Vicki Robin is one of the authors of Your Money or Your Life, the personal finance book that, more than any other, influenced how I think about personal finance and how it relates to how people live their lives.

Recently, I had the opportunity to speak with Vicki and ask her a few questions about Your Money or Your Life and other related endeavors. I hope you enjoy her answers!

If someone were to walk away from “Your Money or Your Life” with just one idea in their head, what would you like that idea to be?

If people walk away with one idea I would pick “money is life energy”. We live in a financial, economic and money system that to most of us is incomprehensible, out of our control and unfair – yet vital to our survival. Seeing money this way, we are stuck in the scramble to get some of that thing out there into our wallets so we can get what we want and need. In reaction to that, we develop ideas about what money means – prestige, power, bad, good, a tool of the devil, evidence of God’s blessings, helpful, harmful. our daily transactions with the pieces of paper and metal and plastic in our wallets are distorted by these unconscious – so doubly powerful – emotionally-charged ideas. Plus we live inside a collective delusion that more is always better (more stuff, money, prestige, power, love, etc.) – which drives us to stress, clutter and debt, never having questioned that assumption or discovered how much is enough for us. When you understand money as YOUR life energy, the hours of your life you invest to put dollars in your wallet, you translate it into something knowable… and limited: the hours of your life. This transforms spending because you see everything from a cup of coffee to a new car in terms of “does this merit the hours of my life invested to get it” rather than “I want it, I deserve it, everyone else has one, expense be damned i’ll put it on my credit card.”

What is the biggest change in the overall message of the book since it was first printed?

Our original emphasis was on using the steps of the program to retire early so you can liberate your life energy for your true purpose. The people who’ve done this using the 9-step program have gone on to stellar lives of service and creativity, unleashed from the need to make their dreams make money. Over the years I’ve seen that everyone gets something from doing the steps, even if they don’t retire early. The original title of the seminar was “Transforming your relationship with money and achieving financial independence” and i’ve come to see that there are two parts to this powerful whole systems approach: there’s transformation and there’s independence. The transformation of your thinking and behavior with money doesn’t necessarily lead to exiting paid employment. People change to less lucrative but more fulfilling jobs. People go to half time, take sabbaticals, change professions, move to less expensive areas, engage in barter and even stick with their jobs but do them more boldly. All of this comes from the transformation. For me, the first definition of “financial independence” we give in the book – FI thinking or liberating your mind from the thrall of the consumer culture – is the crucial step that leads wherever the individual chooses to go.

Since the book was first printed, society has changed quite a bit with the advent of the internet, the advent of globalization, and so on. How do you think the big changes in society over the last decade or two have affected the message of “Your Money or Your Life”?

The current economic meltdown only makes FI thinking and practices more important. The distortions in the larger system are becoming daily more apparent, and a proven pathway to a more balanced relationship with money, getting out of debt, having savings and putting values and people (not money) first is crucial. I hope people simply learn to steward all their resources well, to attend to what has true value, to view frugality as freedom, integrity and self-respect. This isn’t an “alternative way of life” – it is a sane way of life and the way humans have lived for millenia… and will again.

One common problem that people have is that their spending tends to closely match their income level – if they earn more, they spend more. This makes reaching the long-term goals of “Your Money or Your Life” very difficult. Do you have any thoughts on avoiding this trap?

Not to be coy, but doing the steps in Your Money or Your Life leads naturally to avoiding the trap of ratcheting up spending in tandem with rising income. In the fifth step people set up a charting system (we suggest posting it on your wall) to see visually the trends of income and expenses over time. When you confront the fact that you are spending more than you earn month in month out it induces a natural desire to save. One practice that can help is delaying impulse buying. Go ahead and want it – the jar of chocolate syrup, the flat screen TV – and then walk out of the store. if you still want it in a week, consider buying it. Another practice would be to ask, “What else could I spend these dollars on.” Often when we impulse buy just because we can, we fail to realize there is a trade off – that some other way of spending resources is sacrificed.

