can be used not only for college tuition, but also
for room and board, and books and supplies, including
a computer.
If your kid doesn’t go to college—or, heaven forbid,
dies—you can transfer the account to another relative
or use it yourself. The definition of a family relative is

generous, extending to such familial relationships as
step-children, nieces, nephews, and first cousins. If you
don’t use the money for college, you’ll have to pay a 10
percent penalty on withdrawals plus income taxes. One
exception is if your kid gets a scholarship, you can with-
draw money equal to the scholarship amount without
paying the 10 percent penalty. But you will have to pay
income taxes on the money’s growth.
Opening an Account
How do you start a 529 account? That’s both easy and
hard. But mostly, it’s worth it, to keep Uncle Sam’s
hands off money earmarked for college.
It’s easy because once you choose a 529 plan, you
just fill out forms and mail a check (or fund it by elec-
tronic transfer from a bank account). Some plans let
you do all that online. That’s it. You’ve successfully
opened a 529 college savings plan. Make sure to open
separate accounts for each child, but register accounts
in parents’ names. That’s so you, as a parent, control
the investments, and the student might end up qualify-
ing for more financial aid.
Because opening a 529 account is so easy, there’s no
reason to go through a stockbroker, insurance salesper-
son, or financial planner. More important, opening an
account by yourself is free. A financial professional is
likely to put you in a plan that includes commissions
and management fees that will retard growth on your
college-savings money. That means you’ll probably have
a smaller total when it comes time to pay college bills.
Professionals don’t have access to better plans than you

do as an individual.
Choosing a Plan
Where people get bogged down is trying to choose
among all the different plans. Section 529 plans are
operated through state governments. So, most states
offer their own 529 plans. Here’s the confusing part:
You can pick from most any state’s savings plan, and
your child can go to school in any state. That means
you’re not locked into your own state’s plan.
That sounds like good news. But there are so many
plans with so many different features, costs, and invest-
ment choices, it’s almost impossible to compare them all
in any intelligent way.
But take heart. You can transfer your 529 plan once
a year. So, you’re not locked into your first choice. You
can always change it later.
That’s why, to make things simple, I recommend just
one: the Utah Educational Savings Plan, found at
www.uesp.org. The Utah plan is on virtually every
respected list of top-tier 529 plans. It has low fees and
great investment choices.
Is the Utah plan the absolute best choice for every-
body? Not necessarily. But it’s a darned good choice,
and it’s “good enough” to get you started so you can get
on with your life. Opening and regularly contributing to
a decent college savings plan is far more important than
which one you choose.
Should You Transfer Your 529 Account?

Already have a 529 plan started? It might not be worth
switching. When 529 plans first started, some were real
stinkers. Fortunately for parents, many states have
improved their plans by cutting fees and offering better
investment options.
“529 college-savings plans continue to get better,”
says respected mutual fund analysis firm Morningstar,
which each year reports on the best and worst 529
plans. “Several years ago, many were high-cost messes.
Since then, some [lousy choices] have been spruced up
and others have been shut down. The important thing is
that more people using these vehicles to save for college
are getting a good deal.” Go to www.Savingforcollege.
com, and see how your plan is rated. If it receives a rat-
ing of four graduation “caps” or more out of a possible
five, you’re fine where you are. For example, I started
years ago with the 529 plan in Iowa. It’s not always at
the very top of ratings I see, but it’s usually in the top
few. The Iowa plan received a four-cap rating from
www.Savingforcollege.com. As a general rule of thumb,
if the plan manager has the name Vanguard or
Upromise/Vanguard, T. Rowe Price, Fidelity, and to a
lesser extent TIAA-CREF, it’s probably a decent plan.
If you’re in a plan with high expenses and live in a
state with no tax breaks for 529 plans, you should
accelerate your search for a new plan. Your new plan
will give you instructions on how to transfer money
from the old plan to the new one. If you want to shop
around for a more optimal 529 plan—and don’t want
to take my advice to use the Utah plan—here are the
primary considerations:
G Fund expenses. The most important fees are those

charged by the mutual fund companies and those
charged by states to administer the college savings
plan. These fees might seem insignificant, 1 per-
cent or lower each, but they add up to a lot of lost
money over time. States might also charge flat fees
for opening and maintaining an account.
Compare costs and other features at www.saving-
forcollege.com/compare_529_plans/.
G Allocations. Though most 529 plans offer age-
based investment options, they spread the money
around differently among types of investments.
Look for a broad allocation among U.S. and for-
eign stocks, as well as bonds. And always prefer
index funds, rather than actively managed funds.
G State tax breaks. Some states won’t tax your gains
in a 529 plan, although many require you to use
your own state’s plan to get that break. Others
allow you to take a tax deduction on your income
tax form for money you contributed. These good-
ies from state governments are nice and could be
considered as you choose a plan. But they proba-
bly won’t make up for high expenses and lousy
fund choices.
Here, briefly are non-529 options for college savings

that I skipped earlier.
G Prepaid tuition plans. With these, also called guar-
anteed plans, you essentially buy college credits at
today’s prices. They’re good for the same number
of credits when your kid goes to school. So, the
return on your investment is about equal to the
price inflation in college tuition costs. This might
be a good choice if you just want to preserve the
value of money against tuition increases and you

don’t care about growing it to pay for more
semesters. Or, if you can’t stand to see the value of
your college nest egg ebb and flow with stock and
bond markets, the guaranteed program might be
best. Some states require residency to use these
plans. And many states only allow you to pay for
tuition and fees with prepaid money, not room
and board.
Starting in 2004, individual educational institu-
tions were allowed to offer their own prepaid
tuition plans. The Independent 529 Plan is such
an offering by a group of private colleges. More
information can be found at www.independ-
ent529plan.org, or 1-888-718-7878.
To add to confusion, all these prepaid plans are
technically 529 plans too. However, most people
call these “prepaid tuition plans” and the invest-
ment-style plans “529 plans.” One strategy might
be to use both an investment-style 529 and a pre-
paid 529.
G Coverdell Education Savings Account. There’s
nothing terribly wrong with these accounts, for-
merly called ESAs. The main drawback is you can
only contribute $2,000 a year per child.
Otherwise, they’re similar to a 529 plan. The big
advantage as of this writing is you can use them to
pay for private school expenses before college.
However, unless Congress acts before 2010,
contribution limits revert to the old cap of $500
per year, and you can’t use the money for elemen-
tary or secondary private school.
G Custodial accounts. These accounts are called

