Recently, after discussing my fears about a home purchase, I received a very thoughtful email from a reader that I wanted to share with all of you.

I love your site. I just discovered it and I pop in every day. I don’t usually respond but I have to tell you this….
You aren’t silly for not liking the mortgage set-up you described. I don’t think it is fear that is holding you back – it’s your common sense.
Now, as a 40 year old, mother of 7, I’m going to say something you can’t. Your wife is wrong. The house is too expensive and the ARM is too risky. After baby #2 comes along and wife wants/needs to stay home that house will sink you. She will hate you for not “letting” her quit her job and she will have totally forgotten that is was you that said the mortgage is too much.
All of that seems so unlikely but I’ve seen at least 5 couples overbuy on houses on the basis of it being a good investment. One couple divorced and another couple is up to their eyeballs in debt. The second couple had dental expenses (of all things) for three of their four children that will need expensive implants. The third couple isn’t in a happy place. They could swing the mortgage (barely) but then the furniture, lawn equipment, sprinkler system all had to be bought with payments. Not to mention eating out and daycare for the “oooops” 3rd baby.
Buy the house that you can afford on one income, save a decent down payment and skip the ARM. Some couples gamble on a ARM to qualify for too much house then don’t qualify later for a standard mortgage when they really, really need to convert.
Swallow your pride and don’t get caught up in thinking the kind of house you live in reflects the kind of person you are or how much you love your family. Oh, and don’t even consider buying a house until you have your debt gone.

I basically agree with everything she said here. I do not want to get caught up in a home purchase that will financially strangle me for most of my adult life. My fear is that this will happen, but I have set up several safeguards against this.

First, my wife agreed to not purchase a home that sells for more than 1.5 times our annual income. This puts a pretty clear cap on what we can even look at, obviously, because we’re not exactly raking in money by the bushel.

Second, we live in an area with very modest property values. We live in the midwest with no major cities near us; the closest one is Minneapolis, which is about a three hour trip. This means that house prices are quite reasonable and that we can find a decent house in our price range.

Third, rather than using an ARM to make the down payment, we can cover most of it with a zero-interest loan from my retirement plan. This is an avenue that we explored only because of our discussions with a close family member who helped us to find some avenues of fund raising that we had not previously examined. We may still need to get a small ARM, but we’re looking at an 80/3/17 situation, where the ARM will be trivial to pay off in three years.

It really is great to have readers who write in with such feeling and sincerity. Thank you, dear reader; you know who you are.

Growing up, I watched my parents maintain their checkbook ledger quite carefully, though it was easy for them: they only wrote checks or (on a rare occasion) made a counter withdrawal from their checking account, and they also would manually go to the bank and make deposits of any paychecks they received.

Today, I still write and receive checks, but I also do some ATM withdrawals, some check card purchases, and some automatic withdrawals as well. These new transaction types have made money management easier in some ways (it’s much easier to get at my money when I need it and in some ways it’s easier to budget) and harder in others (the old paper ledger doesn’t cut it).

Rather than sticking with a paper ledger, which would make it very difficult to keep track of all of these different transaction types, I’ve moved the whole thing to Microsoft Excel. Essentially, it works like a traditional ledger, with a check number column, a memo column, a credit column, a debit column, a “type of transaction” column, and a continuous balance column (just a formula that automatically adds the new debit and subtracts the new credit from the balance of the previous row).

Whenever I pay bills, I just enter them right into Excel. Whenever I’m out and about and I make purchases, I save the receipts and enter them in Excel when I get home. Whenever I make an electronic payment, I immediatly make an entry into Excel. In short, a spreadsheet has become my replacement for a checkbook ledger.

At first, I had trouble with automatic deductions and deposits. They would come at various points in the month and if I forgot to enter one on the right day, my balances would get out of whack. I finally hit upon a solution that I call the “better safe than sorry” solution: at the start of each month, I enter all my automatic withdrawals for the month, and at the end of the month, I enter all of my automatic deposits for the month. Using this method (along with making sure my balance in Excel stays above zero), I am able to be sure that I won’t overdraft in a given month.

I’ve found that this system works great for me. What system works well for you?

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #13: Keep three months’ worth of living expenses in a bank savings account or a money-market fund for emergencies. If you have kids or rely on one income, make it six months’.

This is an appropriate rule #13, as it covers a scary situation that most of us don’t want to think about: emergencies. What will happen if you lose your job? What will happen if the transmission dies in your car? What will happen if you get spinal meningitis? These seem like unlikely things, but eventually something disastrous will happen and you need to be prepared.

This rule is a solid one, but it doesn’t cover every situation. For example, larger households should have more than six months of living expenses in the bank, while single people can get by with as little as two months. Why is this? A household includes people that are entrusted with the responsibility of keeping a child (or children) safe and secure, and the more people in the household there are, the greater the likelihood that an unexpected event could happen.

