Coin by Coin

Quick reminder: the goal is to reach $1,000 a month of web income by January, 2010

For nearly seven years now, I’ve been playing around with my websites. I’ve pulled in a little income from advertising, but I never really wanted to add up the figures. This way I could tell myself I ‘broke even’ — even if I didn’t. Breaking even was an important goal — it felt like a validation. But the time for vague ideas has passed. To reach my goal, I need to know where I stand to see how far there is to go.

It’s time for charts and figures. Here’s how things went last month, December 2008:

Income

• Adsense: $122.00
• Text-link-ads: $64.45

Outgo

• Website Hosting: $299.99

Nearly all my pain comes from webhosting. Hosting all of my sites, each running wordpress and receiving substantial traffic requires a dedicated server. The $299.99 for three months is my biggest expense and the one I can do the least about. $100 a month for dedicated servers and the good tech support is the best I could find at the time.

The noticeably smaller side of the equation is my income. Adsense is the program that has earned me the most income over the years I’ve been running it. Top earner though it is, it’s not enough to cover costs.

My second source of income for the month is text-link-ads. I’m newer to them and not quite sure what to think. For the moment, they seem to be a bit of too-good-to-be true, but I withhold judgment.

In summary I lost $114 in December — not ‘breaking even’ by far. How to reverse this trend? Next article up, my expansion plans.

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Header photograph by kevindooley

One of the most interesting things we’ve discovered… is that [people] are more motivated by the fear of looking bad than by the hope of getting millions of dollars. So if you want to get millions of dollars, put yourself in a position where failure will be public and humiliating. —Paul Graham

Today is New Year’s Day. It’s goal-setting time.

Normally I keep my goals quiet, hidden to all but myself. As a result, I often fail to achieve them. But, since I tell no one my aims, I can sweep them away and try to forget that I every wanted to achieve them.

This year is different. This year it’s time to put myself in a position to fail.

The goal I’m setting myself is: to earn $1,000 a month on average from location-independent sources before January 1st, 2010. I’m keeping track of progress on this blog — were everyone can see how well I do.

Why this goal? Like most, I don’t particularly enjoy working for someone. $1,000 a month is about half of my living expenses. If I could reach that, I could switch from working full time to part time.

The bar is set, the gauntlet thrown down.

Today is January 1st, 2009. 365 days left. Ready, set, go.

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Header photograph by Bob Jagendorf

For many years I tried, and failed, to make a budget. Planning ahead, I discovered, didn’t work for me. I’d sit down with a piece of paper and scribble some expenses, starting with the easy, predictable ones like rent. But, soon I’d get to the more nebulous areas of my budget, like food. ‘Just how much do I spend on food?’ I’d wonder, without any idea.

Rather than recognize my ignorance as a warning sign that I really needed a budget, I took it as an excuse to stop. ‘Well’, I’d think, ‘If I don’t know how much I spend on food, I can’t really start, can I?’

To be fair, planning out a month’s worth of expenses for the first time is a daunting and anxiety-producing task. I suggest an easier method that worked for me: grow your budget, don’t plan it. Here are the steps to grow a budget.

1. Start your budget with known expenses. Take out a sheet of paper and list all the easy-to-measure expenses. These will be your fixed, predictable costs such as monthly rent. If there are any bills that are reasonably consistent or that you are somewhat confident about their amounts, add them.
2. Leave the rest of your money undefined. Add all the expenses you wrote down in step one and subtract that amount from your take-home pay. If your expenses are $1,000 a month and your take-home pay is $2,500, the difference is $1,500. Take the left over money and put it in a debit card account. Your first month of budgeting is now done. Yes, the majority of your money is unaccounted for, but that’s no problem. The budget will improve each month.
3. Pay all your expenses with the debit card. By paying your random bills, going out money, and miscellaneous expenses from the debit card, the bank tracks your expenses for you.
4. In the second month, add your undefined expenses to the budget At the end of the first month of this process, the bank will send you a statement. From this, you can now estimate last months’ expenses. If, after looking through your previous month’s debit card records, you discover that you spend $200 on eating out, that goes on next month’s budget. Adjust up or down as you see fit.
5. Repeat from step two. Each month that passes will give you a slightly better idea of how much your average expenses are and help you plan for next month’s budget and have less money unaccounted for.
6. As unexpected expenses come up, add them in. Surprise! Valentine’s day is in February. If you need to plan to spend a certain amount of money on Valentine’s day for a trip with your partner, then take the total amount you spend (say $500) and divide by 12 ($42). That’s how much you need to put away for Valentine’s day each month. (I recommend using ING direct to store the money)