Uniform Gift to Minors Act (UGMA) and
Uniform Transfer to Minors Act (UTMA). They
were the primary way to save for college before
creation of 529 plans in 1996. However, they have
lost almost all of their appeal as college-savings
vehicles, when compared with 529 plans. If you
already have an UGMA or UTMA, feel free to liq-
uidate the account and put the money in a 529
college savings plan or prepaid plan, or convert to
a 529 plan with the help of your accountant and
the 529 plan administrator.
2. Select an Age-Based Plan

Most 529 plans include an option to invest all of your
college savings in a single diversified mutual fund. It’s
an age-based fund invested aggressively when children
are young and more conservatively when children
approach college age. Unless you have a specific invest-
ing philosophy or don’t need the money to grow much,
these age-based funds are the way to go.
Age-based funds automatically reallocate money to
more conservative investments as your child nears col-
lege enrollment. When your children are toddlers, the
money would mostly be invested in stocks. When they
reach high school, the money shifts to more conserva-
tive holdings.
For example, in the recommended Utah No. 8 plan,
Diversified-B, a toddler would have money invested this
way: 56 percent U.S. stocks, 24 percent foreign stocks,
and 20 percent bonds. As the child ages, money shifts
from stocks to bonds. The other age-based options in
the Utah plan are fine too. I like Diversified-B, mostly

because it includes a decent portion of foreign stocks. It
also provides finer diversification among stocks from
companies of all sizes.
Does this automatic investing sound familiar? These
are similar to target-date retirement funds, only college
is the target date, rather than retirement. They are the
no-brainer, set-it-and-forget-it option that is more than
“good enough.”
QUICK TIP
If you have a huge lump sum to deposit into an
account, rather than trying to grow monthly contribu-
tions, you should probably choose a more conserva-
tive allocation.
Just like you can switch 529 plans once every 12

months, you can also switch investment strategies
within a 529 plan once within a year’s time. So, you’re
only stuck with your allocation for one year, if you
decide you don’t like it.
3. Contribute Automatically
We’ve talked about the importance of making savings
automatic. It’s the same for college savings. Contribute
with regular deposits in your 529 account by setting up
automatic monthly withdrawals from your checking
account.
Formulate a plan to raise the contributions annually,
when you get a raise or at a predetermined time, such as
the child’s birthday. And consider funding the account

with portions of such windfalls as a federal tax refund,
annual salary bonus, or cash gift. As you finish paying
off debt, you can funnel more money into college sav-
ings. For example, if paying off an automobile is your
last nonmortgage debt, redirect at least part of that pay-
ment to college savings. Again, that’s assuming your
other priorities, such as paying off high-interest debt,
funding retirement, and building an emergency fund,
are all under way.
QUICK TIP
Boosts to your college savings plans can come via
rewards programs, where your everyday spending via
credit cards or online shopping portals contributes
small amounts to college savings. Find details at
Upromise.com, BabyMint.com, and Littlegrad.com.
Community College Route
Saving for four-year college expenses is a swell

idea. But if you really want to chop down the
price tag, consider sending your child to a com-
munity college for the first two years. They
would then transfer to a name-brand university
to get a four-year degree diploma. It’s what I
call the two-year, two-year plan.
The cost of tuition and fees at community col-
leges is typically half of public four-year schools
and about one-tenth the cost of private col-

leges. Studies show students taking the commu-
nity college route are just as prepared as those
who go to four-year schools, and earn just as
much money after they graduate.
They might even get a better education in those
introductory classes. Courses at community col-
leges are taught by teachers who often have real-
world experience working in their fields. Intro-
ductory classes at four-year schools are often
taught by teaching assistants or professors more
interested in research than education.
Choosing a Financial Adviser

Americans today are forced to make a dizzying array
of financial decisions, including many we’ve talked
about in this book: how to build a retirement nest egg,
save for kids’ college expenses, and deal with debt and
insurance.
For help, you might consider hiring a personal finan-
cial adviser. That can be a great idea or a bad one. The
main advice: Buyer beware.
Choosing a Financial Adviser, 1-2-3

1. Interview three fee-only planners.
2. Ask questions and listen to your gut.
3. Never agree to an investment you don’t
understand.
The title “financial adviser” is not regulated. No

government body dictates who can call themselves one.
So, anybody can print up business cards and call him-
self or herself a financial adviser. It’s up to you to weed
out bad advisers from good. To do that, you’ll need
to know the insider secrets of the financial planning
industry.
The first thing to know is that you shouldn’t abdi-
cate responsibility and turn over your financial life to
someone else, no matter how good the adviser is. Hiring
a financial adviser is not like hiring a lawn service to cut
your grass. In that case, you’re hiring the lawn service
to perform a specific task so you don’t have to. A finan-
cial adviser should be different. It’s like asking a land-
scaper for advice on how best to cut your grass. He
might pull-start the mower for you and walk alongside.
But ultimately, you’ll guide the mower and navigate
around the yard. And you’ll have to live with the result.
So, hiring an adviser should be a partnership or
coaching relationship, rather than work-for-hire. A
good adviser will help identify problems, set goals, sug-
gest strategies, and provide objective opinions.
1. Interview Three Fee-Only Planners

The biggest problem with most financial advisers is they
have divided loyalties. On one hand, they might truly
want to help you achieve your goals and get you the
best returns on investments. However, that can be in
direct conflict with other goals, which are to keep their
job, feed their own family, and provide themselves a
good income. That brings us to this unfortunate fact:
Financial advisers make more money if they put you

in bad investments.
Why? Because many get commissions—call them
kickbacks, if you like—from the investment companies
where they put your money. Sometimes, the worst
investments offer the biggest kickbacks. Advisers at
insurers and brokerages might be good and decent peo-
ple, but their first and foremost job is to sell you finan-
cial products.
A similar conflict would be going to a doctor who
doesn’t charge for office visits but is paid by drug com-
panies for selling you pills. Any chance his prescription
pad would be a little busier, whether you really needed
drugs or not?
The solution? Use a fee-only planner.
A fee-only planner is paid only by you, not financial
companies. Beware that the term “fee-based” is entirely
different. That means the adviser is compensated by
both fees and commissions. Fee-only advisers often
charge by the hour or by a percentage of your assets
that the adviser manages. Ideally, you would pay for
advice and implement the recommendations yourself.
But if the adviser will manage your money, a manage-
ment fee amounting to 1 percent of your assets is rea-
sonable, while 2.5 percent is too much. Either way, be
sure the planner is using the right tools—our good
friends, no-load index funds.
Two good online sources for finding fee-only plan-
ners are NAPFA.org and GarrettPlanningNetwork.com.
Each of these Web sites has a “find-a-planner” option to
help you locate an adviser near you.
This is important: All that said, there are many good

