This week, Sarah and I are going to our first parent-teacher conference, obviously regarding our oldest child.

He brought home his first report card, which showed pretty solid progress in almost every area. He has a few little things to work on, but it mostly seems good.

I’ve got a pretty good sense as to what I’ll hear at this conference, much as I’ve had a good sense as to what our children’s preschool teachers would say about our kids before they even said it.

Too Frugal For Your Own Good There’s a giant difference between frugal and cheap, which is the area Watson is really looking at here. (@ watson inc.)

give up hope (it’s a good thing to do. really.) Hope is mostly a bad thing because it’s a crutch that prevents you from taking action or making decisions. (@ white hot truth)

What Are the Differences Between the Rich and the Poor? I think the biggest difference is unexpected events. Another huge difference is brain chemistry. While the behaviors we control do play a pretty big part, both of those things have a giant impact and our ability to alter them is limited. (@ get rich slowly)

5 Things That Are Destroying Your Success I agree with all of these, and I think almost all of them can be corrected with better choices in the moment. (@ pick the brain)

Monica writes in with a great question:

I read Your Money or Your Life in 2002 and it changed my life. My dream has always been to be able to focus all of my energies on painting and I realized that if I didn’t actually make that my goal it would never happen. So I started drastically changing my life so that I could do that.

Over the last few months, I’ve begun to realize that I’m on the home stretch. I have $600,000 in my savings account that came from spending very little over the last decade. I own my home and have no debts of any kind. When I got my statement from the bank last month, I saw that I had made about $8,000 in interest over the last year on that money and so I started investigating how to set things up so that I could live in perpetuity on this money I saved.

Right now, I make about $1,000 a month on my paintings in profit after the expenses are paid. I have four or five slots at a local gallery, where I sell on average two paintings a month, which is about the same as my painting output as I do it in my spare time.

My living expenses are about $1,400 a month, meaning I need to consistently come up with a $400 shortfall each month beyond my paintings. The interest on that money in savings would provide that, so it would appear that I’m financially ready for this leap.

My question to you is how would you organize all of this so that it’s easy for me to step away? What’s the best way of moving from where I am right now to walking away from my job in six months or a year? I want to do this right, not just rush into something.

Right off the bat, I’d say that your current savings account is probably the best deal out there. My back-of-the-envelope math says that your savings account is earning you 1.2% or 1.25% interest or so, which is better than almost any other rock solid investment with a relatively short term out there on the market right now.

There are usually two options that people follow when it comes to setting things up for such long-term living. One, they buy certificates of deposit from a bank and set up a “ladder” or two, they buy long term treasuries from the government and live off of the payments. Let’s look at these two options.

CD “Ladder”
A certificate of deposit (often called a CD) is something you can buy from a bank. CDs are usually sold at a particular length of time and at a particular interest rate.

Typically, people will go to the bank, buy a CD with a particular interest rate and length, and wait for that length of time. At the end of that length of time, the buyer gets their money back plus the interest earned on the money during that period. If you try to get your money early, though, you usually have to pay a stiff penalty.

So, let’s say you find a 1 year CD at your local bank with an APY of 2%. You put $10,000 into it. At the end of the year, you get your $10,000 back and get another $200 back in interest. You can set this up to happen automatically so that the $200 gets rolled into your checking account and the $10,000 goes to buy another CD. All you see is the $200 in your checking account each year.

So, what’s a “ladder”? Let’s say you buy one of these CDs at the start of each month for a year. This means you’ve spent $120,000 on CDs over a year.

At the start of each month, one $10,000 CD matures, paying you $200 (assuming they’re always at 2% interest). That $10,000 then automatically buys another one year CD. That way, when that month rolls around next year, the same exact thing happens again.

The problem with this approach right now is that the interest rates on CDs are so incredibly low that you’re not really getting much of a boost at all beyond what interest rate you can get for an ordinary savings account. As the economy rebounds, these rates will go up and, eventually, CD rates will exceed savings account rates by enough to make it worthwhile.

If you’re thinking of this option, I offer a couple points of advice.

One, don’t put all of your money into this CD “ladder.” Keep at least a month’s worth of living expenses outside of this in savings as an emergency fund so that you don’t have to sell a CD early.

Two, wait to start this until there’s at least half a percent between a one year CD rate and what you can get in your savings account. Since you have to lock away your money for a year, you shouldn’t do it unless you’re getting some reasonable compensation for it.