In short, if you have a large family, you want to be sure that even if two or three bad things happen at once with different family members, you’re fine. That’s why it makes sense to have a certain amount in an emergency fund for each family member, so that your emergencies won’t affed them and vice-versa.

How much is appropriate for each person? Three months is nice, but it is not quite necessary to have a year’s worth of living expenses sitting around for a couple with two kids, plus three is a little bit high for a single person, anyway (unless they like the security blanket). Two months of living expenses per household member is a much better balance of security and reality. So, let’s rewrite that rule.

Rewritten Rule #13: Keep two months’ worth of living expenses in a bank savings account or a money market account for each person in your household. So, if four people live in your household, have eight months’ worth of living expenses.

You can jump ahead to rule #14 or jump back to rule #12.

This week, The Simple Dollar is conducting a detailed review of Kevin McKinley’s Make Your Kid A Millionaire. This title focuses on the role parents play in building a net worth for their child, both financially and psychologically. Does this book provide some interesting insights, or is it merely a repeat of the power of compound interest? This week, we aim to find out.

As your child grows older, the book begins to assume that you’ve done a few fundamental things, such as plan for an unexpected disaster as well as begin a savings program in a 529. What else can you do to help ensure a great future for your child? The middle section of the book addresses this.

The strongest suggestion given is to invest in your own Roth IRA. Since this money is all after taxes and you can begin withdrawing at age 59 1/2, it’s a great way to channel money to your future self without worrying about taxation. This serves two great benefits in terms of your child: one, it ensures that they will have very little expense when it comes time to look at assisted living facilities and other late-life needs for you, and two, it gives you a source of money that you have many options for distributing. You can take the money out steadily and spend it on your children or grandchildren while you’re alive, or, if you’re in great financial shape, you can hold onto that money and pass the Roth IRA onto your descendents upon your death. Either way, a Roth IRA is a great way to keep control over your money while still allowing you to be able to help your children later in life.

The book also suggests investing in common stocks and annuities for the future, but it is quite clear that there are better investment options than these, so there are portions of the middle of the book that feel much like supplemental material.

Another disappointment in this section of the book is the continuing references to the value of this period in a child’s life to educate them about money, but the book offers no real advice on the subject. I found this particularly disheartening because of my belief that a good education about life is the most valuable gift you can give your child, and an education about money is a vital component.

McKinley’s book does a very good job of explaining the mechanics of how you can make your child a millionaire by giving the child the money, but it does a poor job of explaining how you can teach your child to understand the real value of this gift, that money in the bank is freedom, not just the key to more stuff. This is the big sour note for this book.

Tomorrow, we’ll go through what this book has to say about your financial arrangements with adult children.

You can jump quickly to the other parts of this review of Make Your Kid A Millionaire using these links:
Overview
Prebirth Through 6 Years
Ages Seven to Twelve
Age Thirteen to Adulthood
Buy or Don’t Buy?

Make Your Kid A Millionaire is the fourth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

I finally bit the bullet and ordered a new laptop. 2.0 Ghz Core 2 Duo with 2 GB RAM, 256 MB video RAM, and a 80 GB hard drive (not counting my external one) should take care of my needs for a long while.

Revolt Against Telemenu Day My advice to this person is to never ever call Dell’s customer support. Telemenu hell followed by a barely-decipherable phone conversation from a poorly trained person in Bangalore. (@ the art of debt)

Closed Down ING Direct Account Memo to ING: your customer service and interface are great, but if you can’t keep your rates competitive, you’re going to lose customers. That’s all there is to it. (@ get rich slick)

How To Pay Off A Boatload of Debt Quickly To add to that impressive list, I was able to eliminate about $9,000 in high-interest credit card debt in about seven months. I used some of the ideas from this article… hmm… maybe I should write my own. (@ free money finance)

There Should Be A Pill To Make People Stop Spending My first dumb reaction to this was that there already is a pill for this: Valium. I had a relative get hooked on Valium and Darvon once upon a time; she was a compulsive shopper, but soon had no compulsion to do anything. Even dumber: I first thought this subject referred to a bill to make people stop spending. (@ the tao of making money)

I recently had the opportunity to read Enough with the Adsense!, a pretty provocative response to a rather provocative Simple Dollar post about “pay per post” schemes. In that post, the mercurial Dimes refers to me as logorrheic (guilty as charged) and also makes the astute observation that my site and many others shamefully use AdSense to gain a bit of revenue from our blogs.

The problem is that Dimes is forgetting one big thing: the real enemy here isn’t AdSense. It just catches the blame because quite often a strong AdSense presence (or the presence of other affiliate programs) is a symptom of any number of much worse problems. Let’s look at some of these potential enemies.