commission-based financial advisers that would do a
fantastic job for you. I just think the built-in conflict of
interest is too important to overlook. Conversely, just
because an adviser is fee-only doesn’t mean he or she is
any good.
Once you have a short list of fee-only advisers,
schedule an in-person interview, which should be free of
charge. That might seem time consuming, but it’s
worthwhile. Come prepared with your financial infor-
mation, such as how much income you have and all
your investment balances.
As you set out to choose an adviser, think about
what specific help you need. Do you feel helpless in
choosing mutual funds? Don’t know what to do with
stock options you received at work? Are you worried
you don’t have the right insurances or financial docu-
ments, such as a will, living will, and medical power of
attorney? Do you need advice on spending an inheri-
tance? Do you want a comprehensive plan to cover all
aspects of your money life?
Before setting up the interview, make sure the plan-
ner hasn’t been in trouble. Find out about disciplinary
actions by going to the U.S. Securities and Exchange
Commission Web site at www.sec.gov or calling 1-800-
SEC-0330. Look for a link like “Check Out Brokers &
Advisers.” You can also contact your state agency that
oversees investment advisers. For advisers who sell
investments, otherwise known as stockbrokers, you can
conduct a BrokerCheck at the FINRA Web site,
brokercheck.finra.org, or call 1-800-289-9999.
2. Ask Questions and Listen to Your Gut

Choosing the right adviser breaks down into three basic
tasks: Assessing the adviser’s technical competence,
trustworthiness, and compatibility with you. Here are
six questions that will help you judge an adviser,
whether they are fee-only or not:
G How are you paid? This might be an uncomfort-
able question to ask. But it is fundamental and
important. If you’re using a fee-only planner, the
answers should be straightforward. Ask the plan-
ner for his or her Form ADV, a document that
describes the fee structure.
G What are your qualifications? Choose a planner
who has been in the business for several years and
has a certification, such as Certified Financial
Planner or CFP. (See sidebar for other certifica-
tions.) Ask about work history.
ABCs of Financial Certifications
The financial services industry has an alphabet

soup of acronyms that represent certifications
for financial advisers. Unfortunately, none
assures you of a competent or ethical adviser.
Designations are awarded by private organiza-
tions that don’t answer to government regula-
tors. However, an official designation after an
adviser’s name at least signals he or she proba-
bly passed a test of basic financial concepts and
is staying current on changes. The following are
a few of the more meaningful certifications:
G CFP: Certified Financial Planner. Among the

most popular of financial planning certifica-
tions, CFPs must have at least five years of
planning experience or a bachelor’s degree
plus three years of financial planning experi-
ence. They must also complete a five-course
program, pass a 10-hour comprehensive
exam, complete 30 hours of continuing edu-
cation every two years, and adhere to ethics
standards.
G ChFC: Chartered Financial Consultant.
ChFCs must complete three more courses
than the CFPs but only have to pass individ-
ual topic exams, not a comprehensive exam.
They must have three years of experience in
the financial services industry and adhere to
ethical standards. They must also complete
30 hours of continuing education every two
years.
G CFA: Chartered Financial Analyst. A designa-
tion geared more toward the specialty of
investing and portfolio management than
broader areas of personal finance. CFAs must
pass three rigorous exams covering econom-
ics, financial accounting, portfolio manage-
ment, securities analysis, and ethics, and have
approved work experience.
G CPA-PFS: Certified Public Accountant-

Personal Financial Specialist. The PFS desig-
nation is awarded to CPAs who have a
minimum of 1,400 hours of financial plan-
ning business experience, completed continu-
ing education within the last five years,
passed an exam, and adhere to a code of
ethics.
For brief information on other designations, go
online to Finra.org and click “Investor Infor-
mation,” then “Professional Designations.”
G What is your financial planning philosophy?

Here, you’re fishing for a comfort level. The
adviser should talk about his or her planning
process and not about hot stocks or unusual
investments. If a prospective financial adviser says
he or she can beat the market and promises big
investment returns, end the meeting. Nobody can
predict market movements. The adviser is either a
fool or a liar, and probably a cheat. A good finan-
cial adviser will make sure you’re well-diversified,
so you can limit risk and maximize returns.
As the adviser explains his or her philosophy, ask
yourself: Are you being coached or sold to? And
get a feel for how rushed the adviser is. If he or she
doesn’t have time to attract you as a client, the
adviser might not have time for you after you
become one. Finally, note the words and tone the
adviser uses. Is he or she speaking in financial
jargon, knowing you won’t understand? It actu-

ally takes greater skill and knowledge to explain
things simply. Is the tone condescending or
supportive?
G What services do you offer? If you need a broad
spectrum of advice, make sure the planner can
help with insurance, tax planning, investments,
estate planning, and retirement planning. This is
the time to ask whether the adviser will be the
only person you deal with, or whether you’ll be
shuffled off to a junior associate. And ask about
how the adviser will communicate, by e-mail or
phone, for example. Will you receive regular
reports and periodic reviews about your financial
status?
G Tell me about your typical client. You want an
adviser accustomed to working with people like
you. If the adviser typically works with multimil-
lionaires and you have total assets of $100,000,
how much attention do you think you’ll get? You
should also ask for a sample financial plan for a
client in similar circumstances to yours—with the
client’s name removed, of course.
G Can I contact referrals? Granted, an adviser is
only going to refer you to his happy clients. Ask
the client, “If you had to do it again, would you
pick this planner?” and “What is the downside of
working with this planner?”
You want to gather factual information, but trust

your gut, too. That doesn’t mean you should judge
whether you like the adviser as a person or whether you
hit it off in idle chitchat. That’s irrelevant. This is a busi-
ness relationship, not a personal one.
Although some people are more gullible than others,

your gut should guide you, especially if you go into the
meeting with a bit of skepticism. It will tell you if the
adviser is being evasive or is snowing you.
3. Never Agree to an Investment You Don’t