How exactly do you judge the influence of “Your Money or Your Life”? What have you looked for over the years to see that it (and the overall program) has had an impact?

Of course it’s hard to know. Overall book sales (somewhere around 3/4 million in English, and more with translation into 10 languages and with it being for a long time the most requested book in the US library system) is one measure. The fact that everywhere I go I meet people who say the same thing: “Thank you. This book changed my life.” Ranking on Amazon is some evidence of current sales. Upon the reissue shot up to nearly the top 100 and now hovers in the top 1000. Before the reissue it was normally in the top 2000 – and that’s 16 years after initial publication. You could measure the number of other books that cite Your Money or Your Life (according to Amazon it’s 150). I feel very satisfied to have had the privilege of participating in all of this. I feel humbled by it – perhaps it’s Joe’s (Joe Dominguez, author of Your Money or Your Life and architect of the program, who passed away in 1997) program and my way of explaining it, but every person who thanks me is simply acknowledging their own hard work.

The New Road Map Foundation is mentioned in the back of Your Money or Your Life, but I confess to being unfamiliar with what it does. Could you tell me a bit about the NRMF and how it might be useful to someone figuring out their financial and personal future?

Joe, I and others created New Road Map Foundation in 1984 as basket to take in money from our teaching and – without retaining any money for ourselves – give it away to organizations concerned with a sustainable future. The design was to give people practical tools and perspectives to transform and liberate themselves in three areas: money, relationships and health – and to financially support others supporting the sustainability shift. Joe died in 1997, I stepped down from leadership in 2006 and now a new team of people has created several resources to help people do and teach the program. You can find them at http://www.financialintegrity.org/. I am no longer associated with NRM.

What are you currently involved with?

I was diagnosed with cancer 5 years ago which prompted me to reevaluate how I spend my own life energy. I’m well now, and perhaps in part because I dance every week, I’m in a choir, I’ve started an improvizational theater team and I’ve moved to a small town on an island and love so many aspects of community life. One of my main projects has been Transition Whidbey, whose purpose is to ‘catalyze our community to work together towards greater self-sufficiency in food, energy and economics (and everything else) in light of the major climate and resource shifts. ” I think the transition/relocalization process is the FI program writ large as a community. You take stock (map local assets – from food production to businesses), measure flows (understand where food and energy and products come from and go so you can maximize well-being for everything spent), evaluate, adjust, seek well-being and joy and community over isolation and stress and maximizing income production, and then refine all of this over time with greater productivity and conservation and mutuality. It’s a crucial need for a changing world – and working together with others on something challenging and meaningful is the most fun game in town. Also, I just finished the tour for the reissue of YMOYL and enjoyed the speaking so much I hope to do more – some corporate, some non profit and some college campuses. Any takers?

Most of these questions came directly from Twitter followers of The Simple Dollar – thanks for your help!

I’ve mentioned many times on The Simple Dollar that I enjoy brewing my own beer at home, and just as many times, readers have requested a walkthrough of this process along with some cost analyses.

Recently, I made a batch of porter and took some photographs along the way to illustrate the process. Let’s dig in!

Equipment
If your goal is simply to brew a batch of beer and consume it in one sitting with a group of friends, all you need is a brewing bucket, a bubbler, and a siphon hose, depicted below.

These supplies are available at any home brewing store.

When you mix up a batch of beer, it needs to ferment for a week or two, and this bucket makes it quite easy. You simply put your unfermented beer in the bucket, put the bubbler in the little hole on top of the bucket (the bubbler allows gas to escape without contaminating the beer), and let it sit. When you’re ready to drink the beer, just open the spigot and drink a glass – the hose can make it easier to pour.

Most home brewers tend to want to bottle their beer for long-term storage. If that’s the case, you’ll need to accumulate roughly fifty empty, clean beer bottles and also a simple bottle capper, again available at your local beermaking supply store.

This equipment, all together, will cost $20 or so and are often available in kits.

