It is better to do the wrong thing than to do nothing.
- Winston Churchill

I have a strong tendency to overanalyze things, getting myself stuck without moving forward.

I first considered starting a Roth IRA in early 2007. It seemed like an easy move – just find an investment house, set up an automatic investment plan, and let it roll, right? Whenever I thought about it, though, I found myself engrossed in details. I read a ton of information about the specifics of Roth IRAs. I’d reconsider whether or not it was really the right option for me right now. I looked at a ton of investment houses. When I finally decided on Vanguard, I spent literally months looking at the investment choices and reading the specifics of their plans. The end result? I missed my opportunity to invest in that Roth IRA for 2007. Completely. It just went away. In effect, that’s a year of missed retirement savings.

When I began my financial turnaround, I made some moves immediately. I sold off a bunch of my stuff. I cut a lot of my spending. I started reading personal finance books. But when I sat down to come up with a debt repayment plan, I ran into trouble. I couldn’t figure out what the optimum plan was for me. I came up with a plan, tossed it, created another one, and tossed that one. It took me months to really decide on my plan – and that cost me quite a bit in interest payments.

Right now, my wife and I have been thinking about and shopping for a vehicle to replace my truck for almost a year. We keep going back and forth on what exactly we want. Right now, we’ve basically settled on a minivan, but we’re still talking in detail about whether we should consider a new one or simply go for a late model used, especially considering the current environment. We have a few models in mind as well. Another challenge: is it really time to sell off that truck? Has it really reached a point of diminishing returns? It’s twelve years old and has about 140,000 miles on it, but it doesn’t get used nearly as much since I started working from home.

These cases all have a few things in common. In each case, I know what I should be doing – starting a Roth IRA, paying down debt, and making a real decision about our vehicle situation. I also know the process I should be following. My real problem is that I get caught up in the details and choices along the way.

The end result of that analysis paralysis is that I end up making no choice at all – and that ends up being a worse mistake than making a poor choice earlier on.

Take my Roth IRA, for example. If I had just opened a Roth IRA with Vanguard early in 2007 and just dumped the money into a money market account while I figured out the investments, I would have been far better off than just doing nothing at all and losing my 2007 investment year. If I had just stuck with the simple Dave Ramsey debt repayment plan instead of stressing out about finding the “optimum” plan, I would have paid off several of my debts months earlier. And, while I haven’t been caught with regards to selling the truck and purchasing another vehicle, if my “analysis paralysis” continues unabated, I likely will wind up with a truck that doesn’t work (with significantly less resale value) and I’ll have missed many of the deals available at car dealerships now.

What have I really learned from this?

First, it pays to consider the worst case scenario if you move forward now compared to not doing anything at all. What’s the worst thing that could happen if I just started a plan with Vanguard and just put the money into a money market account for now? What would happen if I did nothing for six months? In that case, opening the account and getting started with a money market is far, far better than doing nothing at all.

Second, it’s useful to eliminate most of the options right off the bat and not worry about analyzing them too much. With our vehicle purchase, we’re pretty sure we want a minivan, so why not just look at the top five in terms of vehicle safety (our primary concern) and eliminate the other options right now? That would save a ton of analysis time right there.

Finally, there are situations where it’s worse to do the wrong thing than to do nothing. This is not a call to rash decision-making. Instead, it’s a call to really look at the penalty for simply doing nothing. There are times when that penalty isn’t as bad as making a poor choice now – but the fact that there are such situations doesn’t mean that you should always get stuck in analysis paralysis.

For us, I think it’s time to do some serious shopping for a new vehicle.

For those of you who don’t follow international news very closely, Iceland suffered a very rough year in 2008. As recently as early October 2008, Iceland was the sixth wealthiest nation in the world. On October 6, 2008, the prime minister of Iceland addressed the nation, informing the people that they were taking extraordinary efforts to avoid a national bankruptcy. Iceland then nationalized all of their banks (meaning the government directly took control of them) and their currency dropped like a rock compared to other currencies like the Euro. The end result? The people of Iceland are facing double digit unemployment, inflation that’s well into the double digits (and into the triple digits depending on your source, meaning prices on everything are doubling annually), and uncertainty that the nation will even survive this crisis.