Understand
If you can’t explain it to your teenager or your elderly
mother, don’t do it.
This is a great rule because it can keep you out of
harm’s way. For example, there are few average
Americans who can thoroughly and accurately explain
what a variable annuity is. They’re wildly complicated.
And that works out fine. They’re not good investments
for most people anyway.
That’s not to say you shouldn’t endeavor to learn
more about finance basics. You shouldn’t shy away
from stock mutual funds because you’re not quite cer-
tain what they are.
There are many good resources for investing basics,
including books and Web sites. One free resource is at
the Los Angeles Times newspaper Web site. It has a
“Money Library” with a host of finance topics, includ-
ing investing. It’s at www.latimes.com.
All this due diligence in hiring a financial planner
might seem daunting, but don’t let it deter you from get-
ting the help you need. Starting on the right financial
track, even using a mediocre but ethical planner, is bet-
ter than doing nothing. And remember, you can always
switch financial advisers later.
Endnotes
1. On October 3, 2008, Congress temporarily
increased FDIC deposit insurance from $100,000 to
$250,000 per depositor through December 31,
2009. As of this writing, it is uncertain whether the
raised limit will become permanent. Learn more at
www.fdic.gov.
Chapter 8
Putting It All Together
Succeeding with Money
I
n the introduction of this book, I promised to help
you navigate the world of spending and saving
money. I said this book would be like a GPS device
that helps you with driving directions. I wanted to get
you from here to there safely and with the fewest has-
sles.
I’ve touched on the vast majority of money issues
that you will probably encounter in your life. Did I
cover every detail of every money topic? No. Few books
do. And I didn’t even try.
What I wanted to do is to make money simple. I did
that by breaking down common money topics to their
three most-important tasks. I gave you very specific
advice. And granted, it might not be the absolute best
advice you could possibly receive. But it’s darned fine
advice for almost everybody. It nudges you toward
money decisions that are “good enough.” That allows
you to make money decisions and get on with your life.
You can take comfort in the fact that you’re doing smart
things with your hard-earned cash.
263
We even had some fun along the way. What other

personal finance book tells you how to make razor
blades last longer, how to get the best deals on video
cables, and how to spend $20 a year on phone service?
I hope you’ll go through the topics in this book and
methodically address each area of your money life—
after all, each contains just three steps.
Throughout this book, I used a 1-2-3 format, which
defined tasks for each money topic. But what if I were
to give you just one more 1-2-3 list? This would be a
super–Cliff Notes version. It would be three steps to
succeeding with money.
If you did nothing else in this whole book, doing
these three things will give you a shot at being a finan-
cial winner.
Based on my knowledge of money topics and based
on feedback from literally thousands of readers over the
years, that list would look like the following:
Succeeding with Money, 1-2-3

1. Never buy a new car until you’re a
millionaire.
2. Buy a home that you can afford.
3. Care about spending.
I briefly mentioned cars and houses in other chap-

ters. They are the largest single purchases most people
Putting It All Together 265
will make in their lifetimes. Financing for these two pur-

chases often ranks at the top of most people’s monthly
expenditures. For that reason, they are important.
But you already know that. You probably already
take great pains to be a smart consumer about vehicles
and houses. Whether you succeed is a different matter.
What you might not have contemplated is the vast
difference between buying a car and buying a house.
They impact your money life in dramatically different
ways. They are different for two fundamental reasons.
The reasons are:
• The value of your vehicle is guaranteed to plum-
met. (That’s bad.)
• The value of your house almost always rises.
(That’s good.)
These might seem like terribly elementary observa-

tions. But from a bird’s-eye view overlooking the span
of your money life, there is profound wisdom in recog-
nizing these truths. Is the money you’re spending work-
ing for you or against you?
1. Never Buy a New Car Until

You’re a Millionaire
Get-out-of-debt guru Dave Ramsey often says this. He
has a flair for dramatic statements, and I agree with this
one, so I stole it.
If a new car costs $30,000 and it loses the standard
30 percent of its value in its first year, that depreciation
costs $9,000.
Is $9,000 a lot of money in your world? If so, you

should always buy one-year-old or older cars. In other
words, don’t buy a new car until you’re a millionaire. It
doesn’t get much more complicated than that.
But car-buying isn’t that easy, is it? Confusion sets in
when you start talking about your dream car or how
low the monthly payments are or how unreliable a used
car might be. Somehow new-car smell warps our brains
and clouds the issue.
Vehicles today are more reliable than ever. Even a
three-year-old car is still a pup. Some of the reliable
family sedans with minimal maintenance go 150,000
miles without a hiccup. See Chapter 7, “How to Save
Money,” for details on setting up a car fund to save
enough to pay cash for your next vehicle.
QUICK TIP:
Need to ease into the buying-used-cars thing? Try a
certified preowned car with a warranty from the man-
ufacturer, not the dealer or a third party. Certified cars
are more expensive than noncertified, but this might
give you the peace of mind you need to move from
buying new to buying used. By the way, isn’t “pre-
owned” a silly way to describe a used car? Preowned
literally means “before it’s owned,” or new.
2. Buy a Home That You Can Afford

Let’s split this task into two parts. The first half, “buy a
home” is a recommendation to buy a house instead of
renting.
The value of a home comes partly from its price

appreciation. Generally, house prices increase over the
long term. The house-price bubble that started bursting
in 2006 was an exception.
Homeowners also get another kind of value, how-
ever. They don’t have to pay rent. Instead, they pay on
a mortgage, which ends up being a form of forced sav-
ings. When renters pay rent, they never see that money
again. Meanwhile, homeowners are building equity in
the property, assuming they don’t have one of those
exotic “negative amortization” loans that were all the
rage just before the housing bubble.
And if homeowners itemize their tax deductions,
they can claim their mortgage interest, which is yet
another financial benefit.
A home mortgage also provides leverage. You put
down a small fraction of the home’s worth in the form
of a down payment. But when you sell the home, you
get to keep the gain on the entire home’s value—not just
the down payment portion. For example, imagine you
bought a home for $300,000 with a 20 percent down
payment of $60,000. If you sell the house for $500,000,
you get to keep all the $200,000 gain, not just 20 per-
cent of it.
And you lock in your housing costs. Rents might rise
every year, but assuming you got a 30-year fixed-rate
mortgage, your payment will be the same for decades.
Consider this startling statistic: The average home-
owner has a net worth of nearly $200,000, while the
average renter has a net worth of less than $5,000,
according to the Federal Reserve Survey of Consumer
Finances. And it’s not because homeowners have 40

times the income of renters; they only have about twice
as much.
The second half of this “buy a home” task is the
qualifier “that you can afford.” This is where so many
people messed up during the housing crisis. Because of
weirdo mortgages that artificially lowered the monthly
payment, many people bought homes they could not
afford in the long run.
One rule of affordability comes from the Federal
Housing Administration. It contends that your monthly
payment for mortgage principal and interest, plus real
estate taxes, plus homeowner’s insurance should not
exceed 29 percent of your gross income. So, if your
household income is $8,000 a month, you could afford
a total monthly payment of $2,320.
That’s fairly liberal. I might even classify that as a
“stretch” payment, meaning you’ll probably feel
pinched until your income rises over the years.
Remember, the principal-and-interest part of your
house payment stays the same with a fixed-rate mort-
gage. So, when your income rises, the payment becomes
easier to make.
If you were going to stretch to afford a house pay-
ment or a car payment, the house is the one to choose.
You can play with mortgage-affordability calcula-
tors on the Internet at such Web sites as Bankrate.com
and Dinkytown.com to hone in on a comfortable pay-
ment for you.
3. Care about Spending