When making beer, I use a few optional items:

The large glass jug is called a carboy. You can use it for long-term storage of the fermenting beer – it doesn’t last too long in the bucket. Also, I use an auto-siphon (which makes it very easy to siphon beer out of the carboy) and a bottling tip (which makes it very easy to put beer in the bottles). You may also want a hydrometer, which you can use to calculate the alcohol content of the beer you make.

You don’t need these things to make beer, but it does make it easier in some ways. You can leave the beer for a very long time in the carboy and bottling is a much easier process with the auto-siphon and the bottling tip.

The only additional items you’ll need to make your own beer can likely already be found in your kitchen. You’ll need a large pot (one that can hold four gallons of liquid or so), a large spoon to stir it with, a thermometer, and a funnel (if you’re using a carboy). You’ll also need to carefully sanitize any equipment you may use – I use a bleach solution to make sure everything is as clean as possible.

Making Beer
As I mentioned earlier, I planned to make a porter. I found an interesting recipe on the internet:

6 pounds plain amber malt extract
8 ounces crushed crystal malt (60 L)
4 ounces crushed chocolate malt
4 ounces crushed black patent malt
1 ounce cluster hops (bittering)
1/2 ounce Williamette hops (finishing)

Along with these ingredients, there are a few standard items you’ll need for any beer making journey: a grain steeping bag (essentially a teabag for steeping the grains in the water), priming sugar, yeast, and caps.

All of these items are available at a beermaking supply store. I acquired all of the above for roughly $35.

A big part of the fun of homebrewing is that you can experiment with the recipes as much as you want. For example, my wife and I made an oatmeal stout that went off the recipe quite a bit and it turned out sublimely delicious.

Most beer making recipes follow a pretty standard procedure. Just pour two gallons of water into your large pot, heat it to 160 degrees F (80 degrees C) or so, put the grains in the grain bag and tie it off, then drop the grain bag in the water to steep for twenty minutes or so.

Above, I took the picture just after dropping the “tea bag” into the water. The steeping will cause the water to change color, usually to some shade of brown. Here’s what it looks like after the steeping.

Once the steeping is finished, you simply bring the pot up to a low boil and add the malt extract (a brown liquid) and the bittering hops. Leave this at a low boil for an hour (stirring it regularly), then five minutes before the end, drop the finishing hops into the mix. Once it’s finished boiling (it’s now called “wort”), you’ll need to cool it down to 70 degrees – I usually do this by dunking the stock pot into ice water in the sink. I then pour this into the carboy, though you can also do it in the bucket if you don’t have a carboy, then I add two to three gallons of filtered water. I then drop in the yeast, stir it a bit, then put the bubbler on top and let it ferment. Here’s a picture of my porter in the carboy at the start of fermentation.

Then you wait. Usually, you’ll wait for roughly two weeks. What you’re looking for is whether or not there are bubbles coming through the bubbler. Watch it for a minute – if you see no bubbles, wait another three days and you’re ready to finish it up.

When you’re ready to finish it, you simply add the priming sugar to two cups of boiling water, boil the priming sugar/water solution for a few minutes, then add that to the beer. You can then bottle it – if you’re not going to bottle it, you should serve it in the next couple of days.

Bottling is similarly easy. You just thoroughly clean 50 to 60 beer bottles, fill each one carefully, then put a cap on each one with the capping tool (basically, you just put a small disc on top of the bottle, put the capping tool on top, and squeeze). Let the bottles sit for a few weeks and then it’s ready to drink.

Is This Cost Effective?
The $64,000 question, indeed. Is home brewing a cost effective hobby when compared to just stopping at the store and picking up some beverages?

If you are comparing the cost of homebrew to the cost of well-made craft beers at the store (which is what most homebrews are comparable to), then homebrewing is actually quite cost effective. In the above example, I used $35 worth of ingredients to make seven six packs of porter, a cost of roughly $5 per six pack. This doesn’t include, of course, the cost of the equipment, but this cost is pretty small per six pack if you make many batches. Comparing this to my favorite porter at the local liquor store (Fuller’s London Porter, which cost $8.99 per six pack), homebrewing is substantially cheaper than the craft option.

