Our one year old daughter has discovered a fun game in the family room. Whenever we are down there, she marches right over to the entertainment center and begins to pull DVDs off of the shelves. She refers to them as “books” and opens them up to show us, then throws them on the floor.

Obviously, this is a habit that we’re working hard to break, using the usual tactics one would use on a one-year old: clearly telling “no,” diverting from the situation, and so on. However, given the easy accessibility to the DVDs, our daughter is just attracted to them like a magnet each time we enter the room.

The best solution, obviously, would be to simply get the DVDs out of her way – but that would require either getting a new shelving solution or putting them into storage, neither of which is a particularly amenable option.

This leads us to a joking conversation I had with my wife the other night. We were both in the kitchen preparing a supper which used some leftovers as a primary ingredient, and I was commenting on all of the various frugal things we do – use leftovers, cook at home, clip coupons, use inexpensive bulbs, and so on. And then, in jest, I said the kicker: “With all the money we save with these things, we should just replace that entertainment center.”

We both laughed it off at the time – after all, I was basically making a joke. However, the moment stuck with me.

I realized that what I described was quite similar to a food binge after several days of dieting – a huge negative over-response to a series of small positive steps. Even more frightening, it was something I used to actually do myself – I’d behave well financially for a while, then binge on something foolish and completely undo my good work.

So, let’s look at our situation again. I’m sitting there listing out all of our good little frugal moves over the last week or so. We ate at home several times, saving $20 or so! We used leftovers, saving $10 or so! We used energy efficient light bulbs, saving $5 or so! We saved $10 at the grocery store on Sunday with our coupons (really, we actually did)!

Wow, we’re really doing good, aren’t we? With all that savings, we’ve already saved most of the cost of that entertainment center. And we deserve it, right? Don’t we deserve the good things in life?

Many people view frugality as exactly that – a bunch of little steps they can take in areas of their life that are less important so that they can afford to splurge in other areas. “If I eat a cheap meal the next few nights, I can afford to go out to that steak house with my date on Saturday.” “If I carpool, I can afford to buy that new gadget in a few months.” Instead of helping you build a financially stable life, frugal tactics are sometimes used as bartering trinkets to help you keep living the high life.

And that’s okay, as long as you’re honest with yourself about what you’re doing. This type of frugality doesn’t serve to put you in a better financial state – instead, it serves to help you maintain a lifestyle that, in some regards, is beyond your means.

This is equivalent to eating a piece of fruit for breakfast and a tuna sandwich for lunch so that you can have a steak for supper chased by a pint of Ben and Jerry’s. Sure, the piece of fruit and the tuna sandwich are good moves, and sure, you’re in a better state than if you had a bagel with cream cheese for breakfast and a Big Mac for lunch, but at the end of the day, you’re not truly getting ahead. You’re merely subsidizing other behavior.

Frugality is merely one tool in the toolbox if you’re seeking financial success. Patience is also vital – it’s going to take time to turn things around. Self-discipline plays a role, too, so you don’t fall into the binge trap.

The real question is, what do you want? Are you striving to get ahead financially over the long haul? Or are you content to just make ends meet while still enjoying most of your perks? In either case, frugality can be a valuable tool.

This is the fourteenth 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 thirteenth chapter, which is on pages 330 to 338, and the Jason Zweig commentary, on pages 339 to 346.

Over the past few chapters, Graham finally began to lay out some of the specifics of how to implement his concept of value investing.

It only took him ten chapters to reach the supposed “meat” of the book. I wouldn’t hesitate a bit to speculate that Graham’s “slow start” to the book is the reason many people have a hard time picking it up and going with it – it’s simply a slow starter, especially if you just want to know specifically how Graham values stocks.

But that’s not the point of the book.

What does it say on the front? The Intelligent Investor. That doesn’t mean “The Guy Who Can Price Value Stocks Really Well” – and the fact that many people believe that the two are the one and the same is actually a real problem.

Investing isn’t just about knowing how to evaluate a company properly or how to seek out huge values on Wall Street – that’s only one small part of the bigger picture. Investing is about knowing yourself (how much risk you can tolerate, for one), knowing the people around you, setting goals, defining a broader portfolio than just stocks, and so on.