And this is what it’s all about. Remember that spending
and saving aren’t really different. Saving is just an intel-
lectual decision to spend later, rather than now. If most
people put as much time and effort into managing their
money lives as managing their weekly TV watching,
they would be far better off.
And daily spending matters. From supermarket
shopping to your phone bills to insurance. You’ll be far
wealthier if you can develop the spending smart philos-
ophy: Spend on purpose, rather than by accident and
habit. And plug the leaks of wasteful spending, so you
can funnel more money to things you truly care about.
Earning is important, but you can’t outearn dumb
spending.
So, care about all your spending, whether you’re
spending today, yesterday, or tomorrow. It’s as easy as
1-2-3.
For more information about saving and spending
smart, see my blog at SpendingSmart.net and my Web
site at www.GregKarp.com. Feel free to e-mail me at
[email protected].
Index
Symbols Apple, iPod, 4

401(k), 206, 230 Aquamira.com, 159
rollovers, 240 Arnold, Curtis E., 200
402(b), 230 artificial scarcity plan, 217
403(b), 206 Association for Independent
Consumer Credit Counseling
529 college savings plans, 36,
Agencies, 212
242-247
audio-video cables, 102
A auto insurance, raising
AAW (average accumulator deductibles, 84
of wealth), 31 autofill programs, 129
accessing credit reports, automatic bill paying, 57-60
170-171 drawbacks of, 58
AccuQuote.com, 81 automatic contribution, col-
age-based plans, college sav- lege savings, 250
ings, 249-250 automatically renewing serv-
aggressive driving, ice, 122
avoiding, 147 automobiles, 22
allowances, teaching children average accumulator of
about money, 140-142 wealth (AAW), 31
Amazon.com, 110
AnnualCreditReport.com, B
170-171 BabyMint.com, 132
antenna, TV, 99 back-to-school spending, 226
AOL Yellow Pages, 120 balances on credit cards,
192-194
271
272 Index
banking, 47-48 reevaluating, 113-114, 117

checks, 52 researching prices, 111-112
credit unions, 54-55 buying services, 117-118
fee-free cash, 52 contracts, reviewing, 124
high-interest online bank prices, researching,
accounts, 52-53 121-123
no-fee checking accounts, reviews and references,
49-51 seeking, 118-121
switch kits, 51 buying used, refurbished elec-
Bankrate.com, 81, 174, 268 tronics, 138-139
batteries, 157-158 buying used items, 134
bill paying, 55 cars, 135
automatic bill paying, evaluating price and quali-
57-60 ty, 137
direct deposit, 56 getting over the “yuck”
electronic payments, 59 factor, 135-136
prioritizing in a crisis, keeping it simple, 137
60-61
BillShrink.com, 199 C
bottled water, 159-160 cables for TV, 102
brokercheck.finra.org, 255 calculators, online
calculators, 228
brokers, checking, 255
call2recycle.org, 158
budgeting, zero-based budget-
ing, 106 cancelling landline phone
service, 85-87
buying online, 124-126
car funds, 224-225
commodities, 126
carbon footprints, 161
coupon codes, 130-131
carbon offsets, 161
credit cards, 128-129
CardRatings.com, 199
eyeglasses, 133-134
CardWeb.com, 194
rebate portals, 131-132
cars, 22, 135, 265
shipping cost versus sales
tax, 127-128 new cars, 265-266
buying products, 107-108 Cars.com, 111
reading reviews, 108-111 cash, 182-183
Index 273
cash back, choosing rewards checks, 186-187

cards, 200-202 Checksinthemail.com, 52
Catalinas, supermarket shop- Checksunlimited.com, 52
ping, 75 CheckWorks.com, 52
catalogchoice.org, 44 cherry-picking, 72
CCCS (Consumer Credit ChFC (Chartered Financial
Counseling Service), 212 Consultant), 257
cell phones. See telecommuni- child life insurance, 83
cations
children, learning about
certifications, financial advi- money,
sors, 256 140-143
Certified Financial Planner allowances, 140-142
(CFP), 257
choicetrust.com, 175
certified preowned cars, 266
choosing
Certified Public Accountant-
financial advisors, 256
Personal Financial Specialist
(CPA-PFS), 258 rewards cards, 199
CFA (Chartered Financial cash back, 200-202
Analyst), 257 chores, 141
CFLs (compact fluorescent CircleLending.com, 223
lamps), 155 CitySearch.com, 120
CFP (Certified Financial CLUE (Comprehensive Loss
Planner), 257 Underwriting
Chartered Financial Analyst Exchange), 174
(CFA), 257 Cnet.com, 96, 111
Chartered Financial ColemanNatural.com, 68
Consultant (ChFC), 257 College Board Web site, 241
Chatzky, Jean, 7 college savings, 240-242,
check cards, 184-186 248-249
check washing, 187 529 savings accounts
checking accounts online, 243-247
no-fee checking accounts, 529 savings plans, 36
49-51 age-based plans, 249-250
rewards checking automatic contribu-
accounts, 50 tions, 250
CheckingFinder.com, 51 community colleges, 251
274 Index
Diversified B, 242 Coverdell Education Savings