On the other hand, if you are comparing the cost of making that same porter to the cost of a case of Old Milwaukee (or a similar very inexpensive beer, which can be found for less than $10 per 24 pack), homebrewing isn’t cost effective at all and is in fact more expensive than such beer. Admittedly, recipes for mainstream beers are less expensive than recipes for top quality porters – I called a homebrewing supply store and was quoted about $24 for the ingredients I would need for something approximating Old Milwaukee – but the homebrew is still more expensive.

So, the real question is what kind of beer are you replacing with homebrew? If you’re replacing great craft beers with your own homemade beer, your costs will in fact go down – and you’ll have found a very fun new hobby. However, if you’re content just buying some Miller Genuine Draft, homebrewing isn’t going to save you much money (if it saves you any at all).

This is the twenty-first (and last) 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 twentieth and final chapter, which is on pages 512 to 524, and the Jason Zweig commentary, on pages 525 to 531.

We’ve reached the end of the trail.

This chapter closes out The Intelligent investor by discussing the true message behind the book: companies that provide a great value are quiet, solid, and able to resist competition. They just pay out their dividends and keep doing what works.

Graham sums this up in one concept: the “margin of safety.” Simply put, it’s the idea that a company has established such a stable business that the company can succeed through many environmental changes. The economy goes up or it goes down – either way, the company is safe and stable. Competitors come and competitors go – the company survives. Management changes – the company rolls right through it.

Companies that have established themselves with such steadiness are the real value stocks. Quite often, companies like this are actually seen as boring (particularly if the company’s business is not in an exciting sector) and thus are often ignored in the “hype” talk on CNBC and the like. That means there aren’t a whole lot of buyers, even though the company is very strong, and that results in an undervalued stock. You buy it for cheap, ride the stability, and collect dividends along the way.

Sounds like a great plan to me.

Chapter 20 – “Margin of Safety” as the Central Concept of Investment
A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

Graham takes this point a step further, arguing that diversification is strongly correlated with margin of safety. In effect, Graham states that you introduce some additional margin of safety into your portfolio when you own a widely diverse array of value stocks that each have significant margin of safety.

Graham’s final note is pretty simple: investors get in trouble when they abandon their basic principles in the heat of the moment. One must approach investing with a set of fundamental principles and not abandon them in the heat of the moment.

Commentary on Chapter 20
Zweig closes out this final chapter by arguing that psychology is a major part of investing, one that many people overlook in the rush to find the big bargain. He goes so far as to argue that people are the primary risk in their own investing – poor decision making and abandonment of principles results in far more loss than an investment gone wrong.

Zweig actually ties this to Pascal’s wager, a famous suggestion by the French philosopher Blaise Pascal in which he argues that, since God’s existence cannot be determined through reason, one should behave as though God does exist, since living in that way (as opposed to living as though God does not exist) provides much more gain than loss. Similarly, since one cannot prove what will happen in the future with investments, we’re better off living by our investing principles than playing it by ear.

This is the final entry in the book club reading of The Intelligent investor. I hope you enjoyed it as much as I did.

A few days ago, I Will Teach You to Be Rich posted an article entitled Trent says The Scrooge Strategy is “short-sighted” — I respond with a challenge. The basic point of the post was that an average person is better off spending an hour eliminating their big bills instead of focusing on little frugal tips. For example, a person with $20,000 in credit card debt is better served spending an hour getting their interest rates reduced than they are spending an hour installing a programmable thermostat.

I don’t dispute that argument a bit. Instead, my feeling is that a person is in the best shape of all if they take two hours and do both. The programmable thermostat won’t be as big of a boon as the interest rate reductions would be, but if you can save $200 over two years from an hour’s worth of work, you should definitely do that, too.

It’s easy to focus on the five biggest financial drains in your life and take care of them. It’s a great way to get started on turning your financial life around. However, if you simply shut off the spigot after dealing with those five things, you’re missing out on a ton of things that are quite worthwhile.

