I have a soft spot for books on frugality, so when I spotted America’s Cheapest Family on the new releases shelf at my local bookstore, I had to read it. Are there a lot of good ideas inside for how to reduce your financial footprint, or is it a bunch of self-promotion and hot air? This week, I’m going to dig into this book and find out whether it’s worth your time.

The full title of this book is actually America’s Cheapest Family Gets You Right on the Money: Your Guide to Living Better, Spending Less, and Cashing in on Your Dreams, an overly wordy title that does actually get the point of the book across pretty clearly. In a nutshell, it’s a lifestyle guide to frugal living, one that I was happy to see come out because there simply aren’t that many strong books on frugality.

Right off the bat, the entire purpose of the book is laid bare, as it gives you three principles for getting you right on the money:

Avoid debt like the plague Debt means that you take your hard earned money and just hand it to someone else in exchange for nothing but instant gratification. Rather than using credit to buy things, you should save up the cash and let the interest work in your favor, not in the favor of some banker willing to lend you money - and take back even more money.

Live below your means This book believes strongly in the concept of the written budget, something I’m not wholly sold on. However, I do agree that you should spend less than you take in every month, and the greater the difference between the two numbers, the better off you’ll be in the long run.

Embrace the thrifty lifestyle The authors pitch living thrifty as being like a game, one in which savings in time and in money are the prize. Every time you can do something that saves you money or time, you’re winning, even if it seems like a pain to get started. I agree: that kind of attitude will win some serious rewards over the long run.

The book is divided into fifteen chapters, so for each of the next three days, I’ll cover five chapters, then on Friday, I’ll give a “buy or don’t buy” recommendation for this book.

America’s Cheapest Family is the seventeenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

An inch and a half of ice with nine inches of snow on top of it means that trees collapse from the weight of it all and vehicles are almost impossible to move. I spent hours outside today with a scoop shovel and trying desperately to move some cars, and now I’m completely beat. So here are two posts that stood out to me from the personal finance blogs I keep tabs on.

Death To High Interest Rate Credit Cards! This person used credit card advice I posted here last week to score a ten percent credit card rate reduction. That’s some serious savings - and proof that the advice around here actually works. (@ money vs. debt)

Friends Floundering In Debt Every single time you spend money you don’t have, you’re risking your entire future. Doubt it? Read this story. (@ my money forest)

Invisible Man
Ralph Ellison
Changed my life in January 2000

Who knows but that, on the lower frequencies, I speak for you?

When I was a little boy, laying flat on my back on the hallway outside of my bedroom as a child, reading obsessively, I dreamed of being a writer. I dreamed of writing a novel that would actually be able to touch someone and completely make them rethink their entire world, even though our life experiences may be nothing alike. I wanted to write something incredibly beautiful as well, with linguistic phrases that would stick in a person’s mind; twists of letters and words that were so perfect as to bring someone to tears.

That boy grew up, went off to college, and instead spent his studies investigating the hard sciences. I let the coals of my writing dream grow ever dimmer, but I never gave up that passion for reading. I would literally read two or three books a day for my entire collegiate period, always seeking some sort of new idea or new way of looking at things. I read some incredibly powerful books, some of which twisted my mind in profound directions and others which showed me the incredible beauty of words.

But nothing else I read during my six years as a college student blew me away quite like Invisible Man. It is a mix of beautiful language and powerful thought on a level I’ve never really absorbed before or since. In fact, it was so powerful to me that it reawakened my desire to become a writer, and without that reawakening, this blog wouldn’t exist (for starters).

I am an invisible man. When they approach me they see only my surroundings, themselves, or figments of their imagination–indeed, everything and anything except me.

What’s it about?