prepaid tuition plans, 247 Account
commodities, buying college savings, 248
online, 126 CPA-PFS (Certified Public
community colleges, 251 Accountant-Personal
compact fluorescent lamps Financial Specialist), 258
(CFLs), 155 credit, 165-168
CompareRewards.com, 132 credit ratings, 166-168
Consumer Credit Counseling credit reports, 170
Service (CCCS), 212 accessing, 170-171
Consumer Federation of disputing mistakes, 172
America, 83 reading, 172
Consumer Reports, 109 credit scores, 172, 174
fuel economy, 148 improving, 175-180
ConsumerReports.org, 96 establishing, 180-181
Consumers’ Checkbook, 118 identity theft, 170
ConsumerSearch.com, payment history, 181
96, 110 saving money, 169
contracts, reviewing before credit cards, 191-192
buying services, 124
balances, 192-194
control, paying attention to
buying online, 128-129
spending, 18
fees, 198
CoolSavings.com, 74
maintaining, 196-198
coupon codes, shopping
online, 130-131 perks, 195-196
Couponizer, 73 raising limits, 222
CouponMom.com, 73 rewards cards, 198
coupons choosing, 199-202
Catalinas, 75 credit counseling, 209-212
food away from home, 78 credit freezes, 46-47
matching to sales, 73-75 credit monitoring, 41
Coupons.com, 74 credit ratings, 166-168
courtesy overdraft protec- credit repair, 177
tion, 184
Index 275
credit reports, 170 discretionary money, spend-

accessing, 170-171 ing, 19
disputing mistakes, 172 experiences, 21
reading, 172 things that rise in value,
credit scores, 165, 172, 174 21-23
improving, 175-180 things you care about,
19-21
credit unions, 54-55
Diversified B, 242
rewards cards, 199
college savings, 249
Credit.com, 174
diversifying retirement
CreditKarma.com, 174
accounts, 233-238
crosscut shredders, 43
dmachoice.org, 44
custodial accounts, college
DMPs (debt management
savings, 249
plans), 211
D dollar stores, 136

Dominguez, Joe, 29
deadbeats, credit cards, 195
drawbacks of automatic bill
debit cards, 184-186
paying, 58
debt, getting out of, 203-204
durable power of attorney for
credit counseling, 209-212 finances and health care, 40
home equity loans, 208
mortgages, 208 E
pay small debts first, Earle, Bill, 31
206-207 Earth911.org, 156
quit borrowing money, 204 Ebates.com, 132
quit saving money, 205 eBay, 112
debt management plans Edmunds.com, 111, 147
(DMPs), 211
electronic payments, 59
debt ratio, improving, 179
electronics, refurbished elec-
deductibles, raising on home tronics, 138-139
and auto insurance, 84
emergency funds, 219-223
digital music players, 5
EmigrantDirect.com, 53, 218
Dinkytown.com, 241, 268
EnergyStar.gov, 154
direct deposit, bill paying, 56
Entertainment.com, 78
discounts, food away from
home, 78
276 Index
environment, going green EyeBuyDirect.com, 134

carbon offsets, 161 eyeglasses, online shopping,
gasoline, 146-147, 150 133-134
avoiding aggressive
driving, 147 F
slow and steady FAKO scores, 173
driving, 148 Farecast.com, 122
tires, inflating, 149 FatWallet.com, 132
home heating and FDIC (Federal Deposit
cooling, 150 Insurance Corp.), 53
avoiding big ticket Federal Trade Commis-
fixes, 154 sion, 44
sealing leaks, 152 fee-free cash, 52
thermostat plans, fee-only planners, interview-
151-152 ing, 253-255, 258-259
light bulbs, 155-156 fees, credit cards, 198
rechargeable batteries, FICO scores, 173
157-158 Fidelity, 232
water, 159-160 FinAid.org, 241
Environmental Protection finances, durable power of
Agency, 154 attorney, 40
estate planning, 37-38 financial advisors, 252-253
durable power of attorney certifications, 256
for finances and health choosing, 256
care, 40
interviewing fee-only plan-
living wills, 40 ners, 253-255, 258-259
wills, 38-39 investments with, 260
EvaluateLifeInsurance.org, 83 findacreditunion.com, 199
Eversave.com, 74 FIT (Food, Insurance,
Expedia.com, 122 Telecommunications), 63
Experian, 170 food. See food
experiences, spending discre- insurance. See insurance
tionary money, 21 telecommunications. See
extended warranties, 79-80 telecommunications
Index 277
food myths about, 149

food at home, 64 slow and steady
cherry-picking, 72 driving, 148
coupons, matching to goals
sales, 73-75 setting money goals, 33-37
price lists, maintaining, spending goals, 34
64-65 going green
stockpiling sale items, carbon offsets, 161
68-70 gasoline, 146-147, 150
food away from home, 76 avoiding aggressive
coupons and driving, 147
discounts, 78 inflated tires, 149
freezer meals, 77 slow and steady
skimp on what you driving, 148
don’t care about, 78 home heating and
freezing, 71 cooling, 150
organic food, 65-68 avoiding big ticket
FoodNews.org, 68 fixes, 154
Fox, Edward J., 72 sealing leaks, 152
Franklinreport.com, 121 thermostat plans,
fraud alerts, 44, 46 151-152
FreeCreditReport.com, 170 light bulbs, 155-156
freezer meals, 77 rechargeable batteries,
freezing food, 71 157-158
Froogle.com, 111 vampire appliances, 156
Frucall, 113 water, 159-160
good enough, 7-8
G Google Checkout, 129
Garmin Nuvi, 1, 108 Google Product Search, 111
GarrettPlanningNetwork.com, GPS systems, 1
254 GreenerChoices.org, 68
gasoline, 146-147, 150 GregKarp.com, 269
avoiding aggressive groceries. See supermarket
driving, 147 shopping
inflated tires, 149
278 Index
H I
haggling, buying services, 124 identity theft, 41
HDTVs, 97 credit, 170
health care, durable power of credit freezes, 46-47
attorney, 40 fraud alerts, 44-46
Healthsavers.com, 68 preventing
high-interest online bank be guarded, 42
accounts, 52-53 crosscut shredders, 43
HighYieldChecking opting out of unsolicited
Deals.com, 51 offers, 43
Hoch, Stephen J., 72 social security numbers, 42
holiday spending, 225 improving
home equity loans, 208 credit scores, 175-180
home heating and debt ratio, 179
cooling, 150
independent529plan.org, 248
avoiding big ticket
index funds, 8, 237
fixes, 154
IndexCreditCards.com, 199
sealing leaks, 152
INGdirect.com, 53, 218
thermostat plans, 151-152
instantquote.com, 84
home insurance, raising
deductibles, 84 insurance, 79
home-equity lines of child life insurance, 83
credit, 221 deductibles, raising on
homes, 22 home and auto
insurance, 84
HotCouponWorld.com, 74
extended warranties, 79-80
Hotwire.com, 122
life insurance, refinancing
houses, 265
term life insurance, 80-83
buying a house you can
insurance reports, 174
afford, 266-268
Insurance.com, 81
How You Can Profit from
Credit Cards, 200 insweb.com, 84
HSBCdirect.com, 53, 218 interest, credit cards, 193
Hulu.com, 101 Internet service, reviewing,
97, 100, 104
Hunt, James, 83
hybrid batteries, 157
Index 279
interviewing fee-only plan- LittleGrad.com, 132

