A few days ago, I had the opportunity to sit down with a fellow in his early sixties who has already retired. He had been self-employed his entire life. I told him about The Simple Dollar and I asked him, if he didn’t mind, if he would tell me about how he had invested for retirement.

What he told me boiled down to four principles.

I spend way less than I earn. By this, he meant he had enough saved up at age fifty to walk away from his work, but he kept at it for several more years so that he could build up even more savings. He wanted the investments to return substantially more each year than he would spend.

I keep a years’ worth of living expenses in cash and CDs. This isn’t just an emergency fund, but it helps him do okay through the ups and downs of his other investments. If they don’t return as well as he’d like for a quarter or two, things aren’t disastrous – he still has a lot of breathing room.

I roll the excess back into my investments. Whenever he starts to build up way more than a year’s worth of savings, he rolls it into more investments. He keeps pretty careful track of his spending and thus has a strong estimate of the year to come. If the amount in cash and CDs gets over fifteen months worth of living expenses or so, he cuts it down to twelve months worth and puts that difference into his investments. And what are they?

All of the rest of my money is in stocks which pay a good dividend. All he does is buy stocks in companies he believes in over the long haul that pays good dividends. He rattled off quite a number of stocks, but the four I remembered were GE, AT&T, Verizon, and Bank of America.

So how does that work? Let’s take a look at AT&T (Google Finance). As I write this, a share of AT&T is at 24.83 and has a dividend of 0.40. What that means is that every three months, for each share of AT&T that a person holds, AT&T pays that person $0.40.

So, let’s say that over time, our friend has bought 1,000 shares of AT&T – at today’s market prices, that would have cost him just short of $25,000. This means that every three months this year, AT&T is directly going to pay him $400. Over the course of a year, that would have added up to $1,600. And if that dividend holds, over ten years, the investment would pay out $16,000.

Obviously, the board of directors of a company can choose to raise or lower a company’s dividends – here’s a recent history of AT&T dividends. That’s why our friend chooses to buy only stable companies that have a long history of paying good dividends.

What about the stock price? Aren’t stocks tanking? For the most part, our friend doesn’t care about the stock price. All he cares about is the dividend – as long as it stays reasonable, it doesn’t matter to him how much or how little the stock can sell for. He intends to hold it for a very, very long time.

In fact, he’s actually ecstatic about the low prices on many stocks. He’s about to buy more of his dividend-earning stocks and given the low market, he can get more shares for his dollar right now.

Is this a good investing strategy for me? Provided that you’re willing to have a diverse selection of dividend-paying stocks (more than 10 with no more than 20% of your money in any individual company or any sector) and you’re willing to pay attention to it so you don’t end up holding a company as it falls down the Enron drain, this strategy can work. It’s often discussed in investing books as “dividend investing” and can work very well for you, not only as a retirement plan, but as a way to build steady income.

Do you want to know more? My friend strongly recommended that I read The Ultimate Dividend Playbook, a book produced by Morningstar that covers dividend investing in detail. I can certainly say I’m intrigued, and I’ve added the book to my to-be-read pile.

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

As usual, we’ll start things off with a few links to older articles that directly answer questions I’ve heard recently. I was asked for some good recipes, so here are three posts I wrote in the past with some good formulas for food.
Five great recipes for once-a-month cooking
Five great crock pot recipes
Five recipes for premade convenience foods (like burritos)

And now for some great reader questions!

I am on a small and fixed budget while I work only a few hours a week while going to college. I realize that my spending has gotten out of control, and I’m not longer excited about saving (though I do). The past few months have really turned my life upside down and I realize I’m doing a lot of spending out of grief and loss. In addition, I seem to have lost the motivation and goals I once had. I know I will eventually heal from the loss of my loved ones who passed away last month – but until then, I’m worried about my spending habits and lack of focus! Any thoughts on the subject or resources/websites you’d like to share?
- Shannon

Your best bet, without a doubt, is to find a trusted friend you can really rely on to help you get through this, especially one who won’t solve the problem by heading out for some shopping.

I’m lucky in that I have my wife to help me deal with such things and she won’t resort to spending to help emotional healing, but if it was her that failed, I have a few other very close friends who I’d turn to that wouldn’t encourage me to spend, either.

Sitting at home alone while you’re hurting will often encourage you to do things that you wouldn’t normally do. Don’t fall into that trap. It’s expensive and often self-defeating.

Here’s a question for you, Trent… how do you feel about being personally expected to bail out failing Wall St companies who knowingly made really stupid financial decisions?
- Jillian

I’m not mad at Wall Street. They’re playing the game according to the rules they’re given. The problem comes with the people writing the rules. I’m mad at the flavor of “deregulation” in Washington that has created a situation where a select few (the CEOs and the large stockholders) collect the profits while everyone else covers the risk.

Let me be clear: we have socialism in the finance industry right now, except it’s a diseased kind of socialism, where everyone bears the risk but only a select few enjoy the profits.

The blame for this falls squarely on the people who have been in charge of instruments such as the Treasury Department, the Senate banking committee, and the House financial services committee over the last twelve years or so, excluding perhaps the last few since it would have been impossible to slow the train in just a year or two.