In a straightforward way, this book follows the life of a black college student in the south in the early 1950s who is expelled for showing a white trustee of the college the actual living experience of a black person in the South at the time. This could have easily turned into a generic condemnation of racism right here, but that would make this book boring and no different than any other book about race - Ralph Ellison is too much of a genius to take that easy road. Instead, the student shows the trustee that in fact the disturbing stereotypes are often true. The liberal trustee, fueled by white liberal guilt, immediately withdraws support from the school, and thus the student is expelled.

He wanders for a bit, winding up in New York City, then eventually seems to find acceptance in a group called “The Brotherhood” who on the surface preaches a message of equality, but in actuality are just as blind as the trustee. By the end of the book, I felt such a mortal tie with this central invisible man that I nearly wept when that last powerful line crossed the page.

On the surface, Invisible Man is about an individual trying to find his way in the world, moving from being a loner to being part of a social movement back to being a loner again. Peel away that layer and it almost seems to be about race, but if you peel away that layer you’ll find that the book is about humankind, stumbling along trying to figure itself out.

There are a lot of books out there that touch upon these issues, but they all seem to want to blame someone. The truth is that there is no truth outside of our own experience, that everyone’s experiences are different, and by spending all of our time being racist or fighting racism, we’re not actually solving a damn thing.

How did Invisible Man shape the person I became?

It reawakened my desire to be a writer. If I could claim credit for any written document I’ve ever read, it would be this book. It is beautiful in every way that the written word can be beautiful, from the ideas to the characters right down to the word choices and the literary aspects. I dream of being able to write something even a tenth as amazing as this book.

It reminded me quite clearly that actions speak louder than words. Does this seem to contradict the idea that I want to be a writer? Ideas are the basis for actions, and words are a way to communicate ideas. Thus, in a way, actions are an amplification of words, but in order to stir up action, the words must be powerful and beautiful and persuasive. The things I choose to do are based on ideas in my head, but many of those ideas were transferred there by words, and words can sometimes reach very far, like a skipping rock across the smooth surface of a pond. I could let this dissolve into a rant against political correctness (my opposition to it basically came from this book), but this is neither the time nor the place for it.

It made me rethink my views on the world in general. Basically, I realized that what is true for me isn’t necessarily true for anyone else, and the best thing an argument can do is help me build up a greater understanding of what I find to be true about the world. I used to argue to win; now I debate to understand.

I’ve written a ton about frugality on this site and how much money it can really save you, but many of these suggestions seem like major lifestyle changes. “I don’t want to do that!” is a common reaction that people give as they imagine a life of pinching every penny.

The truth is that it’s not about pinching every penny, it’s about freedom. It’s about simply trying different activities and seeing which ones leave you feeling the most fulfilled - and often, those choices happen to be the ones that leave me with the most money in my checking account at the end of the day. Why? I don’t have to worry about making ends meet, and after a while I have the freedom to do whatever I want to do.

Still, trying out frugal things seems overwhelming to some, so here’s a suggestion: try out some frugal activities for one week and see if any of them mesh well with your life.

Here’s a list of ten frugal things you can try this week. All of these are proven ways to save money. Give them all a try and see which ones mesh well with your life. At the end of the week, you might have discovered a few things that can really save you some cash without altering your life in a way you don’t like!

1. Prepare and eat every meal you can at home.
Instead of getting take out, spend this week preparing and eating meals at home. They don’t have to be anything complex, just foods you know how to prepare. You can prepare them in advance if you’d like or simply toss something together when you get home, but prepare them and eat them at home all week long.

2. Drive the speed limit.
Instead of dropping the pedal to the floor to save a few minutes, set your car’s cruise control and go the speed limit. You’ll cut down on your gas mileage a significant amount.

3. Buy generics at the grocery store.
Most people instinctively choose the non-generic name brand item, even though in many cases they’re roughly equivalent in quality. This week, buy the cheaper generics to make a point of seeing which ones you like and which ones you don’t. You’ll have a nice low grocery bill this time - and perhaps a lower bill every time in the future.