What brought this on? The largest banks in the country were unable to handle the economic downturn of the last year and had to be nationalized (bought by the government in order to survive). Much like in other nations (like the United States), so many businesses relied on the survival of these giant banks that they couldn’t be allowed to fail or else many other businesses would be sucked down along with them.

For a lot of people, this reflects the “bank bailout” that the United States passed late last year. Instead of having the government directly purchase the banks to keep them from failing, the United States simply gave bailout money to these large banks to prevent their failure.

This leads to a question from Adam:

I have a lot of family in Iceland and I’m worried that what happened in Iceland will happen in the United States. What can I do to protect myself?

In essence, the question Adam is asking is what can I do to protect myself against hyperinflation and huge unemployment? Both hyperinflation and rampant unemployment occur when financial systems begin to collapse, as has happened (relatively gently) in Iceland and (relatively fiercely) in Zimbabwe.

Here’s what I would do to protect myself.

Work on self-sufficiency. Plan a large garden for the coming summer. Consider renewable options for your home energy needs – solar panels and so on. Buy a deep freezer and stock it. If there are things in your home that need repair, now would be a good time to repair them. Make sure your vehicles are in excellent working order. Make sure there’s extra food in the pantry. Doing things that increase your self-sufficiency means that if an economic crisis does come, you’ll be less reliant on a currency that’s losing value.

Diversify your investments. Make sure that the investments you hold aren’t entirely held in investments in your own country. Include some index funds of foreign investments in your investments. This simply ensures that your financial future isn’t entirely tied to the economic future of your own country, but instead tied more to the economic future of the world. One government’s mistakes won’t entirely sink you.

Build good relationships with the people around you. In a period of rapid inflation, people often turn to bartering for many of their needs. They’ll trade with their neighbors, swapping skills and items to take care of what they need. The best thing you can do right now to build up your value in that regard is to build those relationships now. Even if a bad situation never occurs, you may find many situations where that relationship is beneficial to you anyway.

Don’t be too proud. So often, I see people showing a misbegotten sense of pride, telling themselves that they’re above certain jobs or certain activities. You may find yourself in a situation where the best solution is to take that job or do that activity. Don’t be proud. Instead, take the situation and run with it.

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.
The Basics of Estate Planning
How to Create a Debt Repayment Plan
How I Created a Budget that Worked for Me

And now for some reader questions!

Like alot of people, I have major credit card debt. If I die first, is my wife (or legal partner) responsible for that debt?
- Tommy

If the card is yours and yours alone, they’re not responsible for the debt. Of course, the executor of your estate will be responsible for settling your accounts, meaning that if you leave behind money when you pass on, that money will be used to pay off the debt.

The exact rules should be spelled out in the cardholder agreement that you received when you signed up for your card. If you don’t have a copy of it, request one from your credit card company.

My husband and I are in our early 30s and have managed to get rid of all of our high interest debt. In this crazy market, what would you be doing if you were in our shoes — continue to chip away at our mortgage (5.75%) or invest as much as we can since everything is on “sale”?
- Nancy

First of all, you’re asking about market timing – and market timing is a loser’s game. One can never accurately guess where the stock market is going in the future. We could wake up in a year with the Dow at 5,000 or at 12,000.

In short, putting money in the stock market is a risk. You have the potential to earn a greater return than with your mortgage – but you also have the potential to earn a far worse return (or a loss). Over a long period – ten or more years – the stock market is usually worthwhile, but over the short term, that’s not a given at all.

The question then comes back to your current financial situation and your goals. Are you planning on children in the near future? If so, you might want to go “safer” and put the money into the mortgage – or simply keep it in a CD or in a savings account. Is your big concern retirement? Then consider opening up a Roth IRA and put it in the stock market. Spend some time thinking about what you want to do in the future and that will lead you in the right direction. Don’t worry about timing the market.