Free market capitalism doesn’t work if the people who make risky moves aren’t saddled with the risk of those moves. That’s what we have now, and that’s a failure.

Why is it that when you finally get to a point where you can get ahead you get slammed with unexpected bills? My husband and I just recently got to the point where we are not living paycheck to paycheck. We have a small emergency fund, and have some money each month to snowball. He has even been making a lot of overtime, but since that has happened we have had two emergency room bills, my daughter had new orthodontist bills which we were not expecting, I had to spend half of our emergency fund preparing for Gustav which did not hit us too hard thank goodness… and now our dryer is on the fritz!!!
- Jen

What you’re seeing is why an emergency fund is so important. Imagine if you hadn’t built up that emergency fund and instead spent it on things like going out to eat. Where would you be now?

To me, situations like this – and they do happen to me, and to most people – are proof positive of why it’s very useful to have a healthy emergency fund. Spending less than you earn during a normal month and socking away the difference will make abnormal months – like the ones that Jen describes – much, much easier.

You talked about challenging reading a while back. I’m politically liberal and I’d like to read some serious conservative political thinking to challenge me – not the over-the-top books written by radio hosts which just makes me upset. Do you have any suggestions?
- Thomas

Try reading Capitalism and Freedom by Milton Friedman, The Road to Serfdom by F.A. Hayek, and The Conscience of a Conservative by Barry Goldwater. These books are a bit older (and sometimes specific topics are dated), but the principles and arguments for them are timeless and they will make you think.

On the flip side of the coin, a conservative can challenge themselves by reading The Shock Doctrine by Naomi Klein and The Conscience of a Liberal by Paul Krugman are both very well-written.

Also, if you’re trying to push yourself hard on your understanding of politics, read some classic writings on the subject, like On Liberty by John Stuart Mill.

The sure sign of a poor book is when a writer begins making direct attacks on the opposition beyond the arguments of the opposition. If you start reading insults, the book is rubbish and won’t teach you anything.

“For long term investment stock/stock funds are best” is something that’s heard over and over again. I’m wondering if this is a valid stmt as historic values can hardly be taken as reference. The stock markets changed rapidly over the last years, hedge funds, online-trading + realtime quotes for everyone, cfd’s, the speed and amount of money that’s transfered globally…… Do you really believe it’s still worth the risk (not only in the light of current development (lehman & co)?
- john

Do you believe that this technology has made workers less productive or more productive? Do you believe that future technology will increase productivity?

If you believe technology increases productivity, and you also believe that technology is going to keep improving, then you inherently believe that every worker is going to produce more. If every worker produces more, the value they produce will be reflected in stronger companies.

So, yes, I believe stocks will keep going up in general because companies are made up of individual workers, and the more productive those workers are, the more valuable those companies become. And since stocks are just small pieces of ownership in those companies, they’ll also become more valuable.

I’m talking in a broad sense here, not in a specific sense. Stocks will increase in value over the long term as long as individual workers can produce more work over the long term, and as more skilled workers with more technology in front of them enter the workforce, that will happen. It has very little to do with day traders or short-term stupidity in the finance sector.

Would you please tell me if an electrical oven and tea kettles suck watts? My husband thinks that our electric bill is going high because of these two items.I can’t work without tea kettle in my kitchen and am not willing to give it up. Also I was wondering about watts consumed by irons and microwaves.
- Reem

The “Mr. Electricity” site is a good source for data on the electrical usage of most common appliances. An oven typically uses about 4,400 watts, which adds up to about $0.44 per hour of constant usage. A microwave uses about 1,500 watts – about $0.15 per hour of constant use. A clothes iron uses around 1,400 watts – about $0.14 per hour of constant use.

The ten minutes or so it takes to heat a kettle of water on an electric stovetop will cost you about seven cents, in other words.

Hope that gives you some fun talking points with your husband!

How would you be able to save in a 401k plan and emergency fund at the same time if you’re a student who has to pay tuition and educational materials? Would you still adhere to the 10% for 401k plan as you suggested?
- Faye

If you’re a young student between, say, 18 and 24, you shouldn’t bother worrying about your retirement account quite yet. Your focus should be on being a student full time and acquiring a degree at minimal cost to yourself. If you happen to find yourself in a situation where you can contribute, do so, but don’t worry yourself.

However, I suspect Faye’s question comes from a person who has gone back to school after some time in a career path, either to start a new one or to improve on her current one. Given that, I’d take a strong look at your current retirement savings and see how they line up to some reasonable benchmarks, like the Money Magazine benchmarks. If you’re on pace with those benchmarks – or, better yet, ahead of the game – it’s okay to scale back the retirement while you’re in school. Focus on tuition and the emergency fund.

If you’re not quite up to snuff on retirement, don’t let it dangle. Make sure you’re at least putting enough away to get any matches your employer is offering you on your 401(k). Get your emergency fund up and going, too. If you need help, get a student loan for your tuition and pay that off later on.

