Money Listens

Next to our home and cars, food is the biggest bite out of our budgets.  Since we’re always going to the grocery store, we’re always complaining about how much food costs.  Just how much is reasonable to spend on food anyway?  When in doubt, the IRS has the answer.  Yes, that Internal Revenue Service.

If you’re delinquent on your taxes and want to work out a payment plan, the IRS will allow you amounts to spend on various necessary items, then the rest you pay back to them. The IRS allows a family of 4 to spend $752 per month on food and another $74 on household supplies, which are laundry and cleaning products and paper goods. This is a whopping $826 per month.  This is for all food, including eating out.  (We hope if you’re  behind in your taxes that you hold down the restaurant visits).

Are the IRS numbers in line with what Americans really spend?  Fortunately for us, the U.S. Bureau of Labor Statistics stays on top of this stuff.  The “average” family income in 2006 was $43,799, after taxes.  For a family of 4 people, $552 per month was spent on at home food and household supplies.  This included laundry and cleaning products, but not pet food, shampoo or drugs.   If you have 2 dogs and 2 teenage girls and include dog food and “health and beauty aids” in your grocery budget, this number can go way up.  Believe me, I know.

Low income families, the bottom 20%, with $9,969 yearly income spent $331 per month for 4 people. That’s somewhere in the neighborhood of 20% of income on food.

The top 20%, with the highest income of $141,738 spent $1,097 per month.  Think raspberries in January and wild halibut.  Or imagine doing all your grocery shopping at Whole Foods.

The bottom line?  American families spend between $331 and $1,097 for food and household supplies.  The national average is 9.9% of income.

Your costs could vary.  A lot.

So, how much should we spend?  You have to decide that on your own.  If you’re into organic and natural foods you’re going to spend more.  If you buy a lot of convenience foods or have teenage boys, you’re going to spend much more.  If you shop around the store’s perimeter and buy mainly fresh fruits and vegetables in season and what’s on sale, you’ll be about average.  Or not.

See the statistics for yourself at these websites:

http://www.irs.gov/businesses/small/article/0,,id=104627,00.html

http://www.irs.gov/businesses/small/article/0,,id=104627,00.html

http://www.bls.gov/cex/2006/Standard/quintile.pdf

When I was I kid I loved going shopping for school supplies.  Holding the list, checking off the items– it was one of the few times I got to make choices of my own. Did I want a blue pencil box this year?  The highlight was the lunch box.  Snoopy and Woodstock were fun, but would I be cooler with Charlie’s Angels?  I felt sorry for some of my friends.  Their moms would confiscate the supplies until the first day of school.  I was allowed to unpack them in my room.  I would cut the scissors out of the plastic, write my name on all the notebooks, and organize everything in one shoebox.  It was amazing that I had my own Elmer’s glue, my own Scotch tape, and one dozen brand new Ticonderoga pencils.

I have no idea how much my mom spent on school supplies.  We really didn’t buy much.  But I remember what I spent for my 3 kids two years ago– $108.00.  I remember because it was a big shock.  And it wasn’t everything they “needed,” some items we couldn’t find at that store.  Since then I’ve looked for ways to save on school supplies.

You’re not going to believe this, but the “back to school” ads hit in Sunday’s newspaper.  It’s barely the middle of summer, but all the gardening supplies have been cleared out, and the shelves are stocked with paper, notebooks, and highlighters in a hundred different colors.

Here are some tips for keeping costs down.

1.  Look around the house.  Did you save the scissors or rulers from last year?  Do an inventory of any supplies that can be used again this year.  Check those off the list.  You did download the list from your school’s website, didn’t you?

2.  Don’t let the kids go shopping with you.  If you do, they’ll talk you into the $2.00 neon plastic ruler instead of the $.49 one.  If you’re like me and have fond memories that you want your kids to enjoy also, buy most of the stuff yourself and let them choose a lunchbox or pencil case.  Remember that our kids go shopping much more and buying school supplies isn’t as big a deal as it once was.