A local bank (Newport Fed)is offering something called e-loop checking. You will earn 5% APY on every dollar UP TO 50K in their saving account and have free ATM fees anywhere if you do the following – make 10 check card transactions per calendar month and have one direct deposit or ACH exchange per month. For every dollar over 50K you earn 1.2%. If you do not make the required transactions, then you do not earn 5% for that month, you only earn 0.1% on the entire balance. You have to use electronic statements. Is this a good deal?
- DrFunZ

Unless you’re already routinely using a check or credit card far more than ten times a month, this isn’t a good deal. This account is really only worthwhile if you use the card that many times month in and month out.

Sit down and take a serious look at your current usage with your current account. Are you actually using a card that often? Or is that completely different than what you’re doing?

If your normal behavior does not involve using a card that much, don’t switch to this account. A new account won’t change your day to day spending behavior.

So, you’re rooting for Arizona in the Super Bowl. Any prediction about the final score?
- Al

Arizona 35, Pittsburgh 28.

Arizona simply has nothing to lose in this game. They weren’t expected to be there in any way. Aside from Warner, none of their players have been to the Super Bowl before. The odds are strongly against them.

This has pretty much been the story of every game Arizona has played this postseason. I just think they have the right mix of good leadership (Warner) and talent that doesn’t have a big burden of expectation (everyone else) that will put them over the top.

There is something basic I don’t understand about economics. Why are people always encouraged to spend? And given loans to do so?
- Josh

People are always encouraged to spend because the economy runs on transactions. The more transactions that occur, the more businesses that can exist to take advantage of those transactions. If everyone stopped spending, businesses wouldn’t be able to operate and then most people would be unemployed – and eventually, no one would be employed, the government would go bankrupt, and society would regress significantly.

People borrow money because they’re impatient for purchases, and banks are happy to lend that money because banks make money on the loan. It’s just another type of transaction where money moves from one person to another.

I recently received a gift of $10k from my father in law, yes this is truly a gift. However, he told me that he would like to see me invest in and create a handsome roi. I agree. I am a second year law student, I own a home in AZ (that I currently rent out) but live and rent in another state. I have 55k in a money market savings with capital one, no 401k, or other investments, I have about 80k in student loans accrued with about 30k more to go. I am trying to figure out what would be the best vehicle(s) to invest in. I keep hearing gold is strong and stable but don’t know too much about it, my wife thinks we should just put it in a CD for 1.5 – 2 years, I disagree, especially since the markets should rebound within the next year or two and I would hate to miss out. What would you recommend, I would love to have a 10% roi for this upcoming year, but realistically 5-6% would be suitable. What do you think?
- Andy

You need to decide whether you’re more concerned about getting a good positive return in your first year or if you’re more interested in earning a good return over the long term.

If you just want to show off a positive return in your first year guaranteed, you should buy something very conservative – something like a certificate of deposit from a bank. With that, you’ll get a 4% return or so over the first year guaranteed.

If you are more interested in building wealth over the long term – ten or more years – then you should be investing in the stock market. Put the money in a broad-based index fund (I use Vanguard for this) and sit back. You might not get a positive result in any given year, but you’ll get a positive result over the long haul, one that’s most likely substantially better than what you’d get in CDs – but there’s risk there.

I’m a 24 year old grad student, and I’m thinking about starting an IRA. I don’t have any debt – I have student loans but I have the money in the bank to pay them off (and since they’re subsidized, I’m waiting to pay them back to earn the interest on the money). I’m not eligible for a 401k through my employer. I think a Roth IRA is the way to go, and I’m eligible for one.

My question is, in this economy, what should I be investing in with the IRA? Or should I not even worry about an IRA at all yet?
- Liz

The best possible time to start saving for retirement is when you’re still single and early in your career. Being single means you have much more financial flexibility than you will later on with a family and other demands on your money, plus it gives you the longest timeframe for your investment to earn good returns.

In your situation, you’re absolutely right that a Roth IRA is the way to go. Look for an investment house that you’re comfortable with (I use Vanguard for my Roth IRA), then sign up and start an automatic investment plan. I’d recommend choosing a “target retirement” fund for your actual investment.

What do you allow your three year old to watch on television?
- Ellie

Our children don’t watch much television. We DVR a few specific programs from PBS and occasionally watch DVDs. My son basically has no idea what a commercial is (which I view as a good thing, as he sees them as being alien rather than the norm).