Treasuries
Treasuries are sold by the United States government under several different names (treasury notes, treasury bonds, etc.), but they all function in more or less the same way.

In essence, when you buy a treasury from the government, it has a maturity date, a face value and a coupon value. Let’s say that the face value is $10,000 and the coupon value is 2% and the maturity date is 30 years down the road.

For the next thirty years, you’ll receive a payment every six months. That payment is equal to half of the face value times the coupon value. So, you’d receive a payment of $100 every six months for the next thirty years, at which point you’d get your original $10,000 back.

Most of the time, when you buy a treasury, you pay either a bit more or a bit less than the face value of the treasury, depending on the market at the time. The federal government makes buying them pretty easy using TreasuryDirect, but you can also buy them through brokerages.

A couple of thoughts:

Even if you own several treasuries, you’ll usually just get a single lump payment every six months. With good money management, this isn’t a problem. Of course, without good money management, you wouldn’t ever find yourself in this situation.

Treasuries are really really low right now. Just like CDs, I would be hesitant to lock down my money for such a long term with rates this low. I would wait for a while.

What Should Monica Do?
If I were her, I would jump on board with this sooner rather than later. She has more than enough money saved up to make this work and she already has her foot in the door with her painting.

I would live out of my savings account for a while until rates begin to rebound, then I would choose one of the above paths and set it up. Which one? I’d probably choose the CD ladder unless 30 year treasuries begin to have rates above 6 or 7%.

After that, the only worry is great painting.

Let’s just cut right to the chase here. It means being in control of yourself.

Every so often, a reporter will call me and ask me for my best financial advice and I always tell them “spend less than you earn.” It really does summarize the best way for someone to get their financial house in order. As long as you do that over and over again over a long period of time, you will be able to overcome any financial situation.

The challenge, of course, isn’t in following such a simple rule. Spending less than you earn is pretty clear.

The challenge is being able to exert that much control over your behavior. It’s being able to step up to the plate over and over again when it comes to not giving in to your impulsive wants. It’s being willing to do what it takes to improve your earnings before spending more money.

In short, it’s harder than that simple rule sounds.

The biggest difference between someone who is buried in credit card debt and someone who is debt free isn’t luck or income level. The biggest difference is self-control and the willingness to say no to most of one’s impulses.

I can tell you right now, from personal experience, that the single biggest change in my life in terms of finances over the past several years is simply gaining much more control over my impulse spending.

Six years ago, I thought nothing of stopping at a bookstore and dropping $50 on my way home from work. A trip to London? Well, I had a big credit limit. Need a vehicle? I don’t have any sort of down payment, but hey, let’s go! New video games? New DVDs? Let’s stroll through the checkout aisle without a second thought. Cable subscription with every premium channel known to man? Great!

This credit card’s reached its limit? Time to open a new one.

The number one reason I got into my desperate financial situation several years back is because I didn’t have any self control about how I spent my money. If I wanted something, I got it, even if it meant more debt.

The number one reason I got out of that situation was because I started adopting some self control when it came to my purchases. If I wanted something, I didn’t buy it unless I was already sure I could afford it while still making progress on paying off our debts.

How did I get that self control?

I started working for something other than the desires of the moment. I spent some time re-evaluating my life and I came to realize that there were an awful lot of things that I cared deeply about that I just wasn’t taking care of. I wanted a great life for my children, largely free from want when they were young at least. I wanted to be able to be at home with my kids when they were young as much as humanly possible. I wanted to someday be able to make a career leap into being a writer. I eventually wanted the ability to not work at all if I didn’t want to.

These were big dreams, and I was exchanging them all for the “freedom” to go buy a new DVD or video game when it would hit stores. I was swapping those big dreams for the ability to watch The Sopranos every week. I was giving up those big life goals so that I could splurge on more books than I could ever read – and I’d buy them less than a mile from a wonderfully stocked library.

The “freedom” to buy whatever you want whenever you want isn’t really a freedom at all. It’s another trap, one that keeps you from having the big things in life that you dream of, one that keeps you working in a career path that you might want to change, one that keeps you from wanting to open the mail.

It’s one that leaves you up at night, searching Google and hoping that someone out there has the answer to your financial situation.

I have the answer. Figure out the big things you want in life and put them first. Stop buying stuff that you don’t really need. Live lean for a while and focus on getting rid of your debts. Set aside just a little bit of “mad money” each week or month that you can splurge with, but keep your splurging within those narrow bounds.

In short, spend less than you earn.

The magic ingredient is self-control. Do you have it?