4. Entertain yourself with things you already own.
Instead of buying a DVD or a book or renting a movie, find something already on your shelf and enjoy it instead. Got a hobby? Spend some time maintaining what you already have instead of buying more.

5. Leftovers!
Remember those meals you prepared? Use these leftover tricks to make them palatable, even if you are very averse to the whole leftover concept.

6. Check out your community calendar.
Stop by town hall and get a copy of the local community calendar. See if there are any free events worth attending in your town. When I first did this, I was blown away by the variety and quality of free events and things going on around town.

7. Skip the incidentals.
Do you stop every day for a latte on your way into work? Do you pick up a quick snack for the evening commute? For a week, throw them out (or find cheap replacements). Drink coffee at work, or eat a simple snack at home instead.

8. Adjust the temperature by two degrees.
If you’re in a warm climate, raise your indoor temperature by two degrees; if it’s cold, lower it by two degrees. See if you notice much. If you don’t, you’re saving energy - and you’ll have a lower electric bill.

9. Turn on only the lights and devices you need.
My parents have a tendency to turn on things and just leave them on whether they’re being used or not. Hence, they have huge electric bills. Make it a point to only turn on the things you’re using and turn them off when you’re done with them, from light bulbs to computers.

10. Look constantly for less expensive ways to do things.
Instead of using a paper towel to wipe up a small spill, use a dish cloth. Instead of getting your nails done this week, wait a week or learn how to do it yourself. Instead of taking your car in for an oil change, ask someone you know to show you how to do it yourself. There are countless ways to save a little money here and a little money there, and if you make it a conscious part of your life, it adds up to a lot.

Good luck.

Whenever I make calculations on this site, I usually involve some calculation in which a person contributes some dollars a month each month to savings in order to make an even comparison of which option is a better deal. Quite often, to the chagrin of my readers who are looking for a “deal,” I recommend the solution with the higher monthly payments.

On a fundamental level, most of us strive for lower financial requirements each month so we have more money to “play” with. The truth is, though, that people we are indebted to are going to want to get their money back with interest, and the longer you keep their money, the more interest you’re going to pay on it. Thus, smaller monthly payments in fact mean that you pay significantly more in the long run.

Even given that, many people argue that this can be recovered if you simply save the difference between the lower monthly payment and the higher one, and thus they use that to justify a worse deal. There’s a big problem with this plan, one that I don’t usually discuss, and that is human nature.

On a monthly basis, almost all of us pay our required bills and then spend what we have left. Even though we “promise” ourselves that we’ll save some, the majority of Americans simply do not, even though it’s incredibly simple to do with automatic deductions and the benefits are quite clear. In fact, many people actually start off saving diligently, but after a month or two, “something” comes up, the savings plan goes in the trash, and you’re stuck with a payment plan that costs you extra money in the long run.

Whenever you evaluate a loan payment, ask yourself honestly how likely you are to actually save the difference between the high and low payments based on your past performance. This is risk evaluation at its most simple: are you a risk? If you’re not wholly confident of your ability to save that difference, then quite often you should go for the higher payment? Why? You’re making that difference a requirement, rather than something you don’t have to do - and probably won’t.

This is why I’m planning on getting a 15 year mortgage. Not only is the interest rate lower than a 30 year, the higher payments ensure that I’ll be putting that money into equity each month instead of merely “hoping” that I’ll invest it in something worthwhile. Even though the payments are higher, I’m reducing my biggest risk element: me.

It’s true. After all the financial advice I give out on this site, I keep a decent amount of cash “under my mattress” (actually, it’s in another secure place in my home, but it’s effectively the same thing). At first, this seems to fly right in the face of everything I preach on this site. Why isn’t this money at least earning 4.5% in an ING Direct savings account, if not earning a lot more in a mutual fund or something else? No, because this is a different kind of investment.