There are some disadvantages to growing your budget rather than planning it out. Chief among them is the time it takes — about a year to work out all the kinks. As an example, it didn’t cross my mind that I needed to budget for the rather expensive London-Raleigh Christmas flights to see my parents until about December 20th. After scraping that unwelcome surprise together, I now shuffle £45 a month into a ‘flights’ ING direct account to prepare. To help mitigate the stress of unexpected costs, I recommend you have at least a partially-stocked emergency fund before trying to grow a budget.

The chief advantage of growing a budget is, however, that you actually start budgeting. Growing a budget allows you to let go of the need for perfection. Beginning with a poor budget, and slowly improving it is miles better than doing nothing at all.

Go plant that seed and start your imperfect, but self-improving budget today.

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Header photograph by sakura

The Dave Ramsey Show is a personal finance radio show that’s actually worth listening to. Every few months I try out the finance podcasts available on iTunes and every time I’m disappointed. Many financial shows discuss money in the most dispassionate, dull way possible. The focus is always on the interest rates, exchange rates and futures.

The Dave Ramsey Show is different. Ramsey takes calls from average people and helps them with their money problems. He also knows that most of the time money isn’t their problem, they are their own problem. People call in and Ramsey makes them face their irresponsibly with money, their family problems and their addictions, all through the lens of how it destroys their financial (and personal) lives.

Ramsey has a simple fix-your-finances algorithm that he mercilessly applies to all the callers. They are his ‘baby steps’ and go as follows:

1. Put $1,000 in an emergency fund.

2. Pay off all your debt using a debt snowball.

3. Save three to six months worth of expenses.

4. Invest 15% of your income into Roth IRAs and pre-tax retirement plans

5. Save for your children’s college

6. Pay off your home early

7. Build wealth and give

After you’ve listened to the show for a few weeks, you get to know what Ramsey will say before he says it — there is a church-like aspect to listening. Yes, you already know how how to lead a good and prosperous life, but it helps to hear the steps repeated over and over.

If you are not a Christian, be prepared for a few biblical moments in each episode. Ramsey always tells his listeners that people who don’t take care of their family are ‘worse than unbelievers’. When talking about future job paths, the question is always asked what the listener feels God is calling them to do. That being said, I am one of those unbelievers Ramsey thinks there can be nothing worse than, and I (and my unbelieving wife) both enjoy the show and listen together. For the unbeliever, there are some entertaining moments, such as a discussion on whether credit card numbers are the mark of the beast. There was also the time a listener’s mortgage payment came out to be $666 a month and Ramsey advised him to change it ‘for obvious reasons.’

Disagree with him though I may do on religion, his financial advice is sound. It was his plan that I followed to get out of debt. My wife and I owe our debt-free lives to him. Every Friday the show encourages people like us who have followed the plan to call in and scream ‘I’m debt free!’ when they’ve made it out of the credit card trap. While you’re working to pay off you debts, the Friday show is a mighty inspiring thing.

If you’re struggling to get out of debt, I highly recommend listening to the Dave Ramsey Show. You can click here to subscribe to the podcast. Also, if you are a fan of This American Life they did a segment on Ramsey a few years ago that’s worth listening to.

On the long bets website, Warren Buffet has wagered $1 million against Protege Partners, LLC saying that their mutual funds and hedge funds are a bad investment that won’t outperform the S&P 500. The exact bet is:

“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”

Buffet’s reasoning is as follows:

…passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

I agree with Buffet and think he will easily win this one. What do you think?

