Quite often, I’ll get emails from readers saying that they’re looking to invest their money and that the money they want to invest is currently sitting in a savings account. What these readers often overlook is that the money in their savings account is already invested.

An investment simply means that you’ve put aside a resource for future use with the hopes of gaining a return on that money. A person can invest in anything from baseball cards and stamps to real estate and stock investments.

I usually look at three big factors when thinking about an investment.

Rate of return How much of a return on my money can I reasonably expect with this investment? For example, over the long term, a reasonable rate of return to expect from a broad stock market investment is 7%. If you invest in a savings account, a reasonable rate of return is about 1% right now.

Risk How likely is it that I’m going to get the return I expect with this investment? With stocks, there’s a significant amount of risk, particularly over the short term. If you bought heavily into stocks in early 2008, you probably lost 40% of your money. On the other hand, if you put your money in a savings account in any year, you had a small positive return, just like clockwork.

Liquidity How easy is it for me to get my money out? Savings accounts are incredibly liquid – all you have to do is visit an ATM. Stocks are a bit less liquid, but you can usually sell them quite easily through your broker. Other things, like real estate or CDs, are not very liquid, as you incur losses for cashing out a CD early and real estate sales require a buyer before you can get your money out.

As you can see, a savings account registers on all of these factors. A savings account is a highly liquid, very low risk investment with a low expected rate of return.

You can make similar statements about a lot of investments. An index fund of all American stocks is a highly liquid, moderately risky investment with a medium expected rate of return. Vintage baseball cards are a fairly illiquid, moderately risky investment with a medium expected rate of return (based on my experience). A CD is a fairly illiquid, very low risk investment with a fairly low expected rate of return.

The question then becomes how do you decide where to put your money? Again, I use a few simple rules of thumb to compare the investment types.

The sooner I need the money, the less risk I’m willing to accept. If I’m saving for retirement, I’m fine with significant risk. If I’m saving for a car I intend to buy in six years, I’m fine with some risk. If I’m saving for an air conditioner repair in five months, I don’t want much risk at all.

If I’m going to possibly need the money quickly, I need it to be pretty liquid. In other words, I would not put my emergency fund into real estate or collectibles, nor would I put it all into a certificate of deposit. These investments have their place (a long-term goal), but they’re certainly not for everything.

If I absolutely must hit a certain dollar amount at a certain time, I’ll lower my risk and focus on raising contributions. For example, if I have to have $100,000 to pay off my ARM in four years, I’m not going to want to put that money in a risky investment where the balance can unexpectedly slip away from me. I’d rather put it in something with a lower rate of return with much lower risk and focus on increasing the amount I can save.

Rate of return rarely plays a role in these decisions. I generally focus on liquidity and risk first and foremost, and when I have those figured out based on why I’m investing, I try to find the best rate of return for that amount of risk and liquidity.

Thus, quite often, savings accounts are my preferred investment vehicle.

One common theme in the emails I get this time of year is the cost of wrapping paper. Many people find it difficult to swallow that they’re investing $15 to $20 into paper that’s simply there to cover a box and will be torn to shreds on Christmas morning – and, frankly, I don’t blame them. For us, that means supplies for multiple homemade gifts or even a moderately priced store-purchased gift for someone. I don’t know about you, but I’d rather give a gift than give some shredded paper.

So, what can we do about it? Here are some options to consider. I have used all of these at various points.

Plain brown paper This is an old standby, of course. It creates a classic look for packages (“little brown packages tied up with string…”). You can easily jazz it up a bit with a stamp and some ink, covering the paper with little red candy canes or other festive shapes.

How can I get this inexpensively? The easiest way is to just request paper bags at the grocery store. Most grocery stores will bag your groceries in brown paper bags upon request. Then, when you’re home, save the bags. When you’re ready to wrap, just cut off the bottom of the bag, cut a single slice through the side of the bag, then flip it over so that the bag labeling is on the inside of the package.

Newspaper When I was growing up, many of my relatives would give gifts wrapped in the comic pages from the Sunday newspaper. They’d just save them throughout the year and use them as their gift wrapping for all gifts. I actually thought it was incredibly cool at the time, especially since the relatives that did it usually gave interesting gifts. When I was in college, one friend of mine would wrap all of his gifts in old issues of The Onion that he’d get from his parents.

How can I get this inexpensively? There are lots of ways to get free or discounted newspapers. For instance, one local gas station will give away old newspapers if someone is willing to take them, so I would often get the Sunday paper for free there early on Monday morning (for the coupon flyers, if nothing else). You can also keep an eye on recycling bins or else pick up copies of the local free newspaper.