I keep a small pile of twenties in my home as my ultimate emergency fund. I keep this money on hand for the sole purpose of being available if I have no access to funds in any other way - in the event of an absence of electricity or some other essentials, a cash economy will dominate and I do not wish to risk being in that situation with no leverage to make sure my family has food, water, and protection.

Even though it’s not earning anything, I view this money as an investment. It’s an investment against the unexpected - situations where everything else has failed and I have no other options to turn to. Knowing that it is there provides a certain level of security that money sitting in a bank account somewhere can’t quite provide.

Is this necessary? Let’s step back to Labor Day 2005, when Hurricane Katrina basically wiped a major city off of the map in the United States. Let’s step back to the summer of 2003, when much of the northeastern United States blacked out, many areas for weeks. What about the San Francisco earthquake of 1906 - I do live near the New Madrid fault line, after all. I’m only mentioning domestic disasters so far - what about the tsunami of 2004? The dozens of devastating earthquakes in recent years?

The fact is that such disasters happen, and quite often you have no way of knowing these things are coming. To not be prepared for them on some level is a poor choice, the type of choice that leaves people in situations of desperation, like those poor souls who inhabited the Superdome after Katrina.

I view the pile of bills under my mattress as an insurance policy against such a disaster, so that I can get my family the things that they need or at least get us to a place where we can get the things we need. Is this the right thing for you? That’s a question you’ll have to ask yourself - it comes down to whether or not you feel that such preparation for a relatively slim possibility is worthwhile. Is it? Give it some thought today as you go through your activities - and put a few twenties under the mattress tonight if if feels right to you.

Regular compound interest is (basically) the way most loans and savings accounts work, including home mortgages. Here, we’re going to use a spreadsheet to calculate a home mortgage payment estimator (and even a full payment schedule) using the principles of compound interest.

Fire up your spreadsheet and enter the following information into cells:
In A1, enter Simple Mortgage Calculator
In A3, enter Amount Borrowed
In A4, enter Length (in Years)
In A5, enter Interest Rate
In A7, enter Monthly Payment
In A8, enter Number of Payments
In A9, enter Total Interest
And in A10, enter Total Loan Cost

That’s a lot of labels. We’re going to use the first three numbers to calculate the last four, so enter some dummy values in B3, B4, and B5. I used $180,000, 30, and 8.00%. Then we begin setting up the calculations:

The piece in B7 looks really strange. This is what should be typed in:

=-PMT(B5/12;B4*12;B3)

If you’re using Excel instead of OpenOffice, it will look just a bit different:

=-PMT(B5/12,B4*12,B3)

This PMT function is a part of the spreadsheet that calculates how much a monthly payment will be for you. The interest on each payment will be 1/12th of the annual rate (hence the B5/12 part) but you’ll be making 12 payments a year (hence the B4*12 part). The number that appears here is the actual cost of a monthly payment given the terms you set up in B3, B4, and B5.

The other three numbers are fairly straightforward:
To calculate the number of payments (in cell B8), enter =B4*12
To calculate the total interest paid over the loan’s lifetime (in cell B9), enter =(B7*B8)-B3
To calculate the total cost of the loan (in cell B10), enter =B7*B8

In the end, you’ll get something that looks like this:

You can change the first three numbers however you want to look at various different possibilities. Want to make it even cooler? In cell A13, write Month 1, then click and drag the black square down from that cell until you can see month 360. Then, in B12 through E12, add these labels: Starting Balance, Payment, Interest Paid, Principal Paid, and Ending Balance. Yep, we’re going to see what exactly each payment is doing.

To set up the numbers, you’re going to have to enter some more formulas into the first couple rows of this little table, but after that, you can just drag down to fill in the rest.