[Click here to see the bet]

[Click here to read an article on Fortune about the bet]

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Header photograph by !!!! scogle

Story via boing boing

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Look at the skyline of any major city and play the ‘who owns the tallest buildings game’. Almost always it’s insurance companies. These buildings are like the resort casinos in Las Vegas: they are evidence that, on average, people don’t win. I don’t go so far as Ned Flanders (who doesn’t insure himself because `it’s gambling’) but there is a similarity.

A warranty is a kind of insurance. You buy something, and pay the company a bit extra to fix it if it breaks in a given time period.

If you walk into Home Depot and purchase a washing machine, they will try to sell you the extended warranty. Imagine the warranty costs $100 for two years of coverage. Is it worth it to buy the warranty?

Think of the warranty as what it is: you are betting Home Depot that you will need more than $100 of repairs over the next two years and they are betting you won’t If you need $101 in repairs, you win, if you only need $99 (or 0) then Home Depot wins. Is it a good bet?

Well, you really only know one thing: the average person spends less than $100 in repairs on a washing machine every two years. If the average person needed more than that, the warranty would lose Home Depot money — they would either discontinue it or raised the price.

Statistically, if you want to save money, when you are offered a warranty, note the price and then stick that amount into a separate savings account for repairs. On average, over the lifetime of your purchases, you will come out ahead.

While I do have a separate `repairs’ ING account, I don’t always follow my own no-warranty advice. When I bought a shiny new MacBook Air, I also purchased the AppleCare warranty, even though it’s not mathematically the smartest thing to do. However, I did this because my laptop is a mission-critical device for me. In this case I was buying security.

So, if you have a fully-stocked emergency fund and would rather trade mathematical correctness for security, forgo the warranty and save your money.

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Header photograph by pvera

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Barbara Dafoe Whitehead of the American Interest has written an excellent article entitled: A Nation in Debt: How we killed thrift, enthroned loan sharks and undermined American prosperity. More than the usual panic about the amount of debt in the US, the article covers how the old American ideals of saving and thrift fell by the wayside.

[Click here for A Nation in Debt]

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Header photograph by The Consumerist

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The world recently crossed a demographic threshold: as of mid 2008 more than 50% of the world’s population lives in cities. Despite the Malthusian predictions of the 70s, the population of industrialized nations is decreasing — and the cities are the cause. Cities act as population sinkholes for one simple reason: babies are expensive.

In the city potential parents have a choice to make: would you rather have a child or a million dollars— And the time to enjoy it? While babies are an asset in rural areas, they are an enormous liability in the cities.

When my wife and I started to plan our long-term financial goals, we calculated the earliest possible retirement age if we really focused and lived like spartans. Crunching the numbers we came up with a low boundary of 45 years old. Pretty good, we thought.

My wife, beautiful intelligent woman that she is, looked at the amount necessary to save annually and said to me: “This spreadsheet is the best reason I’ve ever seen not to have a baby.”

The remark about babies costing a million dollars isn’t far off. According to a study done in the 1990s by the US government raising a child from 0 to 18 costs between $170,000 and $250,000. Just one! That’s excluding sending the precious darling to college. And that’s data from nearly two decades ago.

While there may be good reasons to have a baby, your finances are not one of them. So, before you and the little lady decide she no longer needs to take that little pill every night, ask yourself: a child or a million dollars?

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Header photograph by Sam Pullara

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The Motley Fool has an interesting article on how, if you are in your 20s, you can save 20,000 USD and through the magic of compound interest turn it into 1,000,000 USD by the time you retire.

[Click here to read The One-Year $1 Million Challenge]

On Point’s most recent show covered the increase of American’s debt and decline of thriftiness since the start of the nation.  From the show’s description:

Once upon a time, America was famous for its thrift — for local banks and credit unions and savers’ clubs that encouraged everyone - even the little guy and gal - to save their pennies and get ahead.

Today, America is famous - maybe infamous - as the debtor nation: the country that rains credit cards down on the public, builds “little guy” dreams on lotteries and scratch tickets, and struggles with a subprime lending mess.

What happened, and how do we fix it?

[Click here to listen to 'Debt Nation' on On Point]

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Header photograph by kevindooley