His viewing preferences center around Bob the Builder, Sesame Street, and Pixar movies. We don’t permit him to watch more than about 45 minutes of television a day – and even when it’s on, we usually turn the volume down low and get him engaged in something else (like reading a book).

What is a good book or program to teach a teenager about saving money? I have a stepson that does not learn anything from his mother (she cannot manage finances so isn’t teaching him anything) and our time with him is limited since he lives in another state.
- Leslie

Well, you’re going to have to somewhat rely on him to be self-motivated when learning about money. The best thing you can do is to simply set a great financial example for him when you have the chance to interact. Talk about things like frugality and money management and make them seem normal and also beneficial to the things you want to do.

If you want to send a book along with him, I’d probably recommend Please Send Money by Dara Duguay. It’s somewhat targeted more towards college students, but I often find that giving slightly advanced books to engaged and interested high schoolers will often get them to avidly read the book.

Don’t push him, though – frugality and money management isn’t a topic that most high schoolers like to think about a lot. Just provide a good example and give him the resources to learn for himself.

How many cloth diapers do I need for my baby?
- Mal

I would shoot for as many quality ones as you can, enough to make up a bit more than a full laundry load. The more diapers you have, the less often you’ll have to run a load of diapers and the less detergent and water you’ll have to use to maintain fresh cloth diapers. It also depends on whether or not you’re going to exclusively cloth diaper or if you’re going to mix cloth diapers and disposables.

If you’re going to do nothing but cloth diapering, I’d get a minimum of thirty five diapers – but getting up to fifty or fifty five or so is fine. If you’re going to just try it out, you can get by with a much smaller number – my wife and I started with twelve, though we’ve added quite a few more since then.

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 finance book.

Liz Pulliam Weston is described on MSN as “the web’s number one personal finance columnist” – and in terms of readers, that’s probably pretty accurate (MSN has an enormous audience, and she’s the best of the writers over there, in my opinion). She’s got a lengthy archive of all kinds of articles on personal finance topics if you’d like to get a taste of her writing.

I picked up her most recent book, Easy Money, because several readers claimed it was quite good – one reader favorably compared it to a book I quite liked, Jane Bryant Quinn’s Smart and Simple Financial Strategies for Busy People. Both books target the same general topic – simple tactics for busy people to get their financial life in order.

Is Easy Money a winner, or is it just a rehash of information you can find elsewhere? Let’s dig in and see what it’s about.

A Walk Through Easy Money

1. Setting Up Your Financial Life
This is a fantastic opening chapter for any modern personal finance book – the only problem with it is that it runs the risk of being outdated fairly quickly. The basic premise is simple – using online tools and a bit of advance planning, you can essentially build up an “overview” of your accounts, similar to what Mint can provide without the security concerns. Even better, by linking these accounts together – savings to checking, investment account to checking – and using online bill pay, you can have many of your payments handled automatically, including automated savings and automated investing, drastically reducing the time you have to devote to worrying about it. This chapter basically walks you through how to do this – but I’m pretty sure that technology will make some of the steps redundant in a few years. For now, though, this material is fantastic.

2. Take Charge of Your Spending
Weston is a big advocate of the so-called “60% solution” that I wrote about a while back. The idea is simple – you make yourself live on only 60% of your take home pay, putting the other 40% away for retirement, big purchases, your children’s education, a big emergency fund, and other such items. It seems extreme on the surface, but once you start digging into the specifics and working out how it would work for you, it’s actually surprisingly doable for many people.

3. Get the Most Out of Your Credit Cards
The key piece of advice here is to simply not carry a balance on your credit cards. For many people, that’s easier said than done, so Weston advises starting by simply putting your credit cards away and not using them for a while, then spend that time focusing on eliminating that debt. If you do have them all paid off, Weston encourages finding cards with great bonus programs that match how you spend – much like how I use the Citi Driver’s Edge card. I agree wholeheartedly with Weston’s philosophy here – keep a zero balance and enjoy the perks of a good card.