Themed magazines A few years back, I started saving old magazine covers for a project. I simply asked some friends if I could have their old unwanted magazines and saved the covers from them.

When it came time to wrap gifts, I took covers from magazines associated with the gift itself and used it for the wrapping paper. For books, I used things like The New Yorker or The Atlantic. For CDs, I used covers of Rolling Stone. For an article of clothing that I gave to a female, I used a fashion magazine (I think it was W). For a piece of sporting equipment, I used Sports Illustrated.

How can I get this inexpensively? Tell your friends that you’re working on a project and you’d love to have any old magazines they have laying around. You’ll be surprised how many magazines come out of the woodwork if you ask. Then, just save the covers from them throughout the year and try to associate them with some of the gifts you’re giving.

Children’s drawings If you happen to have an excess of children’s art, this can make a perfect wrapping paper for gifts for the child’s grandparents or doting aunts or uncles. I can certainly say that we have an excess of children’s art around our home.

How can I get this inexpensively? If you have a child in preschool or elementary school, chances are you’re going to wind up with more art than you know what to do with. Just save some of the more charming pieces (that you’re willing to part with) and use them to wrap gifts.

Plan ahead If none of these really appeal to you, the best way to inexpensively wrap gifts is to simply plan ahead – way ahead. Just after Christmas, wrapping paper is usually on deep discount at department stores, so that’s the best time to buy yourself an abundance of the stuff.

How can I get this inexpensively? Take a bit of time to buy some paper between Christmas and New Years and stow it away in a closet for next year. Problem solved.

Each week, I highlight ten things each week that inspired me to greater financial, personal, and professional success. Hopefully, they will inspire you as well.

Sarah and I spent a lot of time assembling Christmas gifts this week, so our mind was on the spirit of the season.

1. ifttt
Have you ever taken pictures with your camera and wished they would automatically show up on Flickr and Facebook? Ever wanted an email sent to you with a note if someone posts something new on their blog? ifttt does all of that.

This really is a pretty cool tool, and it’s easy to set up, too. I’ve been playing with it all week.

2. Emerson on sticking to principles
The best way to feel good about accomplishing anything is to know that you did it by sticking to your guns.

“Nothing can bring you peace but yourself. Nothing can bring you peace but the triumph of principles.” – Ralph Waldo Emerson

To me, this is one of the big keys of personal finance. There is a lot of internal reward from having the willpower to stick to a goal and make it happen.

3. Sir Ken Robinson on how schools stifle creativity
As many of you know, my wife is a schoolteacher. She also feels that by teaching to a standardized test, the teachers are stifling the creativity of their students. They stuff the students’ minds with facts, but they don’t work on creatively using those facts.

What’s the solution? I’m actually opposed to standardized testing as I don’t think it relates to the quality of the students graduating. What does? I don’t think there is a way to objectively measure the quality of students. You can measure how many facts they’ve absorbed, but you can’t measure how they can put them to creative use.

4. Digital: A Love Story
This is an amazing little game that tells a beautiful story. It’s set in 1988 (with 1988-appropriate computer graphics), but …

It’s just one of those things that’s worth taking some time to experience. It’s just a great story told in a clever way.

5. John D. Rockefeller on charity
While I don’t completely agree with this quote, it has caused me to think quite a lot over the years about charitable giving.

Charity is injurious unless it helps the recipient to become independent of it. – John D. Rockefeller

There are some charities worth giving to that do not have this as a goal because independence is not a realistic goal for those they help, such as developmentally disabled adults. However, if a charity is helping people who are able to help themselves, I think it’s vital that they try to get those people on a path of independence. Food for thought, as any good inspirational piece should be.

6. Dorothy Parker’s The Maid-Servant at the Inn
Dorothy Parker is one of my favorite poets. I’ve always loved her wordplay, and I absolutely love this poem about the nativity. The perspective and word choice and rhythm are just amazing.

“It’s queer,” she said; “I see the light
As plain as I beheld it then,
All silver-like and calm and bright-
We’ve not had stars like that again!

“And she was such a gentle thing
To birth a baby in the cold.
The barn was dark and frightening-
This new one’s better than the old.

“I mind my eyes were full of tears,
For I was young, and quick distressed,
But she was less than me in years
That held a son against her breast.

“I never saw a sweeter child-
The little one, the darling one!-
I mind I told her, when he smiled
You’d know he was his mother’s son.

“It’s queer that I should see them so-
The time they came to Bethlehem
Was more than thirty years ago;
I’ve prayed that all is well with them.”