ners, 253-259 Living Rich by Spending
investing in retirement, Smart: How to Get More of
229-233 What You Really Want, 9
investments with financial living trusts, 40
advisors, 260 living wills, 40
iPod, 4 LowCards.com, 199
iTunes, TV shows, 101 loyalty cards, supermarket
shopping, 68
J
Jellyfish.com, 132 M
Joost.com, 101 MagicJack, 87-88
junk mail, 44 magnitude, paying attention
to spending, 18
K maintaining credit cards,
Kayak.com, 122 196-198
kids, 140-143 Make Money, Not Excuses, 7
KidsMealDeals.com, 78 Malkiel, Burton G., 238
KISS (Keep It Simple, Mays, Benjamin E., 33
Stupid), 6 Mint.com, 32
kleankanteen.com, 159 mistakes, disputing credit
reports, 172
L Mobissimo.com, 122
landline phone service, can- money
celling, 85-87 getting out of debt
latimes.com, 260 credit counseling,
LawDepot.com, 223 209-212
layaway, 188, 190 home equity loans, 208
LED (light-emitting diode) mortgages, 208
bulbs, 156 pay small debts first,
libertarian paternalism, 3 206-207
life insurance, refinancing quit borrowing
term life insurance, 80-83 money, 204
light bulbs, 155-156 quit saving money, 205
Lincoln, Abraham, 33 saving. See saving money
Lindich, Don, 103
280 Index
succeeding with, 264

caring about
O
online bank accounts, 52-53
spending, 269
online calculators, 228
cars, 265-266
online shopping, 125-126
houses, 266-268
commodities, 126
teaching children about,
140-143 coupon codes, 130-131
allowances, 140-142 credit cards, 128-129
Moneycentral.msn.com, 81 eyeglasses, 133-134
mortgages, getting out of rebate portals, 131-132
debt, 208 shipping cost versus sales
MyFico.com, 173 tax, 127-128
Mysigg.com, 159 OpenTable.com, 78
MySimon.com, 108 opting out of unsolicited
offers, 43
N OptOutPrescreen.com, 43
NAPFA.org, 254 Orbitz.com, 122
National Credit Union organic food, 65, 67-68
Administration, 55 OrganicConsumers.org, 68
National Do-Not-Call OrganicValley.com, 68
Registry, 44 Orman, Suze, 38
National Foundation for
Credit Counseling, 212 P
natural food, 66 PAW (prodigious accumulator
needs versus wants, 105, 107 of wealth), 31
net worth, 30 pay yourself first, 216-217
NewEgg.com, 139 paying attention to spending,
NewWaveEnviro.com, 159 17-18
no down payment, no inter- paying bills, improving credit
est, no payments for 12 scores, 177
months sales, 190 payment history, 181
no-fee checking accounts, payment methods
49-51 cash, 182-183
no-no-no sales, 190 checks, 186-187
nonretirement invest- credit cards. See credit
ments, 223 cards
Index 281
debit cards, 184-186 researching before buying

layaway, 188-190 services, 121-123
no-no-no sales, 190 prioritizing bill paying, 60-61
PayPal, 129 Privacy Rights Clearing-
perks, credit cards, 195-196 house, 44
phone service. See telecommu- privacyrights.org, 44
nications prodigious accumulator of
PhoneScoop.com, 96 wealth (PAW), 31
power of attorney products, buying, 107-108
durable power of attorney reading reviews, 108-111
for finances and health researching prices, 111-
care, 40 114, 117
precharged batteries, 157 programmable thermo-
preowned, 266 stats, 152
prepaid cell phones, 89-90,
93-94 Q
prepaid tuition plans, college QAM (Quadrature Amplitude
savings, 247 Modulation), 99
preventing identity theft quality, evaluating when buy-
ing used items, 137
be guarded, 42
Quicken, 228
crosscut shredders, 43
Quicken WillMaker Plus, 38
opting out of unsolicited
offers, 43 QuickRewards.net, 132
price-protection guarantees, Quit Saving rule, 205
115-116 Quizzle.com, 174
Priceline.com, 122
pricelists, supermarket shop- R
ping, 64-65 Ramsey, Dave, 265
PriceProtectr.com, 116 A Random Walk Down Wall
prices Street, 238
evaluating when buying ratings Web sites, 120
used items, 137 razor blades, 75
researching before buying reading credit reports, 172
products, 111-114, 117 rebate portals, shopping
online, 131-132
282 Index
rechargeable batteries, rewards cards, 198

157-158 choosing, 199
references, seeking before cash back, 200-202
buying services, 118-121 rewards checking
refinancing term life insur- accounts, 50
ance, 80-83 RewardsNetwork.com, 78
refurbished electronics, Robin, Vicki, 29
138-139
RoboForm Pro, 129
researching
rollovers, 401(k), 240
prices
Roth IRA, 206, 231
before buying products,
rule of threes, 10
111-114, 117
rules for FDIC, 53
before buying services,
121-123
reading reviews before
S
buying products, 108-111 sale items, stockpiling, 68-70
Restaurant.com, 78 sales flyers, supermarket
shopping, 69
retirement, 36, 226-228
sales tax versus shipping
diversify, 233-238
costs, buying online,
holding on for the long 127-128
term, 239
salespeople, 109
index funds, 237
Sanyo Eneloop, 158
invest automatically,
saving money, 215, 217
229-233
for college. See college sav-
target-date funds, 236
ings
retirement savings plans, 206
credit, 169
reviewing contracts before
financial advisors. See
buying services, 124
financial advisors
reviews
retirement. See retirement
reading before buying
short-term savings,
products, 108-111
218-219
seeking before buying serv-
car funds, 224-225
ices, 118-121
emergency funds,
219-223
seasonal funds, 225-226
Index 283
Savingforcollege.com, 241 speed, paying attention to