4. The No-Sweat Guide to Retirement and Other Investing
Again, Weston sticks to pretty simple advice in the investing section of her book. She basically encourages readers to always invest in low-cost index funds (this is a major theme of investment books, for good reason – it works) – but not just stock-based ones. You should also have some of your retirement money in bonds and cash and even a bit of real estate. She seems to be largely in favor of “target retirement” funds for the most part (as long as they contain some stocks, some bonds, and some cash) if used for retirement.

5. The Easy Way to Save for College
Get a 529 plan and set up an automatic savings plan to fund it. That’s Weston’s advice for college savings – and that’s what I do as well. She’s not a big fan of prepaid plans since they tend to lock you into a particular school (or set of schools). She also strongly encourages people to avoid taking out excessive student loans (ones for more than the amount you actually need for college – to consolidate other debts, for example) because student loan debt can’t be forgiven during a bankruptcy.

6. Insurance: Protecting What You Have – And Will Have
Here, Weston offers a bunch of very specific advice about different types of insurance, from life and auto insurance to homeowners’ insurance and umbrella policies. I was mostly interested in her life insurance advice, as my wife and I have been discussing an additional policy: Weston encourages us to get a term policy that covers a long period, don’t buy it from her employer, and get a convertible policy that could be transformed into a cash-value policy if needed. Solid advice, all around.

7. Buying Homes and Cars
The big advice that Weston gives here is don’t overbuy. People have a tendency to “push” what they can really afford with these major purchases. Weston argues that such a move is a mistake – you’ll end up with property that you can’t easily pay the bills on that’s worth less than what you paid for it, and that’s a situation that’s a real loser for anyone in it. What can you do to avoid it? Take serious stock of your finances before any major purchase and set a strong spending cap before you even look.

8. When You Need Help
Liz’s biggest piece of advice if you find yourself needing additional help is to find a certified financial planner (CPF), preferably one that works only for fees and not for commissions. Also, no matter who you hire to help you with anything, do some background checking on that person to make sure they’re legitimate (they are who they say they are and have the accreditations they claim) and have a positive reputation (ask around in the community and among your friends, and also check out the Better Business Bureau).

9. Be a Savvy Shopper
This chapter is basically just a lengthy “tips” collection for general shopping needs. One tip I found interesting was Weston’s suggestion to focus your travel with just one airline, one hotel chain, and one car rental company – join their frequent “flyer” programs and scoop up the benefits. This would, of course, apply best to people who travel regularly. She’s also a huge advocate of using lots of online price comparison tools, but she’s also pretty wary about using the internet – virus scanning and pop-up blockers for all!

10. Changing Your Uneasy Mind
Here, Liz tackles several of the most common psychological hang-ups people have with money – things like “the one with the most toys wins” and “I’ll never get ahead financially, so why bother?” Liz’s choices here are quite good – they reflect almost all of the common emails and comments I get from readers who are doubting the benefit or usefulness of trying frugality or adopting good money habits.

11. Setting Goals, or What Are You Doing the Rest of Your Life?
The final chapter focuses on setting goals – short term, medium term, and long term goals with tangible definitions of success. I find goal setting to be a key part of personal finance, one that’s sometimes overlooked in other books, and this is a solid discussion of how to develop goals. I would have put this chapter much earlier in the book, however.

Is Easy Money Worth Reading?
I generally put personal finance books into two distinct groups. There are the “mechanical” ones – the ones that are mostly there to provide instruction on how to handle different situations – most of the books people think of as personal finance books fall into this category. Then there are the “other” books – ones that take a completely different approach. I personally tend to enjoy reading the books from the “other” category, as the “mechanical” ones tend to be quite repetitive – once you’ve read two or three, there’s not much new out there worth reading.

Liz’s book falls clearly into the first category. I had already read most of the advice in the book – very little was strictly new to me. Yet, of all of the “mechanical” personal finance books I’ve read, I think Easy Money might very well be the best of the lot, at least in terms of presenting information that I agree with.

If you’re looking for a general reference-style personal finance book with a lot of solid information in it, written in an approachable and easy-to-read tone, Easy Money is probably the best one I’ve yet come across. Do note, however, that if you’ve already read multiple books along those lines – or already have a few in your own home for reference – this one won’t provide much additional information.