7. John Stuart Mill on desire and happiness
The one thing I’ve learned about desires is that as soon as you sate one, two more pop up to replace it. The wants grow within you.

“I have learned to seek my happiness by limiting my desires, rather than in attempting to satisfy them.” – John Stuart Mill

It’s far better to seek happiness and pleasure in other things.

8. Advent candles
One of our traditions is to light candles on our table centerpiece during the four weeks leading up to Christmas. I took several pictures of our lit candles, but none were nearly as beatiful as this image by Per Ola Wiberg:

It’s a nice, soothing reminder that the season isn’t about presents.

9. Sophocles on preparation
No matter how well planned out we think the future is, chance often destroys those plans.

“Fear? What has a man to do with fear? Chance rules our lives, and the future is all unknown.” – Sophocles, Oedipus Rex

The best way to prepare is to improve yourself and keep some cash on hand. The more you focus on these things, the better you’ll be able to deal with whatever life hands you.

10. Frank Sinatra singing Let It Snow
This is one of my favorite winter songs.

I have a ton of respect for Frank Sinatra as a singer. He’s so good at phrasing and making the words he’s singing absolutely clear while staying in tune and adding immense character to the song. I wish I could sing even a tenth as well as he does.

From about mid-October to roughly the end of March, we have some form of soup for dinner two or three times a week. It’s incredibly easy to make, has infinite variations, and is really inexpensive. What’s not to love about it?

Here’s exactly how we do it.

The Basic Tools
Obviously, the most basic thing you need to have is a soup pot or two. We often make soup in these 5 1/2 quart enameled cast iron pots, but any pot that ranges from five quarts or so on up will be sufficient for making soup. I highly recommend having a lid.

You’ll also need to have a ladel, as it makes serving the soup into bowls much easier. You’ll also, of course, need bowls and spoons for eating and a spoon for stirring the soup.

That’s really all you need in your kitchen (aside from a stovetop) to make soup pretty much any time you want.

The Basic Ingredients We Always Have on Hand
We keep a steady supply of a few key ingredients on hand at all times for soup making.

Our three most frequent soup ingredients are barley, egg noodles, and dried beans. These form the backbone of many of the soups we make, plus they store quite well in the pantry in their dry form. When we find a sale on these, we stock up every time.

We also keep a few basic seasonings on hand, such as salt and pepper. In addition, we also usually keep some homemade vegetable stock around for the liquid of the soup. We also keep some vegetable boullion around in case we’re out of stock.

If you like beef soups, use beef stock or boullion instead. If you like chicken soups, use chicken stock or boullion instead. Keep whatever it is that you like around.

In addition, we keep a few basic spices around: thyme, sage, and bay leaves, for starters. These work well in most soups.

We also keep oyster crackers around as a condiment for the soup.

This is actually all you need to make a flavorful passable soup at the drop of a hat. Just cook the main ingredient, add some herbs and pepper, and simmer for a while until it smells too good to resist.

Varying Things Up
Of course, you’re going to want to vary this for variety’s sake. How do you do that?

The way we do it is that we simply watch for vegetables that are on sale at our local grocery stores. If potatoes are on sale this week, we use potatoes in a batch of soup. The same goes for almost any vegetable, from turnips to kale to spinach to corn. Whatever’s fresh and inexpensive, we try it and use it.

You can also include meat in your bargain hunting, too. If you find chicken or beef or pork on sale, pick it up and use it as an ingredient. If it sounds good to you, it probably is good.

How do you cook it? The first step is to simply boil your liquid ingredients – water and/or stock. You’ll start with this, then likely add more liquid during the cooking process if the soup gets too thick. Don’t worry about evaporated water – the flavor will just get richer over time.

The easiest way is just to search for your ingredient on Google with the addition “time to boil.” So, if you want to know how long to make soup with, say, turnips in it, you’d search for “time to boil turnips.” You’ll find that turnips take 25-30 minutes to boil.

Then, just make a list of all of your ingredients and how long they take to boil. Add the ingredients in order so that they all finish cooking at the same time. So, for example, if you have beans that take two hours, turnips that take 30 minutes, and potatoes that take 20 minutes, you’d start the beans, let them cook for an hour and a half, add the turnips, and then ten minutes later, add the potatoes.

The exception to this is the meat. If you’re adding meat (I actually also do this with onions and a few other things, too), I suggest cooking it separately until it’s done, then adding it with about ten or fifteen minutes left to go for the soup. Take some of the soup broth you have going, pour it in the pan that you cooked the meat in while the pan is still hot, then pour it back into the soup pot to add some delicious flavor.