I was wondering if you read any political blogs or daily news feeds. I find that I’m much better at keeping up with information in daily/blog formats & was wondering if you had any suggestions.
- Dorothy

I read tons of these online, actually. Since any news source you read has a bias, I try to read multiple accounts of and commentary on news stories.

My usual stops for actual news are Google News, the Wall Street Journal, and several other newspaper sites, and for international perspectives, I also read BBC and Al Jazeera English. I want a good grip on facts from many different angles, and I tend to not trust anything unless I find multiple clear reports on it. Of all of them, I tend to trust the BBC the most, actually.

For commentary, I read some highly left-wing stuff, like Daily Kos and Democratic Underground. I read some highly right-wing stuff like Free Republic and Little Green Footballs. I read centrist commentary like Andrew Sullivan and Glenn Greenwald. I also read Huffington Post and Politico – HP seems fairly left-leaning and Politico seems fairly right-leaning, but they both mix things and criticize both sides quite a bit.

If you start reading a mix of perspectives, you start seeing how much bias some people have out there. I think that if you get all your news from one source and you stick with that source over and over again, your thoughts start getting skewed. For example, the folks on Free Republic cannot conceive that Obama is anything less than evil, while the Democratic Underground folks tend to believe that everything John McCain does is an attempt to strangle America. Neither one is true, and I think that people who subscribe solely to one viewpoint or another is intentionally strangling their own understanding of the world.

What age is the right age to have a child get their own checking account?
- Evan

My belief is that you should get a child a checking account as early as possible. It’s a great opportunity to teach them how it works, how to write checks, how to use an ATM card, and so on. You can use the account to teach them how important it is to watch their balance and plan ahead.

The way I see it, the more time a child has to get used to managing their money in a relatively safe environment, the better they’ll be at it when they fly on their own.

I want to run for the school board in April, but I don’t know what’s appropriate for campaigning. Do you have any suggestions? You seem to be pretty into local politics.
- Manny

It’s really up to you. Obviously, if you’re interested in running for the school board, you should already have a good grasp of the issues facing your local school district at the moment and you’ve likely got an idea of how you’d like things to be.

The first step I’d take is talking about running with everyone I know in the community. Float the idea by them and the reasons you want to run and ask for their input. Use that material to hone your stances a bit. If you hear a lot of people saying the same thing, that’s something you might want to add to your list of plans.

I’d make sure I filed the correct paperwork to be on the ballot. I’d also canvass the neighborhood on weekends close to the election. Just walk around door to door, shake hands, meet people, and hand out flyers that state what you want to do. I’d also give piles of fliers to your closest friends and ask them to give them to people they know. Be sure to include the voting date and voting location clearly on the flyers.

I’d also make sure to participate in as many community events as I could, especially close to the election. Keep a few flyers with you so that if you start a conversation with someone, you can give out a flyer. Plus, your mere presence will reinforce your community involvement from people who have seen your flyer.

That’s what I’d do, anyway.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

Every other Sunday, The Simple Dollar reviews a personal development, personal productivity, or business book of interest.

One of my mentors once told me that there’s usually no difference in content between a good job and a great job, but that the spoils go to those who do the great jobs. What’s the difference between good and great, I’d ask. He’d tell me it was lots of little things – humor, polish, connecting with people, and so on.

That idea is basically the premise behind The Encore Effect by Mark Sanborn. The core idea here is pretty simple: there are a handful of general principles that can take any well-performed task and make it exceptional. The title hints at the result – people want more from a person who turns out something exceptional, thus ensuring career success to the person who masters those principles.

There’s a lot of merit to this general concept. Think of it in terms of baseball. People don’t remember Steve Dalkowski, perhaps the most naturally gifted pitcher who ever lived. They remember Greg Maddux, who covered up a lack of a real fastball with incredible mental preparation, which led him to a Hall of Fame pitching career.

For me, the greatest baseball memory I have is watching Game 1 of the 1988 World Series in which Kirk Gibson, suffering from a stomach virus and two bum knees (one of which was so painful Gibson would tear up from the pain of every swing) faced the best pitcher in baseball at the time, Dennis Eckersley, in the bottom of the ninth inning – and Gibson knocked it out of the park. I was a jubilant ten year old, jumping around the living room whooping and hollering. Only later did I realize that what Gibson did was the result of years and years of intensive preparation for that moment – and it paid off.

What makes those more memorable performances stand out? Preparation is obvious, but what other factors make the difference between a good performance and a great one? Let’s see what Sanborn has to say about it.

1. The Power of Encore Performances
We all have a lot of roles we fill in our lives. In my own life, I’m a writer, a father, a husband, a community member, a volunteer, a neighbor, a speaker … the list goes on and on. Within each of those roles, we have the capacity to do poorly, solidly, strongly, or exceptionally. Am I an exceptional father? Am I an exceptional husband? How about as a writer? And, if I’m not, why not? Exceptional performances in the roles we have in life not only fulfill us personally, but add great value to the lives around us. If I’m an exceptional father, my children will have an exceptional childhood. If I’m an exceptional writer, my readers will have an exceptional reading experience, adding value and entertainment to their lives. And when you give out great value, it’s paid back to you often in very unexpected ways.