3.  Pick up items every week that are on special at the grocery store.  Most stores have crayons one week and glue the next.  And buy extra if you know that your kids always need more after Christmas.  If you do a lot of art projects, get as many bottles of glue as you can.  They won’t be this cheap again until next year.

4.  Find a store that has spiral notebooks for $.10 and buy 2 or 3 dozen.  Your kids will complain because everyone else has Batman or Narnia on their spirals.  But they can decorate the front covers with markers and stickers.  And you’ll have enough to last the entire year.  If you like using them for journals and to-do lists, buy a few more for yourself.

5.  Buy at least 6 poster boards per child.  You know how your kid tells you at dinner that he’s got a poster project on recycling due the next day?  He wants you to drive him to Walgreens to get a poster board.   You suggest that since it’s about recycling he should tape some brown paper bags together and use that for a “poster.”  Now you don’t have to have that conversation, you’ll have plenty of poster boards stashed in the back of your closet.  If you really go through them, Sam’s Club online has a package of 25 for $8.88, including shipping.

6.   Stock up on what your kids use the most.  If you have elementary age kids, they will devour markers and crayons.  High school kids need vast quantities of index cards and mechanical pencils.  Everyone seems to need folders.  They are so inexpensive at this time, buy 2 or 3 dozen.  Make sure they have prongs.  You might want the plastic ones if you kids are hard on paper folders.  If you have the storage space, stock up when you find a good price; you can use the items for more than one year.

7.  Don’t buy inferior quality items.  Some of the dollar stores have pens that barely write and pencils with erasers that don’t erase.  Stick with name brand items unless you’ve used a brand before and are satisfied with the quality.  I’m partial to the Dixon Ticonderoga pencils, they are a pleasure to use and really help young kids with writing.

8.  If you need office supplies for yourself, buy those at this time of year.  Most stores have “dorm room” collections with great prices on desk lamps and organizers.  But don’t buy them unless you need them and were planning to buy them.  Some of these items can make great birthday or Christmas presents.

9.  If you start shopping now, you will be able to buy school supplies at your normal shopping trips.  Just pick up whatever items are on sale that week.  It isn’t worth going all over town to several stores, but over the course of the next few weeks most of the items you need will be on sale at places you regularly shop.  You can plan a trip to a store like Office Max for the other items on your list when they have a good sale.

10.  If you kids must have a particular binder or item that is more than you want to pay, tell them you will give them the cost of the plain item and they can add their own money to make up the difference.

Buy some extra supplies and drop them off at your child’s school.  There are always kids that don’t have school supplies.  Isn’t that one of the reasons we want to save money, so we can afford to share with others?

For all the cows you’ve loved before…

Friday, July 11, 2008 is Cow Appreciation Day.  Anyone who dresses like a cow gets a free Combo Meal.  Go for breakfast, lunch, or dinner.  Or all three.  Even if you’re not up for a full body costume, just wear a mask or spots and get a free sandwich.

It’s time to say thank you to all those cows who do so much for us all year long.  Where would breakfast cereal be without cows?  Today is their special day.  And it can be yours, too, with a little creativity. And did you know Chick-fil-A has some of the best cole slaw?  But the waffle fries are my favorite.

Visit Chick-fil-A’s website for tips on making your own cow costume.  And this could be you:

High school is over, college is next.  Your freshman has her sheets and towels, mini-fridge, panini maker, first aid kit, shower caddy, and about 350 lbs. of “must-have” stuff.She’s registered for classes, signed up for orientation, sent her roommate 500 text messages, and has “class of 2012″ on her Facebook.  (Let’s hope she will graduate in four years.)What else is on the college to-do list?  How about money stuff?  She’s going to be using money in college and needs to tell it where to go and what to do.

1.  Bank Account

Where is she going to bank?  She has a checking account and ATM/Debit Card with a local bank.  She needs to open a checking account at a national bank with a location at home as well as a location within walking/biking distance of college.  Most banks have no-fee student checking accounts.  Find out about ATM fees and overdraft charges.   A parent can be a joint holder in order to regularly transfer an allowance, or in a time of emergency.  Make sure she knows how to balance a checkbook and stuff like how long it takes her paycheck to clear after she deposits it.