Here’s the problem – those topics are boring to a lot of people. Yet Graham devoted the first nine or ten chapters of The Intelligent Investor to just these issues.

Graham views these elements as the bedrock of what it means to be an intelligent investor, and that’s why he devoted the first third of his book to it. Those who would skip it or not “waste their time” paying attention to it are missing a key part of Graham’s message.

Chapter 13 – A Comparison of Four Listed Companies
This chapter, however, does focus on evaluating companies in terms of finding ones that offer significant value to the investor. Graham does this by actually running through how he would evaluate four different companies given their situation in early 1972 – ELTRA, Emerson Electric, Emery Air Freight, and Emhart Corp.

What companies? If you looked at those names and shrugged your shoulders, there’s good reason – only Emerson still actually exists as a distinct company and brand. The other three were subject to mergers and buyouts from other firms – ELTRA merged with Bunker Ramo and that operation was eventually purchased by Honeywell, Emery Air Freight is now a part of CNF, and Emhart was bought by Black and Decker. Remember, though, the point here isn’t to point out good stock buys. Graham’s discussion here is about how he would evaluate these companies from his position in early 1972.

Graham walks through all four companies, considering their profitability (he looks at the past decade of results), stability (he looks at their worst year over the past decade), growth (compared over multiple time frames, not just the last year), financial position (they must have $2 in assets for every $1 in debt), dividends (years of dividends paid without interruption), and price history (evaluated over the companies’ entire histories).

Graham concludes a few things here: Emerson and Emery are both overpriced – or at least aren’t value stocks at the moment. He thinks Emerson has better long term potential, but seems fairly gold on buying Emery as a value stock. The other two companies, though, are undervalued, and he believes they would be good buys for a defensive investor.

What exactly constitutes a “good buy”? Graham just begins to touch on that, indicating “seven statistical tests,” but then holds off on delving into those tests until the next chapter.

Commentary on Chapter 13
Zweig basically does the same analysis as Graham, except Zweig focuses on four modern companies – Emerson (again), EMC, Expeditor’s International, and Exodus Communications.

Why those four? Together, they actually provide a very nice history of the stock market during the 1980s, 1990s, and early 2000s, highlighting all of the ups and downs along the way.

What did Zweig conclude from his evaluation? Companies that aren’t stable on paper aren’t stable investments. Exodus Communication was his “dot-com” stock and it went belly-up before 2003 was out. On the other hand, Emerson was Zweig’s stable old horse – and it weathered the dot-com bust just fine.

There’s a lesson here – value investors don’t buy the flashy stocks. The flashy stocks are almost always overvalued compared to what the company is really worth on paper. Instead, value investors tend to look for the boring – Emerson’s shop-vacs aren’t glamorous, but the company does provide a good value for the shareholders.

Next Friday, we’ll take a look at Chapter 14: Stock Selection for the Defensive Investor.

One of the most frequent issues that readers contact me about is more information about a debt reduction or debt elimination program that they heard about on the radio on their way home from work. “The people on there claim to have eliminated 90% of their debt. Can that be for real? What’s the catch?”

I’ve looked into a few of these programs and I’ve noticed that most of them have a few big traits in common.

First, their claims are true – but carefully worded. Usually, the claims look only at one narrow dimension of a person’s financial state – how does their debt level on one date compare to their debt level on another date? In that strict and narrow sense, the programs can be seen as successful – but that narrow window leaves out a lot of factors.

For one, some of the programs wreak havoc on your credit report and credit score. Depending on the exact program, they will play hardball with your creditors, which will sometimes succeed in gaining you a strong reduction in your debt level. However, this will often also include a final negative note on your credit report indicating that your debt was negotiated, which will have a negative impact on your score for years to come. This has a hidden cost, of course – higher insurance rates and higher interest rates on any debts you might incur (like a car loan).

For another, some of the programs charge a hefty fee for a simple debt consolidation. One program I’m familiar with consolidated one person’s debt into a convenient low monthly payment. However, this new consolidated debt had a higher interest rate than almost all of the other debts and, combined with that lower payment, meant that the person involved would be paying on that debt for many years to come.