2. From Routine to Remarkable – Make Them Want More!
If you’re remarkable in some fashion, people are going to want more from you. They’ll generate word of mouth discussion for you. You’ll get more business, get raises, get job offers, and countless other perks. But it starts with you. Today, when you go through your normal routine of activities – regardless of whether someone is observing you or not – do every task exceptionally. Do it as well as you possibly can. Hold yourself up to the highest standard you can possibly reach. Then do it again tomorrow, and again the day after that, until the exceptional becomes the norm. Take what you consider exceptional now and make it normal – and apply that to everything you do.

3. Why Remarkable Performance Matters
Sanborn uses the strong analogy of a sports team here to indicate why remarkable performance matters: whenever a team succeeds on the field, the team is rewarded with more fans in the stands, more merchandise sales, more concession sales, and so on. When a team doesn’t produce remarkable performance, inevitably the rewards that come with such performance begin to slide away. What kind of groundwork is needed for consistent remarkable performance? Sanborn points to five factors: commitment (the willingness to work for it), professionalism (the willingness to do the job, no matter what it calls for), skills (the abilities needed to do the job), values (the aspects you find important in the situation), and character (the positive personal qualities you bring to the table). These five aspects combined provide the foundation for remarkable performance.

4. A Different Kind of PDA
Passion. Discipline. Action. Sanborn defines these as the three core pieces of any remarkable performance. Passion is the desire to do a great job. You enjoy it and you want to do it well. Discipline means you’re willing to put in the hard hours to do whatever it takes to do a great job. You’ll practice and work diligently to make it happen. Action means that you’re not afraid to step up to the plate when an opportunity presents itself. When you’re handed a difficult task where you can really show off a remarkable performance, you jump right on it instead of being timid.

5. Passion: The Fuel for Remarkable Performance
Much of the remainder of the book revolves around the “six Ps,” which Sanborn argues are the keys to achieving the “encore effect,” the first of which is passion. Sanborn states that passion is the fuel for a remarkable performance. It is the desire to excel at what you’re doing. It’s the burning inside of you to learn more, do more, and do it well. In my own life, I’m most passionate about parenting and writing – those are the things that really fuel me. I’d rather be doing research or sitting at a keyboard or reading stories to my kids or playing in the yard than just about anything else.

6. Preparation: Where Remarkable Performance Begins
The second P is preparation. Preparation means knowing what you need to know, knowing what you need to practice, and having the necessary skills and materials ready to go when the time comes. Preparation isn’t just the time you spend making slides before a talk, it’s also all of the time spent gathering the information in your talk, as well as all of the skill and hard work that took you to get to this point. Don’t let all of that work down by not adequately preparing the little things for your big moment.

7. Practice: It Won’t Make You Perfect, but It Will make You Better
The third P is practice. A great musician doesn’t become great by practicing for just an hour a week. A great musician practices all the time, learning new chords and techniques and mastering old ones. A great presenter doesn’t wing it. Instead, (s)he works on that presentation, honing it until the skills of presenting are natural and the slides hum beautifully in concert with his or her words. Parenting is much the same: the more time you spend with your child and the more meaningful interactions you have, the better you’ll grow as a parent and the stronger your relationship will be. Practice makes perfect.

8. Performance: How to Engage Your Audience
The fourth P is performance. When it comes time to step up to the plate, all of that preparation and passion and practice need to actually pay off. You’ve done all of the basic work you need to do – now is the time to make it pay dividends. When your child falls out of a tree, your practiced instincts take over and you rush to help. When you step up to present your work, you bring forth that passion in your presentation and grab the audience. The big key is to not worry about yourself – just worry about relating the information that they need to know with a taste of the passion you have for it.

9. Polish: Making Your Performance Shine
The fifth P is polish. A good performance becomes great when you’ve smoothed away all of the rough edges. Sanborn offers several suggestions for this, but the best one is – in my opinion – paying careful attention to your mistakes. When you’re practicing, your mistakes teach you far more about your rough edges than your successes do, and they point you to where you need more work. Strive to smooth those rough edges by paying attention when you mess up and using what you learn from that as an indicator of the things to work on. Another good tactic: if you have mastery of what you’re talking about, do things a little different. Try doing a presentation without any text on the slides, for example, and hand out notes only after your talk. Better yet, cut out half your slides and just hammer hard on your main points.

10. Pitfalls: How to Keep from Stumbling
The sixth P is pitfalls, and most of them center around reasons why people slack off from practice and preparation. Procrastination. Fear. Lethargy. Complacency. These are your enemies. Those are the things that hold your good performances back from being exceptional ones. My suggestion? Start as early as you can. The more time you have, the more likely you are to get the meat of the work done early, giving you time to let the work rest, come back to it later, and add some polish.

11. How to Help Others Perform Remarkably
The book winds down with a focus on what you can do to help others achieve remarkable performance – mostly, encourage people to follow their passions and offer them as much quality constructive feedback as you can. The more actionable feedback you give a person (with a positive context, pointing out the things they did well, too), the more likely they are to take your advice, apply it to what they’re doing, and achieve something great.