It’s incredibly easy, incredibly tasty, and incredibly inexpensive – my kind of meal!

Saving Pennies or Dollars is a new semi-regular series on The Simple Dollar, inspired by a great discussion on The Simple Dollar’s Facebook page concerning frugal tactics that might not really save that much money. I’m going to take some of the scenarios described by the readers there and try to break down the numbers to see if the savings is really worth the time invested.

Shaun writes in: This time of year (late fall, early winter), the local hardware stores offer several varieties of space heaters. Is it possible to realize meaningful savings by using one or more space heaters to locally heat parts of your house while keeping the thermostat at a very low setting?

This is absolutely a great way to save money in the winter for the reasons you describe. If you have a space heater and run it in only a room or two, then keep the thermostat in your home quite low, you’ll save a ton on your energy bill.

For example, in my own home, we use this 1,500 watt space heater.

Most of the time during the winter, particularly on weekends, we let the whole house stay cool and keep only the family room warm. When we switch to this mode, we turn the thermostat down to about 45 degrees, which is cool enough that the furnace virtually never turns on.

Then, we all settle into the family room. When we notice it getting cold, I’ll flip on that space heater full blast for a while, using 1,500 watts for about ten minutes until the room is warm. Then I’ll turn it on really low, where it uses about 200 watts, and this – plus our body heat – keeps the room we’re in pretty warm.

So, let’s compare that for a 24 hour day against the use of our furnace.

With normal furnace usage, we’ll leave the house set at about 60 degrees Fahrenheit. We wear long sleeves and pants during the winter, so this feels fine. We have an approximately 25 kW furnace (based on the information I could find on the labeling, which is appropriate for a house of our size in a cold climate), which flips on for about ten minutes per hour, on average (I’ve measured it on cold winter days).

Thus, over the course of a full day, our furnace will run for four hours. With a 25 kW furnace, that’s 100 kWh of usage, or about $12 in energy use.

With a space heater, over that same period, I would run it at 1,500 watts for about 10 minutes, then at 300 watts permanently afterwards. That totals approximately 75 kWh of usage, or about $9 in energy use.

In other words, if we are going to spend most of the day in the family room, we’ll save dollars by turning the furnace very low and just heating the family room with a space heater. (At the end of the day, we’ll often go upstairs and position the space heater between the bedrooms at a fairly low rate and it keeps us quite warm during the night while the rest of the house is cool.)

For us, that savings is about $3 a day, according to my math.

However, the variables for your situation are large. How big is your house? How cold is your climate (generally, furnaces in colder winter climates tend to have higher wattages)?

Perhaps most importantly, how much of a difference is there between the area you want to heat via space heater and the area you want to heat via furnace? If you’re living in a small apartment, for example, or have a house that’s less than 800 square feet or so, you’re probably not saving much at all with a space heater.

The savings kick in if you have a large house and are only heating one room with a space heater and if you live in a climate with a large difference between indoor and outdoor temperature.

Two summers ago, my wife, my children, my parents and I all traveled to Texas together, in part to visit relatives but also to enjoy the Dallas-Fort Worth area.

Because we took some time to plan the trip in advance and involved everyone going on the trip in the planning, we ended up finding quite a few free and frugal things to do on the trip. We were also able to save money on the trip by only taking one vehicle.

However, there were other elements of the trip that weren’t quite as frugal. Our housing wound up being quite costly, for instance, as did our food bill.

This leads us to this winter. Sarah and I often plan the details of the following summer’s family vacation during the preceding winter so that we have plenty of time to find bargains for the upcoming travels.

We’re essentially planning two vacations for 2012, and both of them are going to be quite frugal. What do they have in common? They’re both group vacations.

Here are some of the things we’re doing to maximize fun and minimize cost on these trips by leveraging the fact that we’re traveling as a group.

We’re going with people with a similar mindset. None of the people we’re choosing to travel with next year are heavy spenders. All of them are frugally-minded people. They’re also people that we feel good about spending a significant amount of time with over a week. We want to have a reasonably-priced vacation and they’re on board with the same idea.

We’re splitting costs, looking for deals, and budgeting in advance. For both of these vacations, we’re essentially budgeting costs as a group, looking for deals as a group, and splitting costs as a group. These moves enable us to look at our situation through a lot of different eyes and the net result is reduced costs.

We’re going to visit places that are within a reasonable driving range. One vacation is within our own state. Another is only two states away. On trips this short, it makes a lot of sense to drive, not just based on money, but actually based on time. Not only that, driving means we can bring more of our own supplies, which makes these other options easier.