Finally, most of the tactics from these programs are well known and are shared all over the place. Setting up a debt repayment plan is actually pretty simple, as is negotiating with your creditors. People can do this on their own without paying for the services.

What these plans offer is guidance for people who feel lost and don’t step up to empower themselves. Many people who are responsive to these ads are obviously in a bad situation, but the real kicker is that they feel very lost in that situation. They don’t know where to turn for help – and here’s a service that’s pledging to solve that very problem. When you’re being overwhelmed by a problem, a safety rope sounds incredible, no matter where it comes from.

These programs do put a plan in place for you, but that plan is often an expensive one, both in terms of the direct cost of paying for the service and the indirect costs such as the effect their plan may have on your credit report.

Try the well-known tactics by yourself first, and use great caution if you’re considering using a debt reduction or debt elimination program. You are always better off trying to solve debt problems for yourself first. Try to assemble your own debt repayment plan, for starters – creating that plan (and going through a few basic steps to improve your interest rates) can often make a seemingly impossible problem seem quite accessible. If you still need help, ask for help from people you personally know first – not in terms of loaning you money, but in terms of helping you come up with a plan that works for you.

If you’re still having troubles, then consider some professional help – but be careful. I recommend seeking a non-profit credit counseling service first, as they’re not as motivated by the need to raise money from your situation.

Good luck!

As I’ve mentioned many times before, I start off every day with a pretty full to-do list – usually numbering twenty items or so. On a good day, I’ll accomplish most of them – write a few posts for The Simple Dollar, answer email, check the comments, handle some correspondence, work on another writing project, read a few chapters in a book, do some household tasks, and so on.

Inevitably, though, my list at the end of the day has a few things left on it – the things left undone. Quite often, these things are the low priority tasks that I’d like to accomplish during a given day.

The obvious question is why are there things on my to-do list that I regularly don’t accomplish? Obviously, I’m overstocking my to-do list each day – something that a lot of people do. When I put things on that list, I genuinely want to accomplish all of the things on the list, but I simply run out of time to get all of those things done.

Those things left behind eventually dig at me. I want to accomplish them, but I sometimes seem to never get around to them. What kind of things? I want to make another batch of homemade beer, followed by a batch of homemade wine. I want to write more short stories. I want to devote more time to reading for my own enjoyment. I want to rearrange the furniture in my office. I want to add a bunch of shelving to the garage. The list goes on and on.

This probably sounds familiar to you. I know it sounds familiar to a lot of the people I spent Christmas vacation with. I brought up this situation in various forms to different people, and almost to a tee, they all identified with it. Even my nine year old nephew did to a degree – he mentioned a book that he’s wanted to read for a while, but never opened.

Here’s the catch, though. In a few months, I will have done most of these things.

Sure, on a day to day basis, I do leave things undone, and those things do bother me. However, instead of just leaving those little things undone, I use several tactics to actually make sure that I do get around to them.

Here’s the game plan for getting around to those little things you’d like to find time to do.

Make one of them a priority today. The biggest reason that things on your list get left there is because you view other things as having a higher priority.

On my to-do list, there are usually a few things that are of the highest priority for the day. For me, that’s usually keeping up with my required writing – I need to stay ahead with my written words, after all. I usually build my day around those tasks and fill in the gaps with other tasks of less importance, but still need to get done – like reading email.

My solution? I take one of those tasks I’ve been neglecting and make it a top priority for the day. So, for example, today my “suddenly high priority” task is cleaning up my office – along with my writing, I’ll consider today a successful day if I get my office arranged the way I want it.

Do one of the tasks first thing in the morning. Another approach that works well for me is to do this low-priority task first thing in the morning, just as I start my day. This works well because of the flexibility of my schedule, since I can take on personal tasks at the start of my “work day,” but it also works in many office environments particularly if the task is related to your job.

Put off those big “essential” tasks that you start your day with (for me, I usually start off with writing whatever I think will be the most difficult article of the day) and start your day with that simple task. Don’t check your email. Don’t get started on the task of the moment. Instead, get that little thing that you’ve wanted to do out of the way. Write that little bit of code that needs to be written. Read a chapter of that book you’ve been intending to read. Get that office clean. Get that sticky correspondence out of the way.