I think that this “challenge” actually reveals several interesting things about personal finance.

First, there is a sizable group of people who really are only interested in the “big five” things. The only behavior that they’re interested in changing in their lives is the behavior that can result in a large, very tangible, and very straightforward financial benefit. For people in this group, calling the credit card company to get a rate reduction that reduces the monthly payment by $50 is worthwhile, but replacing a light bulb that can save $0.50 a month isn’t worthwhile. I think that Ramit is mostly speaking to this group.

There is also a sizable group that are interested in some degree of frugality. These are the people who are on board with the $0.50 a month saved due to a light bulb change, but they start to balk at things like rewashing Ziploc bags. For the most part, this group is governed by some form of “hourly rate” of frugality, whether they quantify it or not. Is this frugal act worth my time over the long haul? That’s the key question for this group. I’m in this group, and I think quite a large portion of my audience is as well.

There’s also a group of what I would call “frugality extremists.” These are the Ziploc bag washers, the people who will gladly invest quite a bit of time to save a dollar or two. I find these people and their ideas interesting, but not necessarily applicable to my life.

I think people tend to go through a few big, general stages during their financial recovery. At first, people try the “big” things. They make a debt repayment plan. They make a budget. They get their interest rates reduced on their credit cards. They eliminate a few monthly bills. They set up some automatic savings and automatic investing plans. And, for some people, that’s enough. These steps get their financial lives under some semblance of control, so they stop here, viewing further steps as an unnecessary incursion into their life.

Other people are empowered by reductions in their spending and continue to seek out smaller and smaller solutions. They tend to adopt what are traditionally called frugal tactics into their lives. They re-evaluate all of their spending carefully and start trimming the fat that they discover. They try things like shopping lists and installing new light bulbs and preparing meals at home and even things like making their own laundry detergent.

Eventually, people find a balance between the way they want to live their life and the desire to save more money. For some people, homemade laundry detergent is a step too far; for others, it’s a great tactic.

At this point, people tend to start getting into good financial shape. Their net worth goes from negative to positive and they start building up some serious savings. They pay off their house. They start investing.

And eventually, they reach a point where they can make serious life decisions. They can jump to the career of their dreams. They can retire really early.

As you can see, there is no single path that everyone follows to financial success, but there are some milestones that many of us share. The “challenge,” in my eyes, is simply figuring out that path for yourself. How far down the frugality path do you want to go? What are your dreams?

That, my friends, is the real challenge.

From my perspective, once you enter into the realm of marriage, building and maintaining a successful marriage is actually a big part of personal and financial success. A solid marriage not only results in people sharing resources together, but a marriage also provides a lot of emotional support, cheerleading, and encouragement to succeed.

In the most recent reader mailbag, I answered a question about marriage from a reader named Sally: You and your wife seem to have a very strong marriage. Can you give me some tips on how to keep my marriage strong? What do you do to keep it that way?

After I posted the question and my response (which I quoted below), I received a small flood of emails from readers telling me about their troubled marriage at length and asking me for more suggestions along these lines, something that I was happy to oblige in the first email, but by the time the twentieth or so arrived, I realized that this would make a better standalone post than simply reiterating the same ideas in a long string of emails.

First, a general note: my belief is that a successful marriage is built one moment at a time. From what I’ve learned, a marriage is like a stone wall: it’s a mix of big things and little things, all assembled together to form something strong. Sure, there are a lot of big rocks in that wall (the big moments in your marriage, like your wedding day or some other big, key moment), but those rocks don’t fit together without a lot of little rocks to fill in the gaps and make them strong.

Most marriages seem to have little problem with their big moments. It’s easy to think back and think of big, happy moments in the marriage. I tend to believe that most marriages fail because of the small moments. Our individual lives get so busy that we fail to spend the time and effort to put those little stones in place, and when a bit of pressure is applied, the wall falls apart easily. On the other hand, when the little stones are there to fill in the gaps, the wall becomes strong and able to withstand anything that comes along.