The enemy is terrible content. So often, Google searches take you to sites with abysmal content, often little more than a collection of AdSense ads and a bunch of keywords. When you see sites like this, it’s clear that someone is obviously trying to “game” AdSense and make a quick buck. As bad as that is, I’m often more disgusted when I find scraped content stolen from other sites (often stolen from someone who works hard to make an awesome site), as All Financial Matters recently discovered. Another time in which ad banners show up and are unwelcome is when they appear on poor content to begin with – things such as “Hey click this link” followed by a crummy ad.

The enemy is terrible web design. Some sites have no idea when enough is enough and you find yourself clicking through two screenfuls of ads simply to find a small nugget of content. In this case, it’s not the fault of the content itself, but the fault of the web design. If an advertisement ever feels intrusive, then there’s a problem somewhere. I get a pretty low clickthrough rate here at The Simple Dollar because I want what little ads I have to be as unobtrusive as possible. Others may design in a different fashion.

The enemy is terrible ad providers. As Dimes mentions, many of the provided ads are for services of questionable repute. Quite right – there’s little difference between the banner ads and the classified section of your local newspaper. The problem is a matter of leverage – very few sites have the leverage to pick and choose among potential advertisers. I would love to have the traffic leverage to be able to join an advertising collective like The Deck, but The Simple Dollar is pretty new and thus that leverage doesn’t exist – yet. Once I reach a point where I can control who my advertisers are, you’d better believe that I will switch to such a plan. For now, I have to use what little leverage I have, and that means classified-level ads.

The enemy is terrible web service providers. The Simple Dollar started on BlogSpot/Blogger. If I felt that BlogSpot and Blogger were providing good service to people who would want to read my content, I would still happily be there without an ad to be seen. However, weeks would go by with less than 50% uptime and it was very difficult for me to manage posts and comments from my readers with their interface. Blogger wasn’t good enough for what I wanted for my readers. So I shelled out some cash from my own wallet and moved to another provider. I now use WordPress; I love it, and I’ll never go back. GolbGuru went through the exact same process recently; he moved because his free host wasn’t cutting the mustard for his readers any more. Ads exist on our site not to build up a huge profit, but simply to recoup that loss. These are personal finance sites; should we not be attempting to recoup our losses?

In the end, you have to ask yourself whether you’re actually mad that a content provider is providing ads, or whether the problem is something else entirely. If you are claiming that ads are the scourge of the internet, then you’re missing out on what makes the internet great: nearly infinite quality free content. Much as in the print media, advertising has a role here in supporting the people that provide the content.  My thesis is that as long as the advertising does not interfere with the content, then advertising has a welcome home on the internet.

If you’re going through the process of buying an automobile (as I am right now), there are many thoughts that are likely to pass through your head – and none of them should involve kicking tires.

To avoid being suckered into buying a certain car when you get on the dealer’s lot, it’s a good idea to sit down and do a little decision making and research before you even begin to look. Here are five questions to ask yourself honestly before you go buy a new vehicle.

What is your upper limit on spending?
Many people make the mistake of looking before figuring out what they can really afford. Before you ever start thinking about makes and models and features, sit down and make up a simple budget (or review the one you already have), so you can get a grip on how much you can afford to spend each month on a car. Once you have that number figured out, use this calculator to determine the sticker price that you can afford.

Once you’ve figured out what you can afford, you need to commit yourself to not going over that amount. If your price range means you’re going to have to purchase an older automobile, so be it. So often, people find themselves falling in love with a sparkling new Lexus when their budget says Plymouth and they find themselves in deep, deep trouble a few months later when the bills start rolling in. If you’re going to hem and haw about price, do it now so that you have a final number in mind before you hit the lot.

Have you considered other operating costs?
Many people fall in love with big SUVs and sportscars that seem to be within their budget, but when they discover that they need to fill it up with gasoline every other day, their budget implodes. If you already budget a certain amount for gasoline each month, buying a car that gets worse gas mileage will increase that allotment. On the other hand, buying an economical car will likely increase that allotment.

Are you most concerned with luxury, utility, or reliability?
These dimensions can basically point you in the direction of a specific type of automobile and also indicate to you the types of features you’re looking for. For example, a person looking primarily at utility and luxury might want a SUV, but a person gearing towards utility and reliability may want a minivan, and someone who wants luxury and reliability may want a high-end sedan. Think about what you really want from each category before you leave so that you have an idea of what you’re looking for.

What models are appropriate?
Once you’ve figured out the type of automobile you want, do some research. I recommend visiting the library and visiting their periodical room to look at the automotive magazines as well as Consumer Reports. If you’re buying used, look for older issues of magazines and also check for articles on used cars in those magazines. If you have trouble, a librarian is always happy to help if you’re courteous.