Re-evaluate your use of time. If you’re consistently bothered by the things left undone, it might indicate that some of your life priorities are out of order at the moment.

Start by taking a serious look at the things you spend your time on during the day, from the minute you wake up until the minute you go to sleep. What things are you doing during that time that you would describe as very low priority? What things are you doing that seem redundant, pointless, or a waste of your time? What things are you doing that could easily be bridged with other things?

For example, let’s say the thing you’ve always wanted to do is start reading some classic literature, but you can’t find time for it. You don’t watch television, your job is jam packed, and so on. But, when you look at your daily schedule, you notice that you’re burning twenty minutes or so during your daily commute, and you’re usually just listening to talk radio. Why not turn off Glenn Beck and turn on an audiobook of For Whom the Bell Tolls?

Typical places to look for extra time include time devoted to entertainment (like that evening television block), time devoted to commuting, time devoted to gaming, time devoted to … avoiding work by surfing the ‘net, and so on. Just replace these things with some of the things you wish you had time for and suddenly you may find yourself getting things done.

Eliminate a few of your responsibilities. For some, though, the above tactics won’t help – they really are jammed to the brim and they’re leaving things on the table that they should be addressing.

If you’re in this situation, your schedule is overstuffed. You’re walking a tightrope and eventually you’re going to trip, fall, and drop something important.

This means that it’s time to start looking at eliminating a few of your responsibilities. It may be time to step back from some of your volunteer responsibilities – perhaps you can resign from a board you serve on or can step down at the end of a sports season when you coach. It might even be time to have a discussion with your work supervisor about the things on your plate in the workplace.

Every schedule needs some breathing room – without it, you’re begging for disaster. Now’s the time to start making some space in your own schedule.

Ask for help. One effective strategy for clearing out an overburdened schedule is to simply ask for help. Are there not items on your daily to-do list that couldn’t be easily handled with the aid of others? Here are three options for getting some assistance with your to-dos – so you have time to take care of all the things you want to do.

Delegate. If you’re in a position where you have the ability to move some of your most mundane tasks to another worker, take advantage of that. Delegate some of your busywork to an administrative assistant or to a lower-ranking employee. In some situations (I found myself in this situation, once upon a time), if your work load is full of mundane tasks that are keeping you from excelling in the “big” tasks of your job, you can ask for an assistant to help you with these mundane things – freeing you to achieve the things you’ve been aching to accomplish.

Ask. If you need help with the activities in your life, just ask for help from those around you. Ask your spouse to help out more with household tasks. Ask your friends for a break from some of your engagements with them so you have time to recharge your batteries. Ask your family members to help out with some of the personal responsibilities you’ve taken on helping with a sick family member. Just ask – if you’re a giving person, those around you will often step up to help you.

Trade. If there are tasks in your life that you struggle with, perhaps you might be able to clear up some time by trading skills with someone. For example, if you’re struggling with a computer that doesn’t work well – the crashes keep you from getting work done – offer to trade the skills you do have to a person who can tune up your computer. If you have kids, offer to swap babysitting nights with the parents of a couple of your child’s friends – that way, you’ll have a couple free evenings a month that won’t cost you anything in exchange for one night of focused babysitting.

Often, the little things in life are the ones we are most proud to accomplish. Don’t let some of the difficulties of life get in your way.

When I first started writing The Simple Dollar, I was working at a very stable 9-to-5 job that paid quite well. My wife and I lived in a very small apartment with our one child, a boy who wasn’t even a year old yet. Neither of our vehicles were paid off, but they were both still in fairly good shape. We had very little savings and still had a pretty big pile of debt in front of us – in fact, that’s why I started The Simple Dollar, to talk about money and learn along the way.

Roll forward to today. I’m now a full time writer, which basically means I set my own schedule when I work. My wife and I now own a four bedroom house (of which one of the bedrooms has been converted into an office). We now have two children – that boy is now three and a girl who is over a year old. Both of our vehicles are paid off, but they’re getting quite old and one of them is on the fast track to being replaced. We have very few debts now – just one student loan and a mortgage, no credit cards – and our savings are quite healthy.