We’re going to camp for at least some of the vacation. This drastically reduces our housing costs. For us, it also adds to the flavor of the vacation due to the exposure to the outdoors. We’re also considering renting a cabin for our larger group vacation.

Because we’re camping, we’re also going to make most of our own food instead of eating out. Rather than going out to a restaurant, we’ll prepare a meal in our Dutch oven. We can still have something delicious and memorable without spending a ton of money.

The vacations are based on experiences rather than being a tourist. Some of the big things we intend to do on these trips involve going on hikes and fishing, not going to pricy “tourist-y” places. Because of that, our overall budget for vacation is much lower.

In the end, it’s all about people and experiences. Keep that in mind and you’ll find yourself having a great vacation without a great dent in your pocketbook.

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Investing in tax liens
2. How much for housing?
3. Stuck in a rut
4. Choosing an investment house
5. Turning the economy around
6. Investing for youths
7. Reactivating old card
8. Auto loan credit question
9. Handling an inheritance
10. Philosophy reading list

I get two or three book suggestions from readers a day. Usually, one of them is related to personal finance, while the other one or two could be anything.

I just wanted to give a shout out to three great books readers have recommended to me and I’ve enjoyed in the past year: Where Men Win Glory: The Odyssey of Pat Tillman by Jon Krakauer, The Way of Kings by Brandon Sanderson, and Moonwalking with Einstein by Joshua Foer.

Reading a great book is one of my favorite experiences.

Q1: Investing in tax liens
I have heard a lot about investing in tax liens as a risk free (?!) method to get an 18% or more return on your money or acquire the property. I am interested in seeing an evaluation of investing in tax liens. What do you think about tax liens?
- Roger

Investing in tax liens means that you’re purchasing liens held against a property, usually from the state. This is usually due to unpaid taxes and accrued interest.

It is not a risk-free method of investing. If you don’t know the exact procedures for the process in your state, you can very easily end up losing your deposit or find yourself holding a worthless lien. For example, you often have to pay the full amount within 24 to 72 hours of agreeing to buy a lien and putting down the deposit, and if you fail to do so, you lose the lien.

There are also risks involving the property you’re holding the lien against; you can’t insure it, for example, and if the property has environmental problems, you could be responsible for the cleanup.

Tax lien investing works well for institutions that have the bankroll to handle the risks inherent in such investing. If you don’t have a lot of money and a strong legal understanding of what you’re getting into, they can be dangerous.

Q2: How much for housing?
How do you determine how much you can afford for a mortgage and/or rental payment? For instance, I’ve read that you shouldn’t pay more than 25% of your monthly take-home pay for housing costs. But does this include taxes, insurance, and utilities?

Here is my specific situation. Background info: I have an emergency fund of $7,000, I have no debt, I am 26, female, and I currently rent (living alone), paying $860/month for a one-bedroom apartment. Heat and hot water are included; I pay the electric bill, which averages $22/month.

It has my been my lifelong dream to own a dog, and I finally found a dog-friendly apartment in my city. The rent is $950/month (for a one-bedroom apartment), but no utilities are included. Per the current tenant, the gas bill runs about $160/month in the winter. I would still have to pay electric (about $50, as this apartment does have a washer/dryer).

After contributing 15% of my income to my 401K and Roth IRA, I have about $1300/month to put into savings. If I rented this apartment, that would be a hit of $300/month from that savings, plus the cost of caring for a dog.

My ultimate question is two-fold: First, what percentage of your income should go toward housing costs? Second, am I better off saving the full $1337 for a home? Or going for the rental situation? Am I losing out if I decide to rent?
- Lauren

There are a lot of “rules of thumb” out there regarding how much of your income you should put toward housing. From my perspective, if you’re putting much more than 25% of your income toward your housing, you’re starting to put yourself in a risky situation.

As for renting versus buying, if you’re paying more in interest on your monthly mortgage payment than you would be paying in rent, then I would probably rent.

The easiest way to figure this out is to get a mortgage quote, then run some calculations on it. The housing market is depressed enough right now that I would not look at a home as an investment in the short term.

Q3: Stuck in a rut
I’m unable to leave my home due to health issues, I’ve lost my job, but I have my finances taken care of, that isn’t an issue, nor is housing, etc. Everything is in order.

My issue now is that I’ve lost my way regarding what to do with my life. Everyday is like the movie Groundhog Day for me. I’m on the internet looking at sites or watching a movie, not really doing anything. I write for a local political site from time to time, but do not get paid. It gives me something to do.