When I was young, I was surrounded by frugality. My parents did everything they could to shave a few dollars off of their monthly budget, from growing a large garden and wearing clothes until they were almost falling apart to driving used cars and hitting yard sales for many of our purchases.

One would expect, coming from such an environment, that frugality would come naturally to me and I would simply adopt such behaviors almost automatically in my early adult life. Unfortunately (for me), that wasn’t the case – I spent most of my twenties spending money as fast as I could earn it (and sometimes faster – I built up some serious credit card debt along the way).

Fortunately, I figured things out before the wheels completely fell off. I took serious action to right my financial ship, selling off a lot of my frivolous purchases and focusing hard on eliminating debts.

But, perhaps most of all, I began to slowly adopt most of those frugal practices I learned in my childhood.

Three years ago, my wife and I ate out almost every meal. Now, we eat at home almost every meal.
Three years ago, I’d not even bother looking for a used solution to fill my needs – I’d just buy new without thinking about it. Now, I check for used versions of almost everything I buy for myself, using services like PaperBackSwap and hitting things like yard sales and consignment shops as a natural matter of course.
Three years ago, I was already window shopping for a brand new vehicle. Now, I’m pretty happy driving my twelve year old truck until it gives up the ghost – and then I’ll start shopping for a late model used replacement (probably a minivan).
Three years ago, I dabbled in gardening, viewing it only as an amusing hobby. Now, I’m already planning ahead for the most productive vegetable garden that I can possibly plant.

Obviously, something changed. I went from being a complete spendthrift to being a fairly frugal person (I’m far from a frugal zealot, though). I now find myself regularly doing things that I would have considered ludicrous three years ago. Making my own laundry detergent? Swapping used books? Fixing a cheap dinner at home when a nice restaurant is open?

Those weren’t things that I did. Those were things that my parents did.

Over the last few years, though, I’ve come to appreciate more and more the way my parents did things – and still do things. My perception of their frugal ways has changed drastically. When I was younger, I viewed their frugality as somehow trapped in the past – it wasn’t something that I would be doing today. I also viewed it as parochial, as though their choices somehow represented the way people lived in small towns, not in larger towns and cities.

What I’ve come to realize, though, is that frugality is not just a way to save money – it’s also a way that I can connect my own life to the traditions of my family. Today, my father and I have conversations about vegetable gardening – and I’m gradually learning many of his secrets for getting huge production from tomato plants. My mother and I actually swap coupons – if we see really good ones that we’re quite sure the other will use, we’ll simply swap them.

Not only do these things save me money, they provide a vital connection to my roots. It’s opened new avenues of communication with my parents and given us several things in common that we simply didn’t have a few years ago. That’s not only been a personal reward for me, but my wife and my children have been rewarded with a stronger family connection as well.

For me, going back to my hometown isn’t just an opportunity to visit people and reconnect. It’s also an opportunity to learn and grow as a person – and take away some things that I can use in my own life.

My wife and I have an overstuffed pantry. Sometimes, it’s almost difficult to get the door closed because we have so much food stocked away. And, to an extent, I’m proud of this: I often view our pantry as one of the most frugal places in our home.

This often comes as a surprise to people who visit us – and is perhaps a surprise to you as well. Doesn’t food get old in there? Isn’t it wasteful to have such a huge amount of food on hand? What can you possibly keep in there that isn’t wasteful? Aren’t there just tons of things in the back of the pantry that are out of date, just waiting to be tossed (and wasting money along the way)?

We actually use a number of tactics for stocking, rotating, and utilizing our pantry so that the food kept inside has maximum value. Here’s how we do it.

We eat virtually every meal at home. I actually believe this is the key to the whole equation. Our pantry is full, but the stuff inside the pantry gets used all the time. We eat 90% of our meals at home with the four of us seated around a table eating something we’ve prepared with the food in our pantry.