In short, we’re in a completely different financial situation now than we were two years ago when I started The Simple Dollar.

When I go back and read some of the earliest posts on The Simple Dollar and consider them in light of those changes, it’s easy to see how much my own standards of frugality have changed and evolved. Here are some examples.

My earliest coupon strategy involved a lot of work and it was also fairly naive. Today, I spend much less time hunting for coupons, mostly just identifying great deals from the Sunday paper (ones that obviously beat warehouse prices and generics on products we already buy) and occasionally order more of those coupons from brokers.

I used to think saving money in my pocket change jar was a great way to save, but I came to eventually realize that having a lot of pocket cash was actually hurting me because it made spending money very, very easy.

When I was first divesting myself of a lot of my material goods, I spent way too much time trying to game eBay. Now, I only eBay items if it’s clear it will be worth the time – otherwise, I’m content to pass items on to people who will use them or else donate the items to Goodwill.

I used to worry a lot about slight differences in interest rates between banks. Now I realize that most of that worrying and sweating only amounts to a few dollars a year – and good customer service is worth quite a bit more than that if you need it.

In short, things have changed. As my financial situation has become more secure in many ways (and less secure in at least one key way, my “freelancing” job), my priorities for frugality have changed as well.

The biggest change has been a sharp reduction in my free time. With a large house to maintain and a second child that needs and deserves a lot of attention (in addition to the continuing love and attention for the first child), I simply don’t have as many free hours as I once had to chase down savings.

This means that my frugality has to focus more intently on the bigger items. What actions provide the biggest bang for the buck, particularly over the long haul? Spending an hour tracking down coupons to save $4 on my grocery bill? Or spending fifteen minutes making a bucket of homemade laundry detergent that will save $6 over the time we use it followed by making a homemade supper? In the past, I would have done all of these things – today, it’s a choice between the two.

A bigger question lurks behind all of this, though. Given that I’m in a better financial situation than I was two years ago, am I now behaving in a less frugal fashion? In other words, since I’m not as financially pressured as I once was, am I skipping over some of the frugal choices I could be making?

I believe the answer is yes.

That’s not to say I don’t spend my spare time working on projects that will save money. We make laundry detergent, cook lots of meals at home, and so on, and I thoroughly enjoy trying out new tactics that I discover.

Given that, we’ve reached a point of financial security where it makes sense for both of us to focus on other areas of growth. For example, if I have a spare hour today, I might spend it trying to build a new skill or read something that I can apply in my work, whereas two years ago I might have hunted down some coupons or tried to figure out a clever way to save some additional cash.

Yet, in the end, these different choices are just variations on the same theme. In both cases, we’re seeking to increase the gap between our income and our spending.

With frugality, the goal is to reduce your spending. With less money going out, you have more money you can save and apply to your debts and personal savings goals.

With other areas of personal and career growth, the goal is to increase your income. Again, with more money coming in without an increase in spending, you have more money you can save.

What’s the real key in both stories? Control your spending and keep it much lower than your income. If you do that, then frugality and career development go hand in hand – they both serve to increase the amount of money you can keep.

Another question: when is it better to be frugal than it is to focus on career growth? Frugality is something that tends to pay off pretty quickly. If you shave spending immediately, you’ll see the benefits very quickly in your checking account balance and you can immediately use it to keep your head above water.

Career growth and personal development pay off much more slowly. It may take years, in fact, before you see a dime’s worth of return on that investment.

Many people are in financial situations where they simply don’t have the time necessary to invest in career growth and personal development. They need to make changes now in order to keep their head above water. For them, cutting spending is the best choice as it provides immediate results.

Later on, though, when you’ve mastered a lot of great techniques for trimming your spending, you may want to look at other avenues for increasing the gap between your spending and your income, and working on your career is a great way to do just that. You can work on skills that improve your current career, or focus on laying the groundwork for something completely different. These investments of time won’t pay off immediately, but if you have your spending under control and spend far less than you earn, you have the time and breathing room to make it happen.