2.  Credit Card

She will be bombarded with offers to open credit card accounts.  Make her swear not to do this.  Her ATM/Debit Card will be branded with VISA or MASTERCARD, and will be all she needs.

3.   Paperwork

She needs a filing system with folders and a place to keep them. Go ahead and make some now.  Even if most statements and bills are online, there’s still plenty of paper around.  Especially financial aid forms and notices from the school.  Does she know what types of paper she must keep?  What about receipts and warranties?  She also needs to keep her social security card, passport, test scores, health records, payroll stubs, and important papers somewhere.   And under the bed doesn’t count.  Not only does she need to keep the stuff filed, she needs to fill out the forms herself.  And write the tuition check.  And tell her she gets to fill out her own tax return next year.

4.  Spending Plan

She needs a plan for how much money she can spend on eating out, recreation, clothes, Starbucks, gifts.  You get the idea.  If this sounds like a budget,  a rose by any other name. . .   How much will the parents contribute and how much will she be responsible for?  And she needs to keep track of her spending.  Quicken or a spiral notebook will get the job done.  She needs to know that you will “audit her books” at Christmas break.  And you don’t mean textbooks.

5.  Maintance

She needs to know how to take care of her stuff.  If she has a car, what will she be responsible for?  She needs to know how to run the anti-virus programs and backup the data on her computer.  She needs to know to keep passwords safe.  And do laundry.  Ruining clothes is expensive.  She needs to pay her bills on time.

6.  Student Loans

If she is taking out loans she needs to understand the terms, especially what the repayment amount will be.  She must be careful to keep up with the forms and limit her loans to the bare minimum necessary for school.  Loans can get out of hand in a hurry.  She can check out this video on how college students struggle with money management.  http://www.youtube.com/watch?v=JOt3Apl7qBA

7.  Privacy

Does she know not to give out her account numbers or passwords?  Does she have a basic idea about identity theft and scams?  Tell her not to lend money to friends.  And don’t borrow any, either.

8.  Back Up

Tell her you’ll be there for any problems.  Money listens and parents can listen, too.

Investing has its own rules.  When we try to play investing by the rules we’ve always used to run our lives, it doesn’t work.  One of the reasons we’re lousy investors is because we follow the rule “You get what you pay for.”  When you’re buying a car, a computer, or dark chocolate, you generally do get what you pay for.  The more you pay, the better the product.  But not when it comes to investments. You can’t tell whether a financial product is the best one just because it costs more.  In fact, often the opposite is true.

Another maxim we live by is “If you don’t know how to do something, hire an expert.”  In practice, it’s much harder than it sounds.  Just who is an expert?  We’ve all had trouble finding a car mechanic or a plumber we can trust and depend on. How in the world can we find a financial planner?  (Be on the lookout for a future post on how to find a financial planner.)

Listen to your gut.  Trust your instincts. You usually know what is right.  Sure you do.  If you’re playing Clue, you might have a hunch that it’s Colonel Mustard in the Lounge with the Wrench.  So what if you’re wrong.  You’re out of the game and go get another Pepsi.  Are you going to risk your life savings on a hunch?  Okay, I think most of us have this one down.  We don’t rely on hunches.  We don’t guess.  We actually do some research and make the best decision we can.

If Dogbert recommends Index Funds, what are you waiting for?

These cartoons are from Scott Adams’ Dilbert website.  Check it out at www.dilbert.com.  And please don’t mention the words “copyright infringement.”

A recent article in USA Today discussed how seniors were getting hammered by rising prices.  It’s not your imagination; prices have been going up.  For the three months ending May 31, the annualized inflation rate for food was 6%, and for energy, inflation exceeded 28%.  Food and gasoline are the worst, but prices in general rose at a 4.9.% rate.

When you’re retired and living mainly on Social Security, it’s especially tough.  An AARP survey found that 59% of seniors have trouble paying for food, gasoline, and medical care.  If you’re like me you find that hard to believe. You hear mostly about retirees playing golf, going on cruises, and generally enjoying the good life.  You see them walking in the malls and eating at Olive Garden.  41% can afford to do that.  The 56% who can’t will stay at home to save the gas for doctors’ visits.  Are you and/or your parents going to be in the “having trouble paying for” group?