You can also do some internet searching, but don’t expect this data to be perfectly reliable, especially on sites where anyone can submit reports. Auto companies often submit glowing reports of their own products. If you use the internet, find as many sources as you can for a recommendation.

What dealers are you going to shop at?
Did you see an ad on television for a friendly-looking car dealer? Are you going to shop at the place that sold you your last car? Before you do anything, check the Better Business Bureau to see which dealerships have a good track record and which ones do not. If a dealership has a large list of complaints, then you should probably avoid them.

If you’re buying used, don’t ever buy upon your first visit. Ask for a vehicle’s VIN if you’re really interested, then do a CARFAX check on it. If the dealer refuses to give you the number, then don’t bother even considering the purchase as the dealer is hiding something.

You should also ask friends for recommendations and any bad experiences. Your social network is always good for this type of thing, as the experience of a “random customer” is often a good indicator of how you will be treated. Pay special attention to dealers that handle complaints well, as you want the dealer to listen to problems that you have with their automobiles.

What consumer protection is available to you?
If you have trouble with an automotive purchase, be aware that consumer protection agencies do exist. Don’t hesitate to contact the Better Business Bureau if a dealer treats you poorly, and be sure to contact the Federal Trade Commission if you find issues with the car itself, particularly new car purchases.

Recently, my niece was trying to calculate how much money would be in her savings account in six months. She was using the APY as a simple interest rate and thus was coming up with a number larger than what would actually be in her account. It was a small difference, but she seemed to believe the bank was “ripping her off” and was quite upset over the matter.

Although people who astutely follow their own personal finances are quite aware of the differences between these three things, many people believe that all interest rates are basically the same. The fact is that they’re quite different, and knowing and understanding these differences can make a huge difference in the amount of money you can expect to pay on your bills and make on your investments.

Most people believe all interest functions like simple interest. Simple interest basically is the amount you borrowed times the interest rate. In other words, 5% interest on $1,000 is $50. This is the rule most of us are taught in primary school and the one that is most ingrained in our minds, but it’s not the method that most businesses use when calculating interest.

The simple fact of the matter is that if you really believe that all interest rates work like simple interest, you’re going to lose a lot of money.

So how else is interest calculated? Many organizations (such as banks and credit card companies) use compound interest to calculate how large your finance charges are and how much interest you get. Compound interest is interest which is added back to the original amount. Organizations do this on a regular basis and use a method that is most effective for their business, allowing them to report an interest rate to consumers that doesn’t actually describe the full situation of the payments.

For example, most organizations use compounded interest, compounded monthly. This is in line with how most credit cards and many banks calculate interest. Let’s look again at that $1,000 over a year at 5% interest. If we use simple interest, the total is just $1,050, as we saw above. But if we compound the interest each month, our calculation is a bit trickier, as we have to figure the balance at the end of each month.

Let’s work this out. If we start with $1000 at the start of the first month, at the end of the first month, it will have earned 1/12th of the interest it should earn over the year. With simple interest, we don’t care about how much it’s earned during that first month, but with compound interest compounded monthly, at the end of the first month, we add that 1/12th of interest to the original amount and start over again. 1/12th of 5% of $1,000 is $4.17 (rounded to the nearest penny), so we add this amount to the $1,000 to get a starting balance of $1,004.17 at the start of the second month. We repeat this for each month (during the second month, it earns 1/12th of 5% of $1,004.17, and then so on…). At the end of the year, we have $1,051.16, which is $1.16 more than if we just used simple interest.

If you increase the amount or the interest rate, the difference between simple interest and compound interest is even greater, and that is an amount of money that companies would really like to have in their pocket. So here’s what they do:

If you’re borrowing money (using a credit card, for example), they quote you an APR, which is the simple rate. So, even though it’s compounded monthly and thus the growth of the balance in a year will be more than that rate, they advertise the lower simple rate. Let’s look at an example: let’s say you borrow $3,000 on a credit card at a 24.99% APR. At first glance, the interest rate seems to indicate that you would have to pay $749.70 extra after a year, but that’s just not the case. If the credit card compounds monthly, you’ll actually owe a total of $3,841.82 – an extra $92.12. It’s even worse if they compound more often than monthly.

On the other hand, if you’re saving money, they quote you an APY. An APY is the percentage you’ll earn as a difference between the starting balance and the ending balance in a year. If it is compounded more often than each year, your real interest rate is lower. Let’s say that the bank quotes you a 4% APY on your investment of $5,000. At the end of the year, you will have $5,200 in your account, but if you withdraw after six months, you won’t have $5,100 in your account. Why? You’re not really earning 4% interest. If the account is compounded monthly, you’re actually only earning about 3.929% interest, compounded monthly. Thus, at the six month mark, you only have $5,099.03 in your account! Given enough accounts, that difference is quite a bit of money, an amount that the bank can use for other investments.