Even with the little writing I do, I feel like I’m wasting away. I want to make a contribution to society or at least do something that I feel makes me a better person. I’ve thought about starting my own website, doing more regarding social media, but I don’t know if it’s for me.

I’m in a rut and don’t know what to do. I want to get out of the repeating cycle but don’t know how. Any advice would be welcome. I don’t want to keep looking back and seeing that I’ve done nothing.
- Gary

My suggestion would be to try something new every day.

Try knitting one day. Read a book of philosophy the next. Try a new computer game. Learn how to do acrostic puzzles. Try cooking a challenging recipe. Learn how to write the code to make a website. Learn how to use Photoshop. Learn how to speak French. The list is never-ending.

I’m not entirely sure what your health situation limits you to doing, but if you’re able to use the internet, you’re able to read and write, which opens the doors to a lot of things. Keep trying things until you find something that really excites you, then start hammering away at that thing.

Q4: Choosing an investment house
I am 23, married and my husband & I just graduated from college this past May. I want to go ahead and start saving for retirement ASAP and I have spoken with a friend of mine, who is older and has worked in the financial field for many years. He advised that we open an Roth IRA account (in my name initially) and put in $50/month, increasing that as we are able and eventually open another account in my spouse’s name. So that is the plan, but my question is where should we open this account? He mentioned Vanguard, T. Rowe Price, and Fidelity as well as a few others. Advise would be greatly appreciated! How do I decide where to open this account/what should I take into consideration? We don’t make a lot of money right now; however, I plan to just take that $50 and the money we give to church out before we even consider what to use our income on as if it was never even there in order to be disciplined in saving. I also have a set amount from each pay check that is going towards building an emergency fund that is nearly complete.
- Kelly

I can’t tell you where to invest. Most of the major investment houses have their good points and their bad points.

What I can tell you is what I use and why. I use Vanguard for my personal investment purposes. I chose them because I believe strongly in using index funds for passive investing, which is their strong suit, and their hands-off approach to dealing with investors. I don’t feel like they’re trying to sell me stuff.

What’s a drawback to using them? Many of their funds have a $3,000 minimum before you can start putting funds in. This means if you want to diversify across, say, five funds, you need $15,000 to start with. There are a few ways of getting around this (not starting until you have $3,000 in the bank, for one), but it can be a limitation for many.

Q5: Turning the economy around
Have you noticed people shifting their thoughts about their financial lives in the last 12 months? It seems like a financial turn-around in the U.S. will require more than just money, it will require a change of spending habits and how people think about money. Do you see any evidence that people are changing in those ways?
- Emily

I feel like there’s been some change since I started this site in 2006, but I don’t feel like too much has changed over the past year.

In a nutshell, I think 2008 woke up about 5% of the American public to keeping better care of their money.

The other 95% are still doing pretty much exactly what they were doing before the financial downturn began.

Q6: Investing for youths
Our 10-year-old has saved $500 from his odd jobs around the neighborhood and within our household. He wants to start investing. What would you suggest for him?
- Amber

It depends on whether he’s actually investing for a specific goal or whether this is going to be an experience in learning about investing.

If it’s about learning, I’d get an account at a brokerage and let him manage the money himself. Get him a basic investing book and let him invest it as he chooses. If you’re unsure of things, learn along with him.

If it’s about a specific goal, I’d figure out how far out that goal is and how much risk he’s willing to take on. The closer the goal and the lower the risk, the more likely I’d be to just put it in a savings account (a low-risk investment with a low but guaranteed return). If the goal is long term and some risk is acceptable, I’d do something more high-risk like investing it mostly in stocks.

Q7: Reactivating old card
I just finished paying off my debt management plan (DMP)! I am looking to have one or two credit cards to charge small bills to and pay off each month to boost my credit score. Many of my unused lines of credit were closed when I started my DMP program but there is an inactive account with a small credit limit that it still showing as open on all 3 credit reports. This inactive account was opened in 2003.

Do you think it is better to open a new credit card for my plan or should I call the bank to see if they will reactivate this old account?
- Charlene

It’s likely that the business has closed the account, but failed to notify the credit bureau. It’s probably a net positive for you for it to remain open in this fashion, as it extends the length of your credit history.

If I were you, I’d try to establish credit elsewhere, keep it paid off for a while, then contact this company to get it straightened out.

Once you don’t need the account any more to establish the length of your history (in a few years), you’re better off closing the old account.