12. From Remarkable Performer to Remarkable Person
A remarkable person is one who applies remarkable performances to every aspect of their life. They make sincere efforts to be an exceptional parent, an exceptional spouse, and so on. The basic ideas in this book – the six Ps – can push you to excel in every dimension of your life.

Some Thoughts on The Encore Effect
Here are three things I think I think about The Encore Effect.

The Encore Effect got way better on the occasions where Sanborn got specific. The book really took off when he took a general concept (like one of the Ps) and hammered home how to really do it well in a specific field. Unfortunately, it felt like these little gems were scattered and were spread across too many fields to really click together well.

I agree strongly with Sanborn that constant practice and intense preparation is what sets apart (most) really great performers. I’m not talking about the once-in-a-generation people of the world that can get away with mind-blowing performances with little practice. Those people are riding on supreme talent and could be even greater with a truly strong work ethic. I’m talking instead about the people who seem to be showing effortless skill, but it’s actually built up with countless hours of practice – I think of Carlos Santana playing the guitar.

The Encore Effect is a good motivator, though. After reading it, I felt strongly motivated to go out and do something well. If that’s the sign of a good book, then The Encore Effect certainly did its job.

Is The Encore Effect Worth Reading?
The core idea of The Encore Effect is powerful: you have to bring some value to the table yourself in order to become more valuable to others. The advice on how to increase the value you bring – advice that works for all aspects of life – is solid, too. The “six Ps” make sense whether you’re talking about your work performance, your marriage performance, or your video game performance.

The problem, though, is that the advice the book offers is too general, taking things to the point of almost being like common sense. Yes, it’s always a good idea to find your passions and chase them, prepare well, practice what you’re doing, and then when the time comes, use that practice, preparation, and passion to knock people’s socks off. But that basic formula varies quite a bit based on what you’re passionate about. Once you know your passion, you’re far better off picking up a book that shows you how to prepare and excel in your area. You’re a programmer? Read strong books on programming practices. You’re a speaker? Read something like Presentation Zen.

The basic structure of The Encore Effect is loaded with good advice, but I think that a truly stellar book would take the general framework and apply it to a specific task, like presenting or parenting. Adding in concrete and specific examples would make a world of difference.

Still, underneath it all, The Encore Effect is an inspiring read. It’s a great one to pick up before you leave on a business trip, because it will inspire you, even if it’s light on specifics.

My son absolutely loves Fruity Cheerios.

About a year ago, he had them for breakfast at Grandma’s, and since then, he’s been in love with the little colorful circles. He prefers them to all other breakfast options, requesting Fruity Cheerios no matter what else we’re having. Twice a week or so, we relent, allowing him his Fruity Cheerios, since his other breakfasts are quite varied (oatmeal, eggs, and so on) and are accompanied by orange juice or milk, ensuring a diverse diet.

Luckily, we’ve been able to match coupons with Fruity Cheerios, bringing the price of a box of the lovely loops down to a reasonable price range. We’ve yet to pay more than two dollars for a box of the cereal.

Unfortunately, last week, our luck ran out just as the box emptied. As usual, my boy put in a request to get more Fruity Cheerios at the store, and when I checked my coupon binder, I didn’t find a useable coupon.

When I got to the store, I looked at several different brands of the same type of cereal, looking for a generic version that was also substantially lower in sugar than the truly awful Froot Loops. I found a generic brand that seemed to line up fairly well and decided to purchase that instead.

The next morning, my son requested Fruity Cheerios and I pulled out the bag of generic cereal. He got fairly upset, informing me that he wanted the “red box,” even after I poured him the bowl of cereal. He did eventually calm down and eat the cereal.

This made me curious, so I dug out the old Fruity Cheerios box and put some of the new generic cereal in it. The next time, I poured the generic cereal from the Fruity Cheerios box and he was quite happy with it.

Clearly, some of my son’s enjoyment of Fruity Cheerios comes from the branding. He insisted strongly on the “red box,” even though he couldn’t actually distinguish between the contents of the name brand and the generic cereal.

Obviously, I want my child to not grow up believing that branding is a requirement for a good product. This will not only save me money throughout the years as he grow, but will save him money in adulthood as well. So what’s the next step? I have two tactics in mind.

One tactic is demonstrating that I prefer the generic. Basically, whenever he has a morning where he’s allowed to have “Fruity Cheerios,” I eat the generic cereal right along with him. This takes advantage of parental imitation – he sees eating generics as the completely normal thing for an adult to do.

The other tactic? Keep buying the generic cereal and putting it into the Fruity Cheerios box right in front of him. If I keep doing this over and over again, when he reaches the right level of cognitive development, he’ll realize that the cereal he’s been eating all along is actually a generic brand – and he’ll realize it’s just as good as the name brand.

Any additional thoughts on how to reduce the influence of name brands on a young child?

Andy writes in (I touched up his grammar just a bit):

I’m a high school senior. Over the last two years, I’ve built a very successful lawn care business in my neighborhood that filled up my entire summer this year. I will make about $35K this year and I can make a lot more once I graduate. My grades are good and I got good scores on the ACT and SAT. I applied to a few colleges and got accepted to all of them, but I only applied because my mom pushed me. What I really want to do is build my lawn care business after I graduate. My dad sort of agrees with me but my mom demands that I go to college. What do you think I should do?