Times change, but spending less than you earn always works.

As the New Year rolls around, I find myself engrossed in several new books received over the holiday season. The largest, by far, is Neal Stephenson’s Anathem, weighing in at 960 pages. I’m currently deep into it – and enjoying every second. Stephenson is perhaps my favorite writer.

What’s up next on the docket? For Whom the Bell Tolls by Ernest Hemingway and Team of Rivals by Doris Kearns Goodwin are likely going to be the next two books I read once I finish Anathem.

Oh, how I wish I had a few more hours in the day just to read!

They Told Me That Madoff Never Lost Money If it sounds too good to be true, that’s probably because it is too good to be true. Ben Stein lays it out very well here. (@ new york times via get rich slowly)

The “One Big Lump” Theory of Your Money The advice here is simple: don’t think of your money as split up among a bunch of different accounts (401(k), Roth IRA, checking account, savings account, major assets, etc.). Instead, think of it all as one big lump. Then, you can treat the whole thing as a diversified portfolio of investments – and you won’t sweat as much if your stocks lose some of their value, because other parts of your “portfolio” will have gained value. (@ wisebread)

How to Protect Kids from Identity Theft This article takes an interesting angle on identity theft that I hadn’t considered before. In short, there’s no good reason to have your child’s identity out there – so protect it as much as you can. Your young child does not need a credit card to establish their credit history. (@ carrie & danielle)

Is Your Business Prepared for a Disaster? The Simple Dollar is as prepared as can be. I have plans in place for most of the disastrous situations I can think of. (@ freelance switch)

22 Secrets to Discovering Your Dream and Living It This is an excellent collection of advice on following your dreams, even if it seems like there’s no room in your life to give chase. (@ dumb little man)

Post-Christmas Hacks I’ve been thoroughly enjoying browsing the archives of Ikea Hacker over the past few weeks – lots of good frugal stuff there. The premise is simple: buy relatively cheap stuff from Ikea, then modify it to make something classy or interesting. (@ ikeahacker)

I was recently browsing a comment thread on Lifehacker when one particular comment stood out to me:

Having kids is one of the most expensive poverty-inducing things you can do right now. – kalibar

I understand completely where kalibar is coming from with this comment. Many estimates with regards to the cost of raising a child put that figure at $200,000-$250,000 per child over their lifetime – and that’s a serious chunk of change.

When I read these estimates, however, and I look at our own spending, something doesn’t quite add up. To put it simply, we’re not spending that much, even during these expensive years of the child’s life.

Let’s break down what we’re spending right now on our children.

For 2008, our biggest expense by far for our children was child care while we were working. Combined, we spent about $11,000 on child care for the two children this year. After that, costs went down quickly – we estimate that all other expenses combined (food, health care, toys, clothing, and so on) were roughly $7,000 for both children combined. Add onto that $1,200 per child put away for their college education (and I’ll ignore the tax benefits of this, as we don’t have to pay state taxes on contributions) and you have a total of $20,400 spent on both children this year – or $10,200 per child.

So, if those costs continued as they are over the next eighteen years, we would spend $183,600 per child during their childhood – not too far from those estimates.

But that $183,600 total is extremely naive.

Let’s look at several elements that will save us money during our children’s lives.

First, $6,000 of that $10,200 is tax deductible. It’s our child care tax credit, and it knocks roughly $1,800 (assuming a 30% overall tax rate) off of our total tax bill – or $900 per child. So, boom, we’re quickly down to $9,300 per child.

Second, we now have two more deductions on our tax returns. At $3,750 a pop, our two children shave $7,500 off of our taxable income. Assuming that same 30% tax rate, we quickly shave $2,250 off of our tax bill, so we’re down to $7,050 per child.

Third, the mere presence of the children changes our entertainment structure. Instead of going out to the golf course with the guys, I’m much more content to toss the whiffle ball around in the back yard with my son. Instead of going out to the movies three times a week with my wife (as was once the case), we stay home, watch movies in the family room, and play with our kids while doing it. Instead of eating out all the time, we put our daughter in a high chair, cook a meal at home, and serve her some of that delicious home-cooked food.