Q8: Auto loan credit question
I graduated with my Bachelors in May of 2010 and have been working full-time since making about $50k/year. I currently live at home with my parents but am moving out soon. I had been using my junker car I got when I was 16 until I recently totaled it in a snow storm so now it is time for a new car. I have plenty of cash on hand to pay for the car (about $40k in cash) but because my current types of credit on my credit report are so low and limited (2 student loans, a credit card, and that’s pretty much it, no auto or home loans) that I want to improve by credit score. Types of credit and amount of accounts seems like one of the most glaring negatives on my credit report. I want to upgrade from my previous junker but nothing too crazy (I’m thinking about $15k). I was thinking I would make a large down payment of around $5,000 and get a $10,000 loan at a low percentage like 2.99% through my local credit union and pay it off quickly. Does this sound like a good plan or is there a more ideal plan to build my credit while avoiding the interest and debt? It seems like I have several options in this situation. Should I pay it off immediately or will this not be as good for my credit as paying it off over a few years? Should I just take an auto loan for the full $15k and pay it all off immediately? Should I take out a loan for the full $15k and just make the monthly payments while investing my cash elsewhere (hopefully at a rate higher than 2.99%)? What is the ideal way to handle this?
- Kevin

Assuming your card is in good standing, I don’t actually think your credit is too bad. If you have a large down payment on your car loan in hand, you’re likely going to get a very good rate on your car loan.

Now, as for the question of how much you should put down, if I were you, I’d pay as much as possible down except that I’d keep a thousand or two for an emergency fund.

Having debt means that you’re leashed to a monthly debt payment for the foreseeable future. That means you’re required to keep a job that can cover all of these payments, meaning you’re not free to make many career changes and you’re in complete panic mode in the event of a job loss.

Unless there’s a compelling reason to do otherwise, it’s always best to minimize one’s debt.

Q9: Handling an inheritance
Short back story…

I am in my late 20′s with student loans (about $40k left @ 6%) and a mortgage ($220k left @ 6.5%). My husband and I have worked hard to reign in our spending and have paid off about $25k in credit cards, $30k in car loans, and are saving money for our future in terms of an emergency fund and our retirements. We plan on renting our house out next summer(just enough to cover the mortgage costs) by living in a tiny house on our 6 acre property to further reduce our living costs. I will be leaving my job next month and my husband makes about $60k/year and our living expenses total about $1k without the mortgage.

My question is this:

My great aunt passed away in October after a very long battle with cancer. I have learned I will be inheriting about $500k from her estate after taxes (estate is paying taxes).

I would like advice on how to invest this money in a way that allows me to live off the interest without touching the principal balance for the remainder of my life.

I understand if you cannot offer specific investment advice, but it would be greatly appreciated if you could point me in the right direction on whom I should contact (attorney, financial planner, investment broker, etc.), books to read, and what I should be looking for as I don’t want this money to fall into the wrong hands and would like to maintain as autonomous with it as possible. If you need any further details or information, please let me know.
- Jill

$500,000 is not enough money for you to live on the interest for the rest of your life. You can invest it in a way that will pay you some nice supplementary amount for the rest of your life each year, but it will not be enough to sustain yourself.

For example, Warren Buffett suggests that a 7% annual return is a good estimate of long-term stock market returns. That would mean an annual return of $35,000. While that would provide for a moderate lifestyle today, with inflation, you would not be able to live that lifestyle for long.

You have a lot of options for this money. If I were in your shoes, I would take that $500,000, pay off all my debts, and then buy a diversity of high dividend paying blue chip stocks in very large, stable companies, and I’d just collect the dividend payments.

Q10: Philosophy reading list
I was just wondering what’s on your philosophy reading list.
- John

I’ve actually been trying to read through Boston College’s MA Philosophy reading list. I’ve been reading them in the order listed there in order to try to see how ideas have evolved over time.

So far, it’s been quite enjoyable. I tend to read it in fits and starts, picking up a piece or two here or there, then reading other things for a while.

Mostly, it’s caused me to reflect a lot on how I behave and how other people behave.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

Laurie writes in:

My main observation though is the constant path of self control and perseverance you seem to follow. I commend you highly for being able to do this. I guess my question is, even though you manage to make it all sound so (sometimes not) simple and using a lot of common sense, how does the everyday person find or learn the right mindset to stay on the straight and narrow so that it becomes more or less second nature? That seems to be a lot of my problem and I’m sure many others. It’s easy to get all gung-ho about an idea and run with it, but how do we stay the course? I’m not so much speaking about getting off track and totally blowing the bank, but how do you manage to keep such a positive attitude about things for so long? Can this kind of mindset be taught do you think?