This is one of those situations where you’re going to have loud, strong proponents on both sides of the decision. Some people believe ardently in the value of a college education – others see the value in a strong entrepreneurial opportunity.

Let’s look at each case.

Build That Business!
Successful businesses require a mix of drive, talent, and luck. Andy already has all three.

Drive Andy wanted to build his own business and had the drive and desire to actually get up off the couch and do it. While his friends were busy with their X-Box 360s, Andy was building a $35K business – that takes initiative.

Luck In order to make $35K from a part time lawn care business, Andy must have stumbled upon a niche and filled it well. That’s a business opportunity that doesn’t come along all that often.

Talent Every day, as a small business owner, you’re called upon to make difficult choices. It takes raw talent to consistently make the right ones and build business. Andy’s obviously got that talent.

Andy has the natural drive to start his own business, the luck to stumble upon a niche that needed filling, and the talent to grow that business into something impressive. That’s a combination of factors that doesn’t come along that often, and Andy needs to take advantage of the situation.

Go To School!
I speak from experience here: college is a life-transforming experience. It is truly an opportunity for you to figure out your beliefs, learn new things, have countless compelling experiences that are almost impossible to replicate outside of college, and get an education in an area you’re compassionate about. Not only that, it comes at a point where your mind is most open to such diverse experiences – early adulthood.

Andy shouldn’t let that opportunity pass him by. He can always return and get an education later on, but the full growing experience won’t be as open to him.

He has the seed of a small business in place, sure, but he can keep that business going during the summer while attending school, plus he can use the business income to pay for his degree.

Plus, if Andy chooses to major in business, he might find yourself walking out of school with a brilliant plan for transforming your the mowing business into something truly amazing. College doesn’t have to mean giving up that dream.

My Thoughts
I think the real answer resides within Andy himself. Andy, are you truly happy mowing cemetery lawns, fixing lawnmowers, handling invoices, and so on? Do you have a desire to keep pushing the pedal to the floor, growing the business, eventually hiring employees and advertising to build a bigger and bigger client list?

Either these thoughts will excite you or they will fill you with unease. Be truly honest with yourself. This is one of the biggest professional choices you’ll probably ever make.

If you can’t imagine anything better than building this business you’ve started, then go for it. Throw all your gusto into that business and make it grow. Along the way, save most of what you earn – put it away so you can walk away from the business at a fairly young age. If you’ve built the business into something large and successful and sell the whole thing at age thirty, you can go to college then if you want to.

On the other hand, if growing the business doesn’t excite you and you just want to mow lawns, go to school. You can still spend your summers (and lazy weekends in the spring and fall) mowing lawns and maintaining your business as it is. You can use that income to pay for your education and when you graduate, you’ll still have your small side business to do with what you wish, plus a paid-for college degree.

You already know the answer, Andy. It’s inside of you. Ask yourself that honest question: is building this business the thing you really dream about? Let your answer guide you.

One final point of advice: if you do decide to go with the business, save your money. Spend as little as possible and sock the rest in the bank for later. If you decide in two years that you want to go to college instead, it’ll be quite easy if you’ve been banking your cash.

(Yes, that’s me in the picture.)

With the Christmas holidays sneaking up on us, we’re very, very glad we saved ahead for the Christmas season around here. In fact, our Christmas shopping is in full swing and we have several people marked off already.

Isn’t that jumping the gun a little? I don’t see it that way at all. Instead, I see it as a recipe for saving money, giving thoughtful gifts, and creating a memorable Christmas holiday. Here are eleven tactics to do just that.

Decorate in a sentimental fashion. For me, Christmas isn’t Christmas without using a set of handmade Christmas tree ornaments that my mother made for me when I was young. She made a few a year for more than a decade, eventually making a very beautiful set that I remember fondly from my early years. Then, during the first Christmas I had in a home of my own, my mother gave the ornaments to me. They are the centerpiece of all of our decorations. Rather than buying cheap disposable decorations that you’ll toss out in a few years, make your own – high quality ones that will last for many, many years. There are lots of ways to do this – ceramics, wood, and so on. If you don’t have artistic ability, you can still simply seek decorations made by others that are well made, have personal meaning to you, and will last for many years.

Write thoughtful notes, not mindless cards. Several people I know send out about two hundred Christmas cards a year. They’re generic cards, merely signed and without a note – and thus I feel indifference when I look at them. Instead of plopping down money for a mass mailing of meaninglessness, spend some time writing notes to the people you genuinely care about. That way, you’ll reduce your cost (fewer “cards” sent out and less expensive “cards”) and provide something of value to the recipient.

Focus on thoughtful gifts, not showy or expensive. A ten dollar gift that actually matches a recipient well means far more than a thirty dollar gift that’s useless to the recipient. But how can you know what to get? If you’re stymied, make a list of the interests that the recipient has – think hard about it. Then, research one or two of those areas and find intriguing and useful gifts in that area. Know a golf fan? Get that person a box of the latest, greatest balls.