In short, both our entertainment and food budgets went way down upon the birth of our children. We knew this change would happen – it was part of our decision-making process when it came to deciding whether to have children. We knew that many of the trivial aspects of our life would change. We chose to give up most of our social opportunities and entertainment opportunities in exchange for being able to raise children in an enriching environment.

How much did this actually save us? This is something that’s very difficult for me to estimate, as I didn’t actually do any sort of budgeting or number-crunching during the year prior to our having children. However, based on what I can estimate from that year, we cut our entertainment and food spending (from 2004 to 2008) by $6,500 a year. That’s a drop of $3,250 per child, bringing our per-child expenses down to $3,800 per child.

So, let’s use that for the first five years of the child’s life – $3,800 per kid. After that, we lose almost all of the child care costs – but we also lose our $900 tax deduction – a total reduction in cost of $4,200. What’s that? During the sixth year, our total child cost is actually a gain of $400!

Obviously, as the child grows, we’ll begin to accrue more non-child-care expenses for them: education costs, growing entertainment costs, and so on. I’ll actually increase our expense per child at $500 per year after age six.

So, for the first five years, we spend $3,800 a year. At year six, we actually gain $400. Each year after that, we spend $500 more per child than the year before, culminating with an overall after-tax and after-savings cost of $5,600 during their eighteenth year.

What does that total up to? $52,800.

Now, you might quibble with my “back of the envelope” calculations described above and inflate some of the costs. You might even be able to double my estimated expenses by skewing the numbers around.

That doesn’t change the underlying point, however. Children aren’t the enormous expense that they’re made out to be. I’m not claiming that they’re not expensive – not at all. Instead, I’m saying that the quoted expenses bandied about – $200,000 to $250,000 over the child’s lifetime – looks only at expenses. It does not look at some of the savings that will come your way naturally during the child-rearing process, nor does it take into account the tax benefits of children.

What’s the take-home lesson here? Don’t be scared into not having children – or delaying having children for years – by the huge costs bandied about. Those costs only look at the “expense” part of the equation and don’t include the many ways that you actually save money once a child enters your life. For example, a single child, merely by existing, will save you thousands and thousands of dollars on your tax bill over their life.

So, do children cause financial burdens? Yes, they do – you’re going to be spending money on them. However, that expense is not as large as one might think at first glance, and when you consider the advantages of having children when you’re younger rather than when you’re older (if nothing else, you have much more energy to share with them), you shouldn’t choose to delay children without looking at the larger picture.

One of the biggest financial stories of the last month or so was the revelation that Bernie Madoff, a legendary stock trader if there ever was one, had perpetrated a giant Ponzi scheme on investors, bilking them out of fifty billion dollars.

Personally, I found the story fascinating, and apparently many of you have as well, because I’ve received a ton of questions and comments about Madoff and Ponzi schemes and pyramid schemes. Here are some of my thoughts on the most common questions brought up by readers, especially in terms of understanding what happened and what impact it has on you and your future moves.

What’s a Ponzi scheme?
Most of the descriptions of Ponzi schemes that are floating around out there in articles are really confusing, so I thought I’d start off with a clear example of a Ponzi scheme.

Let’s say I wanted to start a Ponzi scheme to get rich really quickly. I’d put an advertisement out there saying that I had an investment opportunity that would return, say, 25% of your investment each year, guaranteed. Obviously, that’s a claim that I’m not going to be able to back up with any real investment, but it’s a strong enough claim that I’m likely to get a few people who want to invest.

Ten people invest in my scheme the first year at $10,000 each, giving me $100,000 to work with. At the end of the year, I actually pay out that 25% to each investor, sending them checks for $2,500 each, leaving me with $75,000. These ten people are amazed by the success, so they each tell five friends about the scheme, plus my original ad draws in ten more people.

So, at the start of year two, I have fifty referred people into my scheme and ten more from my ad. They send me $10,000 each, giving me $600,000 to add to my account, leaving me with a total of $675,000. I keep promoting, and at the end of the year, I write seventy checks for $2,500 (that 25% return to each investor), totaling $175,000. That leaves me with $500,000.