I also believe that the little things are hard. Often, it’s not a matter of desire – almost all of us genuinely want to make our marriages work and work well. The challenge for many is that we get wrapped up in the complexity of our own lives. Others simply have difficulty expressing or showing what we feel.

What follows are twelve little things I do quite regularly to put those little pieces into my marriage. Please, use as many of these as seem reasonable. The first five are quoted from my response to the original question in the mailbag.

I tell my wife I love her every single day. I usually do it in the morning before she leaves the bedroom, and on weekdays I’ll also tell her when I see her in the evening for the first time. I usually couple it with a kiss. It’s so simple, but it’s a constant reminder of the fact that I do love her, no matter what.

I ask about her day, listen, and ask follow up questions. I do this not only so I can keep tabs on her professional life, but also to give her a great chance to vent about her situation. Everyone needs to talk about themselves sometimes to someone who is interested – I try to provide that for her as often as I can.

I try to surprise her on a regular basis. I’ll spend an hour preparing a really excellent supper when she doesn’t expect it. I’ll spontaneously give the kids a bath when she’s comfortable on the couch under a blanket, even if it’s her turn. Doing these little unexpected things not only shows her I care, but also often compels her to do similar things for me.

I hold her hand. I do this all the time, whenever it crosses my mind and seems appropriate. I’ll just hold her hand gently while we’re talking or we’re riding in the car or we’re waiting for an appointment or we’re sitting on the couch in the evenings.

I talk about EVERYTHING with her and let her determine what’s interesting. If something is concerning me, I don’t hide it from her. I tell her about it. Most of the time she’s interested and we’ll discuss it – sometimes she’s not and I let it drop (this is key – if she’s not into the topic, I don’t push it). Either way, though, she gets the message that I’m making an effort to share and be open.

I work on building a positive relationship with her family. Whenever I visit or see anyone in her family, I make a special effort to try to establish or build upon a strong relationship with them. This accomplishes several things: it makes her more at ease in a family situation, it helps me to build stronger ties with people that are important to her, and it helps me to understand the influences that were around her as she grew up.

I send her messages during the day. About once a week, during a time where my wife is really present in my thoughts, I send her a little simple note by email. All it says is something along the lines of “I was thinking about you just now. I can’t wait until I see you this evening.” It’s just a very simple way of letting her know she’s on my mind and in my heart.

I put careful thought into gifts I give her. Sure, it’s easy to just run out and get a generic gift to cover yourself during an anniversary or a birthday. However, a gift with some real thought behind it means substantially more than an obviously off-the-cuff gift.

I encourage her to follow her passions and interests, even if they don’t inspire or interest me. If my wife chooses to spend significant time on a project, it’s obviously something that’s important to her. That doesn’t imply at all that it has to be important to me. If she’s involved in her own project, I give her positive encouragement and then work on my own interests instead of saying things like “that seems like a waste of time.”

If she needs me, I willingly contribute to those passions. If something genuinely excites her and she wants me to experience it, I willingly involve myself in whatever it may be: a particular type of art, a craft project, a yard project, whatever. Even if I don’t enjoy it, I do have the opportunity to learn more about my wife and what she’s passionate about, which means that my understanding of her grows.

I look for opportunities to build mutual friendships. The idea that there is a group of people that are “my” friends and another group that is “her” friends can be a big dividing factor between us. Instead, I often focus on building friendships and relationships that we share with others so that something of a community of friendship and love grows up around us.

I hold her every night, even if it’s just for a moment. I might be completely exhausted when I go to bed in the evening, but I take a moment to move close to her, put my arm around her, and hold her close, even if it’s just for a minute or so. That moment of physical contact to end the day is a simple sign of love.

Dennis writes in with the following question about CD rates:

My credit union has CDs. The rate for a three-month CD is 1.88% while the rate for a one-year is 2.37%. Is my math reading correctly when I come out with $2.37 (on a $100 deposit) for 1 year but if I chose to deposit in the three-month CD four times in a row (thus equaling the 1 year CD) that my return would be $7.52 (assuming the rate remains the same)? At the moment I’m not debating whether or not a CD is the best investment, simply asking about this particular set up.