We focus mostly on staples with a long shelf life. So, what food is actually in our pantry? Most of our pantry is filled with staples that have a long shelf life. Here’s a quick checklist of the items that take up more than half the space in there: baking powder, baking soda, sugar (brown, white, etc.), pasta (many varieties), corn meal, corn starch, flour (all-purpose, white, wheat, rye, pumpernickel, etc.), rice, salt (table salt, sea salt, etc.), spices (a huge number), vinegar, and dry yeast. Virtually all of these items last for years – we buy them and use them until they’re gone.

We buy those staples in bulk. We buy the staples listed above in large quantities – big bags of flour, rice, and so forth. By buying them in bulk, we’re able to save a lot of money on the purchase of such items, reducing the cost of each and every meal that we eat. And, since these items don’t get old or wear out (well, at least not over a short period), we almost never throw away any of the bulk.

We use airtight containers for many items. One concern that many people have with large quantities of staples (like flour, sugar, and rice) is that they’re targets for infestation – mold, mice, and so on. Our solution? We store all of our materials in jars and buckets that are tightly sealed. This keeps the staples as fresh as possible and keeps them from being infested.

We recognize the foods we like and eat them regularly. We like eating pasta dishes. We like homemade bread and breadsticks. We like simple stir fries with a variety of spices and some rice on the side. We like tacos and enchiladas. We’ll eat these things over and over again – everyone likes them and as long as we don’t eat them every day, we don’t get tired of them. Thus, it makes a lot of sense for us to have a lot of the staples for these recipes on hand.

We rotate our entire pantry regularly. Of course, many items in our pantry aren’t such staples – they’re other items, purchased for specific recipes or because they seemed intriguing. Often, these items will gradually find their way to the back of the pantry. Our solution to this is simple: about once a month, we rotate everything in the pantry. We pull everything out and put things back in a new order, bringing forgotten things to the front. This usually inspires a few days’ worth of dinner recipes and also keeps us from wasting things.

We plan ahead for major disasters. We also keep several gallons of water in our pantry and also some “ready to eat” meals. Why do we do this? In the event of a major disaster, where we might be left without power for a week or two, we want to be prepared with the food and supplies on hand that we would need. This takes up some pantry space, of course, and we’re lucky in that we’ve not had to use the supplies since moving to our home, but if such an event happened, these items would be worth their weight in gold.

We share. Last summer, on a whim, I made six loaves of zucchini bread and gave them to our neighbors. Why? I was in the mood to cook, we had an abundance of fresh zucchini, and there was plenty of ingredients in the pantry. When I gave over these loaves, virtually all of the neighbors were very happy to receive them – and it helped us to build a good relationship with some of the ones we didn’t know as well. If you have an abundance of food and an abundance of time, you have the opportunity to share the food you make with those around you – and build valuable relationships along the way.

That’s how our pantry rolls.

In the many articles I’ve written about my financial recovery, I’ve mentioned lots of things I chose to give up – buying DVDs, going out to eat, playing collectible card games, obsessing over video games, visiting coffee shops every day, buying books, and so on. Giving up these things enabled me to find the money I needed to begin my financial turnaround – and sticking with them has enabled me to pay off a lot of debt and build up some semblance of financial security in my life.

At face value, it seems to be a story of sacrifice. I gave up a lot of things to start turning around my financial ship – things that did bring enjoyment into my life. It wasn’t easy giving these things up, either. My heart often longed to fall back into those old routines – it wasn’t just a matter of waking up one morning and simply choosing to do something different.

The idea of such sacrifice often leaves a bitter taste in people’s mouths. They don’t want to give up some of the perks and trappings in their life. I know I certainly didn’t – but I also knew that I had to change something. I was standing at the edge of the abyss, looking down into a large chasm of financial despair, and in that moment I was far more afraid of falling into that pit than I was of trying something different.

What I discovered is that giving up all of those things wasn’t a sacrifice – it was a trade. I gave up all of those bad spending habits, but in return I was able to knock down that scary pile of debt, start saving for my children’s college education, build up a big emergency fund, and buy a house.

It was a trade that I needed at that point in my life. I was really becoming aware of my responsibilities as a parent, as an adult, and as a husband, and this awareness had driven me to spend a lot of time thinking about the choices I was making in life. My conclusion was, largely, that I needed to stop thinking about the short term so much and instead start looking at the long term.