Make gifts for more casual exchanges. Make and can a batch of caramel pear butter, for example, and give away jars of this in an exchange. It’s a gift that most people will appreciate and if you make a large batch of it, it’s pretty cheap per jar. In fact, my wife and I are planning on giving many people gifts like this for Christmas.

Be selective about the gift exchanges you participate in. In the past, I’ve been encouraged to exchange gifts with as many as ten different groups at Christmastime, each one expecting a gift in the $20-30 range. That wound up being very, very expensive – and very time-consuming, too. Instead of just agreeing to be in every gift exchange that comes along, bow gracefully out of a few. Suggest to the people involved that they just skip the exchange and instead just have a pleasant potluck dinner instead, saving everyone some cash.

Set a strict dollar limit for what you will spend on each person. When you’re writing your list, set a dollar cap that you’ll spend on each person and literally write it next to that person’s name. This will help keep your focus – just like a shopping list.

Buy one nice gift instead of multiple less expensive gifts. When buying gifts for a spouse or a parent or a child, you may be tempted to buy a lot of gifts. The problem with buying a lot of gifts is that not only do you avoid putting as much thought into each one, you also end up restricting your gifts to inexpensive items. Instead, focus on one or two very nice gifts instead – ones that you can put a lot of thought into selecting the right thing.

Start shopping now for those gifts – the earlier the better. Right now is the best time to start that Christmas buying process – in fact, you’re better off starting even earlier. Think of ideas, write them down, and seek them out through comparison shopping. The longer in advance you plan a gift, the more time you have to wait for the perfect price on eBay or by comparison shopping.

Stagger gift purchases so that you’re not putting the purchases on credit. Many people go on a giant rush of buying right after Thanksgiving, then are hammered with a huge credit card bill in late December or early January. Don’t let that happen to you. Buy a few gifts now, a few more in a few weeks, and so on – and consider paying in cash, too. This way, you won’t face the mountain of purchases all on one bill (or set of bills that arrive at the same time).

Use newsprint for wrapping paper. Few things make better wrapping paper than newsprint. It looks distinctive, it can be colorful if you choose the right pieces (like the comic pages), and it’s basically free. Isn’t it better to spend an extra $10 on someone’s gift than wasting it on paper that just gets torn up on Christmas morning?

Start an automatic savings plan for NEXT Christmas NOW. Seriously. You have roughly 60 weeks until next Christmas. Start putting $5 a week away right now. Putting that in a savings account that returns 3% annually would give you $305 to spend on next year’s Christmas expenses – just $5 a week!

This is the third in a weekly series of articles providing a chapter-by-chapter in-depth “book club” reading of Benjamin Graham’s investing classic The Intelligent Investor. Warren Buffett describes this book: “I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.” I’m reading from the 2003 HarperBusiness Essentials paperback edition. This entry covers the second chapter, which is on pages 47 to 57, and the Jason Zweig commentary, on pages 58 to 64.

Inflation.

It’s a word I’ve never liked. It represents an erosion in everything we work hard for. It naturally devalues our investments, working against growth. It causes items on the grocery store shelves to inch up in price, completely out of our control.

When my father was a boy, he would go to the gas station and fill up tanks of gas for his boat motor. The cost? Sixteen cents a gallon. Right now, I can buy a gallon for about $2.70 – that’s a sixteenfold increase. Over those sixty years, the price of a gallon of gas doubled, doubled again, doubled again, and doubled yet again.

In other words, the value of a 1940s dollar is roughly sixteen times the value of a dollar today.

It’s inflation that makes putting dollar bills under your mattress a completely worthless investment. Even if you did nothing more with your money than put it in a savings account bearing 2% interest, you’d still be protected at least a little bit against inflation. A dollar put away in that 2% interest savings account for sixty years would be worth $3.28 – better, but still not that sixteenfold increase we’d need to keep up.

The other solution would be to just invest everything in the stock market, but if 2008 has shown us anything, the stock market is a huge roller coaster. You might be way ahead of inflation a few years, then lose most of those gains the next.

How can an investor simultaneously protect themselves against risk and at the same time keep up with (or ahead of) inflation? That’s Graham’s topic here.

Chapter 2 – The Investor and Inflation
The biggest point that Graham makes in the chapter is that there really is no true hedge against inflation. He mostly looks at stocks, pointing out that ups and downs in the stock market are largely uncorrelated with the onward march of inflation. He also looks at the history of other assets and finds much the same – gold isn’t a great long-term hedge against inflation, either.

Another point I found really interesting: Graham suggests that, for your own calculations, you assume 3% annual inflation. He made this prediction in 1972 based on historical data, so I was curious to see how it stacked up. Lo and behold, he’s not that far off. Except for a rough patch at the end of the 1970s, annual inflation rates indeed average out to right around 3% over the long haul. There are some patches that are lower, with percentages in the 2s and even the 1s, and some higher, but the average isn’t all that far off since 1972.