This is actually a fairly common misconception that people have about how certificates of deposit work. In truth, the one year certificate of deposit will earn you noticeably more than the three month CD. Let’s dig into how this all works.

CDs are quoted with their annual rates of return. When you see a rate quoted on a certificate of deposit, you actually are seeing the annual rate of return on that CD – in other words, that’s the percent of your investment that would be earned if you held the investment for a full year. So, the three month certificate of deposit above would earn 1.88% only if it were held over the course of a full year.

A very simple example So, let’s say Dennis buys one of those three month CDs. This CD only pays interest upon maturity and earns 1.88%. Dennis buys one for $1,000. Over the course of a year, this investment would have earned $18.80, but the CD only lasts for three months, thus earning Dennis $4.70 after three months. If he were to take that $1,000 and buy another CD, then do it again, and again, at the end of the year, Dennis would have earned his $18.80.

Compounding Many certificates of deposit compound monthly, which means they pay out 1/12th of the year’s interest at the end of each month. So, in the above example, Dennis would actually see an interest payment of $1.57 every month.

Many certificates of deposit also allow you to put that earned interest directly onto the balance of the certificate of deposit, meaning it would also earn interest along the way. Let’s say Dennis bought a three month certificate of deposit under these conditions for $100,000. At the end of the first month, the certificate would earn $156.67 in interest, which would then be added to the balance of the certificate, making it worth $100,156.67. At the end of the second month, the certificate would earn $156.91 in interest, bringing the balance of the certificate to $100,313.58. At the end of the third month, the certificate would earn $157.16 in interest, at which point the certificate would close. As you can see, compounding monthly is much better than compounding annually.

Buying a certificate of deposit When you go to buy a certificate of deposit, it’s not enough just to know the rate and the term. You also need to know how often it compounds (the more often, the better) and if that compounded money rolls into the balance of the certificate (if it does, that’s better). Although these factors aren’t enough to overcome a large difference in rates, they do make all the difference for small differences in rates.

Dennis, in your situation, if you’re wanting to put your money away for a full year, the one year certificate of deposit is the best option. Buying consecutive three month certificates will not earn you as much as the one year certificate will.

Good luck!

First, an update on my own podcast: I’ve done some test recordings of episodes and am currently showing them to some potential sponsors. I hope to launch the podcast in April or May. I always like to have several episodes done in advance in case of emergencies, much like I do with Simple Dollar posts, so I’m going to have to finalize any sponsorship agreements, write several episodes, and record them before I launch things.

Also, people keep asking me for podcasts I like to listen to. Here are the six podcasts I keep up with: Marketplace, This American Life, TED Talks, Slate’s Audio Book Club, 60 Minutes, and (sigh) Pardon the Interruption. The latter two are television programs that I actually find much more compelling in audio-only form. I occasionally listen to several others, often listening to three or four episodes of them at once, but those are the six I subscribe to and listen to immediately when I see a new episode pop up.

Here are some articles of interest to whet your whistle.

101 Tax Deductions for Bloggers and Freelancers This was a very useful list for me as I began preparing my taxes. As a blogger/freelancer, every legitimate deduction that I can find is directly equal to money in my pocket. (@ wise bread)

Five Strategies for Surviving a Tough Boss This article’s for you, Bill. A reader named Bill wrote me with tales of his nightmarish boss and asked how he could handle it, since he was considering quitting. I was ruminating on a post (and doing some research on it) when this article popped up that answered things very well. (@ zen habits)

Got Any Money Savings Tips For Us? I love it when a popular blog just opens up the comments for people to submit great money saving tips. Here’s a Chicago-centric one that I really enjoyed. (@ gaper’s block)

The Dangers of Personal Branding I’ve experienced this to a degree. Whenever I’m interviewed, people seem to assume that I must be “Captain Cheap,” a suggestion that long-time readers will find rather comical. (@ freelance switch)