In truth, the trade I actually made was swapping short-term gratification for long-term benefits and security. Buying books and video games and DVDs brought me a lot of short-term joy, but really didn’t contribute much at all to the quality of my life over the long term. On the other hand, not buying these things and instead paying down the bills is incredibly boring in the short term, but provides a lot of long-term happiness – I now live in a nice house and know that things are fairly secure financially.

This isn’t a trade that some people want to make. That’s not necessarily a good thing or a bad thing – it’s just a difference in perspective. If I were single, I might very well be content to live in an apartment and spend my time and money on more frivolous short-term pursuits and enjoyments. But such short-term pursuits simply do not reflect where I’m at right now.

It’s because of my own experience that I believe that successful financial turnarounds are often tied to serious introspection about what you truly want out of life. My financial turnaround, for instance, was triggered by a lot of introspection done in the aftermath of the birth of my son. Different events may trigger such introspection in others – it could be a major event, or it could be something as simple as merely getting older.

Is financial success a sacrifice? I think it’s only a sacrifice if you look at it solely in terms of what you lose without proper respect for what you gain.

This is the sixteenth 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 fifteenth chapter, which is on pages 376 to 395, and the Jason Zweig commentary, on pages 396 to 401.

As I mentioned last week, this chapter (and the one preceding it) form what I consider to be the heart of The Intelligent Investor.

What I found most interesting about the previous chapter – Stock Selection for the Defensive Investor – is that Graham basically advocates for index funds if you’re a defensive investor. The interesting part is that Graham wrote that chapter in 1972 – years before index funds appeared for people to invest in. They simply didn’t exist in 1972 – the only mutual funds around at that time were heavily managed by active investors.

This chapter, though, sees Graham talking about individuals who aren’t simply defensive in their investing. How does one seek out and find value stocks, not just ones listed in the S&P 500? Graham really answers that question here.

Chapter 15 – Stock Selection for the Enterprising Investor
So, how do you find a value stock? That’s really the question Graham strives to answer in this chapter.

The first factor to look for is a low price to earnings ratio – information you can easily get from a good stock tracking software like the Yahoo Stock Screener (that’s the tool I use). Graham suggests looking for stocks that have a price-to-earnings ratio of 9 or lower.

Graham immediately points out that simply screening based on a P/E ratio of less than 9 will get you a lot of stocks – and he’s right. I found 909 stocks that had a P/E ratio of 9 or less – a mix of big companies and little ones, ones I’d heard of and ones that I hadn’t.

Graham then suggests five additional factors to screen for:
1. Good financial conditions – assets that are at least 1 1/2 times current liabilities
2. Earnings stability – no losses in the last five years
3. Dividends – some current dividend is being paid
4. Earnings growth – last year’s earnings are more than those of five years ago
5. Price – a stock price less than 120% of the company’s assets

I entered some of these criteria into the tool and found that these factors quickly eliminated hundreds of stocks, leaving me with a much tighter list with companies like Exxon and Chevron to investigate.

Much of the rest of this chapter deals with special situations, most of which Graham encourages people to avoid (”special” issues) or has a lot of caveats about (buying stocks with a stock price lower than the company’s assets – probably meaning the company is in fairly serious trouble).

Commentary on Chapter 15
Zweig actually extracted different lessons from this chapter than I did, which speaks to the density of information in Graham’s writing – and probably indicates why many people have a hard time trudging through the book.

Zweig argues that the biggest lesson here is the value of practice. Graham’s pointers seem straightforward at first glance, but they really only help you find a group of stocks which you’ll have to dig through on your own. The process of digging through those stocks, picking a few, seeing how they do, and learning some of the patterns is something that can’t really be taught in a book – it requires a lot of experience.

How can you get that experience? Zweig strongly encourages people to spend some serious time (he suggests at least a year of practice) using an online portfolio tracker like the one at Yahoo. Study stocks, add some to your virtual portfolio, and watch them. See what works and what doesn’t. If you enjoyed this process and earned a decent return, start investing with real money – but if you just wind up confused and bored, stick with index funds.

Next Friday, we’ll take a look at Chapter 16: Convertible Issues and Warrants.