savings accounts, high-interest spending, 18
online bank accounts, 52 spending
SCOjuice.com, 68 caring about, 269
sealing leaks, home heating discretionary money, 19
and cooling, 152 experiences, 21
seasonal funds, 225-226 things that rise in value,
services, buying. See buying 21-23
services things you care about,
shipping costs versus sales 19-21
tax, buying online, 127-128 paying attention to, 17-18
shopbots, 112 tracking, 32-33
shopping, 115 spending goals, 34
buying online. See buying spending money, when to
online spend, 14
buying products. See buy- spending today, 15
ing products spending tomorrow, 16
buying used items. See buy- spending yesterday, 15
ing used items
“Spending Smart,” 6, 13-14
Shopzilla.com, 112
spending today, 15
short-term savings, 218-219
spending tomorrow, 16
car funds, 224-225
spending yesterday, 15
emergency funds, 219-223
SpendingSmart.net, 269
seasonal funds, 225-226
stockpiling sale items, 68-70
shredders, crosscut
Stonyfield.com, 68
shredders, 43
store brands, supermarket
simplyinsulate.com, 153
shopping, 70
Skype, 87
subscription services, 122-123
SmartSource.com, 74
succeeding with money, 264
snapshots, taking stock,
caring about spending, 269
29-31
cars, 265-266
social security numbers, iden-
tity theft, 42 houses, 266-268
SoundAdviceBlog.com, 103 supermarket shopping, 64
cherry-picking, 72
284 Index
coupons, 73-75 TheGroceryGame.com, 74

price lists, maintaining, thermostat plans
64-65 home heating and cooling,
stockpiling sale items, 151-152
68-70 programmable thermo-
switch kits, banking, 51 stats, 152
thewatergeeks.com, 159
T things that rise in value,
T-Mobile To Go, 90 spending discretionary
T. Rowe Price, 232 money, 21-23
taking stock, 28 things you care about, spend-
looking ahead, 33-37 ing discretionary money,
19-21
looking back, 32-33
TigerDirect.com, 139
snapshots, 29-31
Tracfone, 90
Target, 139
tracking spending, 32-33
target-date funds, 236
Travelocity.com, 122
teaching children about
money, TripAdvisor.com, 122
140-143 trusts, living trusts, 41
allowances, 140-142 TV
telecommunications, 85 antenna, 99
Internet service, 104 cables, 102
landline phone service, HDTVs, 97
cancelling, 85-87 online shows, 101
MagicJack, 87 reviewing service, 97-103
prepaid cell phones, 89
TV, 97-103 U
TV and Internet service, U.S. Securities and Exchange
97, 100 Commission, 255
wireless phone plans, right- uesp.org, 242
sizing, 89-96 UGMA (Uniform Gift to
term life insurance, refinanc- Minors
ing, 80-83 Act), 249
Thaler, Richard, 3 Uniform Gift to Minors Act
(UGMA), 249
Index 285
Uniform Transfer to Minors Will & Trust Kit, 38

Act (UTMA), 249 wills, 38-39
unit prices, supermarket living wills, 40
shopping, 69 wireless phone plans, rightsiz-
Upromise.com, 132 ing, 89-96
used cars, 266
utilization ratio, 178 Y
improving, 179 Yapta.com, 117
UTMA (Uniform Transfer to Yelp.com, 120
Minors Act), 249 Your Money or Your Life, 29
YouTube.com, 101
V
vacation spending, 226 Z
vampire appliances, 156 ZenniOptical.com, 133
Vanguard, 5, 232, 235 zero-based budgeting, 106
Virgin Mobile, 90
VoIP (Voice over Internet
Protocol), 87
Vonage, 87
W
waiting before buying prod-
ucts, 113-114, 117
Walmartchecks.com, 52
wants versus needs, 105, 107
warehouse clubs, 72
Warehousedeals.com, 139
warranties, extended war-
ranties, 79-80
water, 159-160
Weston, Liz Pulliam, 180, 194
when to spend money, 14
spending today, 15
spending tomorrow, 16
spending yesterday, 15
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THE 1-2-3 MONEY PLAN

The Three Most Important Steps

Chapter 1 Spending Smart Redux . . . . . . . . . . . . . . .13

What to Spend Discretionary

PART I SPENDING SMART TODAY

2. Buy a Crosscut Shredder . . . . . . . . .43

Chapter 3 Get Fit (Food, Insurance,

2. Stockpile Sale Items . . . . . . . . . . . . . .68

3. Regularly Review TV and

Chapter 4 How to Buy Stuff . . . . . . . . . . . . . . . . . .105

How to Buy Used Stuff . . . . . . . . . . . . . . .134

Chapter 5 Green Means Green . . . . . . . . . . . . . . . .145

Little Things Mean a Lot . . . . . . . . . . . . .154

PART II SPENDING SMART YESTERDAY

Noncredit Payment Methods . . . . . . . . . .182

PART III SPENDING SMART TOMORROW

2. Ask Questions and Listen to

Chapter 8 Putting It All Together . . . . . . . . . . . . . .263

The great information herein can be largely attrib-

Thanks, too, to Clark Howard, author and host of

G years. His national newspaper column,

Getting from Here to There

done. But, the Garmin Nuvi is a very good line of GPS

upcoming busy intersection and cut through the Cherry

about consumer behavior to get people to do the right

In my mind, answering this question is complicated

specific brand names—maybe because offerings change

Ask any financial adviser about it: Some people just

When Good Enough Is Good Enough

“The truly great thing about ‘good enough’—and

We need to do smart things with our money, but

Is This Book Different from

Instead of striving to deliver more tips, we endeavor

How to Use This Book

The Power of Three

• Life, liberty, and the pursuit of happiness

There are often three characters in a story: the three

So, topics in this book endeavor to keep your to-do

Spending Smart Redux

What Is Spending Smart?

the fall of 2008, credit became more difficult to get, the

When to Spend Your Money

When to Spend Your Money, 1-2-3

payments on debt and unnecessary daily expenses, you

Why Pay Attention to Spending?

Why Pay Attention to Spending? 1-2-3

These concepts about why spending is important

The following descriptions tell you why.

heat an extra degree in your home. However, your deci-

What to Spend Discretionary Money On

What to Spend Discretionary Money On,

1. Things You Care About

company provides your dial tone or pays your sur-

3. Things That Rise in Value

Homes almost always rise in value over the long

By contrast, buying a new car or truck is a lousy

Of course, we all must buy many things that deteri-

Spending Smart Today

Chapter 2 First Things First . . . . . . . . . .27