Personal Finance Software Survey Lots of people swear by Microsoft Money and Quicken, but I find Excel/OpenOffice to be the right solution for me. (@ frugal dad)

Over the years, tons of readers have written into me with some variation on the same question: is it appropriate to use my credit card as an emergency fund? Here’s a sample of that question, from Eddie:

I guess what I’m asking is, if I have such a large credit limit that’s not being used, why don’t I just use that as an emergency fund? If the odds that I’m going to ever use it are fairly rare, why should I just keep cash in a savings account when I could be investing it and earning more with it elsewhere?

This is a pretty common situation, actually. People often view their credit cards as their emergency fund – if something happens, they can just throw it on the plastic and take care of the bills later. Most of the time, this scheme works like a charm: it’s easy to utilize this method to handle a lot of simple emergencies like cars breaking down and so on.

Here’s the problem, though: the purpose of an emergency fund is to reduce your personal risk. However, using a credit card for that purpose actually adds significant risk to the emergency fund situation. Here are some of the risks that you face when using a credit card as your emergency fund:

The “size” of your “emergency fund” is at the mercy of the credit card companies. Credit card companies can change your credit limit on a whim. Miss a few bills? Credit card company tightening their belts? The end result of such events can often be a credit limit tightening – and that means you’ve just lost a big chunk of your “emergency fund” right at the moment you need it.

The interest rates can be painful. You lose your job, so you start using that credit card to buy groceries and gas. Eventually, you rack up $5,000 in debt or so on the credit card. Then, you get your job back – but that debt’s not easy to repay, especially at a 19.9% interest rate. Your minimum payments each month are in the hundreds and that just covers the interest and a tiny chunk of the principal. By the time you repay all of it, you will have paid thousands in finance charges. In short, for real emergencies that require a lot of money, the credit cards will bite you hard.

You’re exposed to Murphy’s Law unnecessarily. Using your credit card as an emergency fund opens you up to lots of other avenues of minor risk as well, each of which can bite you when a real emergency comes along. Identity theft is one potential risk. Card use is another risk – the moment at which you need it for an emergency might be a moment when you’ve used it for something else.

A cash emergency fund stowed in a savings account has substantially less risk than the credit card option. It’s safe, secure, and won’t suddenly disappear on you.

There are two big arguments I’ve heard against using a cash emergency fund:

It’s hard to save up that much money. If you want to have six months of take-home in your emergency fund, you’re going to have to save seriously and diligently for a long time. With the credit card “solution,” you can have the card in hand very quickly. This convenience causes many people to justify using the credit card.

If you find yourself in this situation, using a credit card because it’s hard to save up that much cash, your best solution is to establish an automatic savings plan to build up that cash emergency fund on your own. Obviously, if you’re in a situation where your emergency can really only be handled by a credit card, you’ll have to use it, but you should not choose to remain in that situation over the long haul. Take action to make your situation safer – start an automatic savings plan to sweep some cash from your checking account to your savings account automatically on a regular basis.

A savings account doesn’t earn very well. Others look at the cash held there as an investment and thus argue that it should be put into something that has a greater potential for earnings. The argument against this is that an emergency fund is intended to be both stable and liquid – you can always access it and it doesn’t unexpectedly lose value. If you were to invest this cash in other resources, like stocks, you would lose stability and also perhaps lose some of the liquidity (depending on how you invest it).

My suggestion here is to consider your emergency fund to be the cash portion of your overall portfolio – it’s the steady and stable part of things. This allows you the freedom to seek out other investments that are perhaps more aggressive than you might otherwise consider, like stock investing in developing countries.

Here’s the take-home: a cash emergency fund, stowed away in a savings account, is as safe and secure as you can possibly get, which is exactly what you want from an emergency fund. If you’re in a situation where you rely on a credit card for your emergency fund, you need to start transitioning away from that – try an automatic savings plan to gradually move cash from your checking account to your savings account.