I think it’s fairly reasonable to use that 3% number – or 3.5%, if you want to be conservative and guess a strong inflationary rate. It’s what Graham called almost four decades ago and it’s been pretty accurate over the long haul since then.

What about investment choices? Graham’s conclusion is that diversification is key. You shouldn’t put all your money into stocks (because of the volatility risk), nor should you put everything into bonds or cash (because they usually don’t earn enough to beat inflation). Balancing these two is the right way to go. In Graham’s words:

Just because of the uncertainties of the future the investor cannot afford to put all of his funds into one basket – neither the bond basket [...] nor in the stock basket, despite the prospect of continuing inflation.

Commentary on Chapter 2
Zweig does a great job of pointing out why inflation is sneaky.

There’s another reason investors overlook the importance of inflation: what psychologists call the “money illusion.” If you receive a 2% raise in a year when inflation runs at 4%, you will almost certainly feel better that you will if you take a 2% pay cut during a year when inflation is zero. Yet both changes in your salary leave you in a virtually identical position – 2% worse off after inflation.

A great return is nice, but it’s not all that great if it happens during a period of high inflation. Zweig immediately points to the late 1970s and early 1980s, where you could get a CD at 11% and it still wouldn’t even keep up with inflation.

As I write this, inflation is at roughly 5 to 6%, depending on the figure you use. The CPI (a common measure of inflation) actually fell from August to September 2008, so that rate of inflation may actually be going down. In comparison, as Zweig points out, we were barely at 2% inflation from 1997 to 2002.

The point? Inflation is not constant. And it’s not something you can predict, either. Instead, it’s a constant reminder that your dollar today will be worth less than a dollar tomorrow, slowly but surely. That’s a big reason why investing is worthwhile – investing helps your dollars keep pace with that growth, usually ahead of it, sometimes behind it, but always moving against that force.

One avenue that Zweig explores as a hedge against inflation are TIPS – treasury inflation-protected securities. These increase in value directly with inflation – if inflation is high, these return well. However, Zweig encourages you only to buy them in retirement accounts where you won’t be whacked with a tax penalty, because the taxation on TIPS can keep you on your toes otherwise.

Next Friday, we’ll look at Chapter 3: A Century of Stock-Market History: The Level of Stock Prices in Early 1972.

Many of us want to give to others. We see others in need and deeply desire to reach out and help them. We want to give to the charities we care about and to other causes. Many people want to give to their church or religious organization as well, using that as a conduit for helping the community and the world.

That desire is often counterbalanced by financial reality. When it comes down to the cold reality of making all of our bills for the month. many of us are pressed to make very hard choices that we don’t wish to make. Is it really fair to make a choice between a check to Habitat for Humanities and a check for our mortgage? Yet, quite often, that’s the type of choice many of us have to make.

My response to that is simple: give what you have. No one expects or wants you to put yourself in a deep personal crisis to give. Instead, give of those things which you have in abundance and wait until your financial life is in order to contribute money.

Instead, contribute of yourself in other ways. Here are six powerful ways to donate in ways that don’t force you into difficult and painful financial choices.

Give things you can make You might be pinched so tight that you can’t afford to drop a check in the collection plate, but you can take the pears from that pear tree behind your house and make several dozen jars of pear butter. Take those jars and give them to the organization you’d like to help for an auction or to give away to the needy. Another option: do what my father has always done. He grows an abundance of vegetables in his garden and gives much of the bounty away to others. What can you make (or grow) that has great value to others? Figure that out, step up to the plate, and give away the fruits of your labor.

Give your time Tempted to donate to public radio but scared it’ll put you in a tough spot with your bills? Offer to donate your time doing a menial task like answering the phone during pledge weeks. Offer to work as a receptionist a few hours a week for them. Your gift of time can often be much more valuable than the money you could scrape together.

Give your patience Most charities have menial tasks that no one wants to do. In lieu of putting your money in their hands, put your patience there instead. Recently, I did this myself by taking on the task of rewriting a very lengthy document that needed to be rewritten in order to maintain the legal status of an organization. It didn’t take smarts to do it – just a lot of patience and a willingness to jump through all of those hoops to get everything right. Perhaps you can show your patience by volunteering to help with preschool Sunday school classes or as an assistant one day a week with Head Start.

Give your compassion Hospice organizations often desperately need people with great compassion to step forward and help out with people in end-life situations. If you’re a deeply compassionate person, this is another spectacular way to give something special of yourself, a gift others with plenty of money in their pocket are often unable and unwilling to give.

Give your expertise Many people have strengths in a particular area – computer programming, paralegal skills, teaching skills, etc. These skills have great value to others and that’s why they can often help you to earn a solid paycheck. Applying these skills to a charitable organization can be even more valuable – if you can offer your programming skills to help an organization develop a key piece of software, you’ve given the cost of someone to consult for that piece of software, and that can be a sizable amount. Got skills with accounting? Serving as a free auditor for charities you care about can bring tremendous value to their door.

“Give what you can” doesn’t have to mean squeezing an extra nickel from a rock. Instead, take a broader look at things. What can you really give? When you find ways to give, you’ll find a great deal of additional fulfillment in life, often in ways you never expected.