Now, during that year, I’ve managed to attract 100 more customers, who send me $10,000 each at the start of year three. I now have $1.5 million sitting there, but at the end of the year, I need to pay out $2,500 to 170 customers.

I don’t want to do that, so I take that $1.5 million and vanish to South America. Of the investors, the original ten got 50% of their money back, then the next sixty got 25% of their money back. Everyone else got nothing.

So what is a Ponzi scheme? It’s one where you promise rich returns in order to get a lot of investors into your scheme, then you pay “returns” to the early investors out of the initial investments of later investors, until it looks like you’re going to be paying out more than you’re bringing in, at which point you close up shop and disappear with the loot.

How did Madoff get away with this kind of scheme?
Madoff’s primary tool for making the scheme work was the respect from others he had built up during his long career on Wall Street. He had been the chairman of NASDAQ and was intimately involved in the organization and technology involved in setting it up. He had also been running a fund for many, many years and had discussed at length his investing strategies (which were pretty complicated).

At some point along the line, Madoff began to not see the success that he had been claiming with his investing strategy and quietly began to convert things into a Ponzi scheme. He began to focus heavily on marketing his investment fund, attracting new investors all the time, and when these people would invest, he would use that money to pay out to earlier investors who were leaving the fund. So, for example, if he were taking in new investments and could actually return 8% on them, he was claiming a 12% return and actually paying that out to investors who were leaving the fund.

It’s easier to think of this in raw numbers. Let’s say you have $100 of someone else’s money and you have that invested somewhere where you can earn 8% on it. You tell that person (and everyone else who will listen) that you can earn 12% on their money. After the first year, that initial person wants their $100 back (with that 12% return), but five more want to invest. You take the $100 they invested, plus the $8 you actually earned, plus the $500 the new investors gave you, and you pay out $112 to the original investor. Now you have five investors, but you have only $496 and it’s only earning 8%. Next year, four of those investors want out with their $112 each (total $448). You have only $535.68 on hand, but you pay out the money. You actually only have $87.68 on hand right now (earning 8%), but the lone remaining investor believes he has $112 with you (earning 12%). It won’t be good when that last investor comes to collect his money.

That’s eventually what happened to Madoff. When the stock market tanked in late 2007 and 2008, investors wanted their money out in droves and he simply ran out of money to pay the inflated returns he had been promising everyone because he wasn’t actually earning those returns.

Can any of this possibly affect me?
Madoff’s scheme won’t directly affect you unless you were invested in the scheme.

So why should we pay attention to it at all? It’s a stark reminder of the danger of greed. Madoff got greedy with his own fund and kept seeking more investors so he could keep living the high life. The investors themselves were greedy because they were trying out investments that they didn’t really understand just in the hopes of getting a big return.

What warning signs should I look for?
Here’s the big one: if someone is promising you returns that blow away what can be found easily in the S&P 500, don’t believe it. They’re selling you something fishy. Investing returns in the double digits do not grow on trees, and if they’re guaranteed, something inappropriate is likely going on. Avoid it for your own safety.

That’s not to say you can’t earn returns higher than 10-15% or so – one certainly can. But a person is not going to find that return by investing in someone else’s investment package. You’re much more likely to find it in small events in your everyday life. For example, a couple years ago, I turned a nice and quick profit reselling Nintendo Wiis when they were very hot, earning far more than a 10% annual return. However, such opportunities aren’t sold as investment packages.

Similarly, if you don’t understand how an investment works, don’t invest in it. This is an investing rule I always follow. The only stocks I purchase are very broad mutual funds that basically amount to investments in the idea of American business as a whole. Why? I understand how they work. I don’t invest in individual companies. Why? I don’t have enough information to truly understand how they work. I don’t invest in non-index mutual funds. I don’t invest in hedge funds. I don’t invest in anything I hear about from friends or acquaintances.

If I don’t know how it works, I’m trusting someone else to understand it for me – and, more importantly, I’m trusting that person to always have my best interests at heart. With people like Bernie Madoff out there, it’s not a risk anyone should take.

Good luck!