In B13, in order to set the starting balance for the first month, you want it equal to what you entered above, so enter =B3
In C13, you’ll want it to always equal the payment calculated above, so enter =$B$7
In D13, you want to see how much interest you paid that month, which would be 1/12th of the annual interest (set permanently in B5) on the current balance, so enter =B13*$B$5/12
In E13, you’ll want the amount of principal paid this month, which is just the difference between the total payment and the interest paid, so enter =C13-D13
In F13, you’ll want to calculate the balance at the end of the month, which is the starting balance minus the principal paid, so enter =B13-E13
And finally, in B14, you just want the same starting value as the ending value from last month, so enter =F13

You can click on the cells B14, C13, D13, E13, and F13 and drag the black square in the lower right of each one all the way down until it lines up with Month 360. Don’t worry about weird values until you’ve done all five columns.

When you’re done, you’ve got a full mortgage amortization calculator - and you understand completely how the math works! Be sure to save this file for later - it’s useful!

Now that you’ve assembled your own mortgage calculator, you can see that the possibilities of using spreadsheets to do personal finance calculations are endless. Good luck!

Previously, we discussed how compound interest works on a year-by-year basis, but in the real world, interest is usually compounded more often than that. For many purposes, monthly compounding is used, so let’s look at monthly compounding. Fire up your spreadsheet and enter a few labels:
In A1, enter Monthly Compound Interest Example
In A3, enter Amount
In A4, enter Annual Interest Rate
In A6, enter Monthly Interest Rate
In B3, enter $20,000
In B4, enter 5.00%

You’ll end up with something that looks like this.

You’ll notice that in B6, I’m about to enter =B4/12 … what does that mean? That’s simply how to figure 1/12th of the annual rate of interest, or the piece of the annual interest that happens in a single month. When you enter that formula in the cell, you’ll see the number zero. Don’t worry, just click on that cell, go up to the Format menu above, choose the Cells option on that list, then in the popup box choose Percent and have it show two decimal places. After you do that, you’ll see a value of 0.42%, which is the actual monthly interest rate if the annual rate is 5%.

Now, if you’re doing annual compounding, a calculation is very easy. In cell A8, write If annual, interest is: and then in B8, enter =B3*B4 … you’ll see that with annual compounding, you’ll earn $1,000 in a year.

If you’re doing monthly compounding, though, it’s a little different. To see this in action, you’re going to have to set up some more labels:
In A10, enter If monthly:
In B10, enter Balance
In C10, enter Interest
In A11, enter Month 1, then click on the cell and drag the little black square in the lower right of the cell downwards until you can see all the months up to Month 12.
In B23, enter interest is:

You should have something that looks like this:

Now, the math. For the first month, the balance is the same as the amount, so enter =B3 in cell B11. How much interest will that earn in a month? Enter =B11*$B$6 in cell C11 to find out; for our example, it’s $83.33. If you were to multiply this amount by 12, you’d find that it is $1,000, which is the same as the annual interest earnings.

But things change at the start of the next month: it compounds. In B12, enter =B11+C11 … and then click on that cell and drag the black square down until it’s lined up with Month 12. Do the same in the C column, starting with cell C11. You’ll notice that each month, the interest earned is a little higher.

So how much did you actually earn in the year using monthly compounding? In cell C23, enter =SUM(C11:C22) … this formula basically says add up everything between C11 and C22. The total in our example is $1,023.24.

Right now, you’re seeing the difference between APR and APY. APR is the annual percentage listed above: 5.00%. However, APY is not equal to that. If you want to figure out the APY here, type APY in cell B25, and in cell C25, enter =C23/B3 … and then reformat the cell to be a percentage, as mentioned above. You’ll get a value of 5.12%.

Whenever a bank mentions an interest rate to you, they’ll give you the APR when they’re lending you money but give you the APY when you deposit money with them. To the uneducated, it makes the offer seem better, because almost everyone outside of the financial industry uses these values interchangeably. Thus, when you see a savings account with a 5.05% APY, the actual interest rate they’re giving you is lower; you can just earn a 5.05% overall return if you don’t touch the money at all.

Next time, we’ll take a look at mortgages and build a simple mortgage calculator.