It sure looks that way.  The median balance in 401(k)s and IRAs for those approaching retirement age is $60,000.  That’s not going to go very far.  Seniors don’t just need help crossing the street.  They need help preparing for the future.  This is especially critical for women. Women live longer and are more often alone in old age, and they are more likely to be adversely affected by rising prices.  Forty percent of elderly women  receive more than 90% of their income from Social Security.

There is probably someone in your life that could use help crossing into retirement.

Why are so many of us lousy investors?  We’ve been reading MONEY Magazine for years, keep up with CNBC, and try our best to make wise decisions.

The Bogleheads’ Guide to Investing has been on my “to read” list since it came out in 2006.  The book is a group effort by three followers of John Bogle, founder of Vanguard mutual funds.  Proponents of Bogle’s strategy of investing are referred to as “Bogleheads.”  I postponed reading the book because most of my focus has been on spending less and saving more, not investing.  The book is a comprehensive how-to guide for beginning investors.  But it’s also got a fair amount of psychology and philosophy in the mix.

The book has a great answer for why so many of us are lousy investors.  It’s because of the principles we have learned to live by.

• Don’t settle for average.  Be the best.
• Trust your instincts.
• If you don’t know how to do something, ask an expert.
• You get what you pay for.
• If there’s a crisis, do something, take action.
• History repeats itself.  The best predictor of future performance is past performance.

Applying these principles to investing will leave you poorer. *

Investing is a whole different ballgame, with its own rules.  That’s because the stock market is random and unpredictable.  The rules that we’ve lived by all our life, that have served us so well, are useless when it comes to investing.

Who is happy with being average?  Don’t we always strive to be the best?  Don’t we want the best returns on our investments?  It’s questions like these that torpedo our portfolio.  The “average” investor takes high risks to try for “better-than-average” returns and ends up “below-average.”

Bogleheads choose index funds, little risk, and are happy with “average” returns.

*The Bogleheads’ Guide to Investing by Larimore, Lindauer, and LeBoeuf. p. 76

Americans are spending about as much money on eating out as they are on eating at home.

The ERS Food Expenditure data series indicated that spending on food away from home was 48.9 percent and spending for food at home was 51.1 percent in 2006.

We spend about 58 percent of our food-at-home dollars at traditional grocery stores. Non-grocery stores that sell food, such as Walgreens and Dollar Stores, have increased their share of grocery sales to 11 percent. The really big winners were supercenters and warehouse club stores, which accounted for 18 percent of food-at-home expenditures in 2006. No wonder those check-out lines are so long.

The chain restaurants are also competing with the grocery stores. Many of these restaurants, such as Outback Steakhouse and Carraba’s Italian Grill, have emphasized take-out orders by adding reserved parking spaces and special entrances. These chains’ take-out sales account for an estimated 10 percent of their total sales.

Grocery stores are countering with more ready-to-eat meals and salad bars. There’s less and less cooking and more and more heating and eating. It’s getting harder and harder to separate the “at home” spending from the “eating out” category. Does the lasagna dinner from Macaroni Grill that you eat at home still count in the “eating out” budget category? What about Central Market’s “Dinner for Two?” Preparing and cooking a meal at home, with ingredients purchased from a grocery store, still beats eating out. At least in the cost department. Since we’re willing to spend half our food dollars on eating out, it seems the cost department isn’t much of a priority.

This Saturday, May 10, 2008, letter carriers will collect food for the local food bank. Last week you probably got a paper bag with your mail. If not, put any non-perishable food items in a bag or box by your mailbox. Your mail carrier will pick it up on Saturday when he comes by to deliver your mail.

Any items are welcome, but peanut butter, tuna, soup, and cereal are especially needed. Nothing past its expiration date, and no glass jars, please.

One of the reasons I want to get a handle on my finances is so I’ll have more money to give away. Here’s a good opportunity. It couldn’t be any easier, I’ll just take a look in my pantry and fill up a bag.