It’s difficult at best to show young people why they should be looking so far ahead into the future, and those of us older folks know it’s only a matter of time before some kind of event comes along and knocks us off our feet. “How” do we develop that “no matter what” fortitude? Are there any type of books (other than the run-of-the-mill self-help) that could help build a plain ‘n simple better outlook on (financial) life? It seems to me that it’s mostly inherent in a person. You either have it or you don’t. Some have it but don’t know exactly how to direct it, (which is why we look to you and others), and others have none but could surely benefit from some conditioning.

Laurie’s question hits upon a fundamental part of personal finance success – and, frankly, success in a lot of areas. How exactly do you maintain the level of self-control and perseverance needed to succeed in the long term? That question applies to countless areas, from health to money to careers to hobbies.

I think the best way to start is to tell my own story. Give it some time – there is a point.

When I was in college, I was a pretty unfocused person. I could certainly bear down on a specific project for a short period if I needed to, but I could never sustain anything. I got good enough grades to get through, but I would often get A’s in difficult classes that interested me (theory of programming languages and mathematics of biological algorithms come to mind) and C’s in classes I didn’t care about.

After college, I took a job where I was immediately tossed into the deep end of the swimming pool on a very difficult project. I was handed a legacy database system with a poor web interface that had been built piecemeal over several years and essentially told to modify it into something modern so that people using the interface could easily extract data from it. I worked with one other guy whose experience was in databases, and the two of us were essentially given about six months to come up with a highly functional prototype or else hit the road.

I spent those six months (the middle of 2002) focusing intensely on this project. It consumed me. I worked on it night and day. I thought about it when I woke up and when I went to bed. I taught myself a new programming language, the ins and outs of a database system I’d never seen before, and the details of data sets that I had never even heard of before I started the job.

At the end of those six months, I was completely blitzed. I essentially spent the last bit of that year falling back into an unfocused state, mostly due to burnout.

What I noticed at the end of the year, though, was that the big thing I accomplished during the year was the thing I focused on. I didn’t accomplish much of anything outside of those six months.

I spent a lot of the next two years essentially working on my ability to focus on large projects. I wrote a novel. I started a social media site similar to reddit (I eventually closed this down due to lack of users). I started a blog on parenting that became rather popular (I shut it down due to some privacy invasion issues, lessons that I carried forward to The Simple Dollar). I started investing for retirement.

What I found was that focus on a goal takes practice. It’s not something that comes naturally to a lot of people. Yes, some people have a gift for focusing on a specific goal and carrying it home, but it is certainly not something that comes naturally to me.

Why? I think that in the day-to-day lives of many people, long term goals don’t really have a vital place. They get up, they take care of basic life duties, they go to work or to class, and they relax. They don’t feel a real push to focus on a long-term goal.

Then, when they do feel the urgency of such a goal, they’re simply not mentally prepared to take on that kind of long-term planning and focus. They’ve never invested themselves in a project that didn’t pay dividends within a month or two.

I spent the first two decades of my life in that pattern and it was hard to break out of it. I think there were three things that really changed the story for me.

I completed a long term project after sticking with it for a while. For me, it was that software prototype that I mentioned above. Simply sticking with that project for so long with such focus was very hard and the sense that I had actually achieved something so big really stuck with me.

How can you do this? I would just select a large project that you’d like to accomplish, put my nose down, and make it happen. Maybe you’ve always wanted to write a novel. Maybe you’ve always wanted to run a 5K in under 30 minutes. Whatever it is, set that as your goal and then take action every single day to get there. You’re not just doing this to complete the specific goal, but to show yourself that you can carry off something big.

I made a conscious choice to regularly think about my future self. I actually started putting aside time to think about the situation that I would be in a year from now and five years from now. The more I thought about those future versions of myself, the more I wanted to make their lives better. It became easier to convince myself not to go to the bookstore or to work harder on this project if I knew that it would really benefit my future self.

How can you do this? Think in detail about where you’d like your life to be in a year, and then in five years, and then in twenty years. What aspects of your life do you really want to be included?

Then, look at every choice you make today through that filter. Which choice that I make today will make that “future me” have a better life? I can’t even tell you the number of times this very thought has made me focus on a task at hand or choose not to spend money. I just always reflect on that future self.

I hesitate. I find myself doing this all the time. Whenever I’m about to make a decision where I’m going to use a significant amount of time or spend any money, I stop for a bit and simply ask myself if this is really what I want to do. Yes, sometimes I still go ahead with it, but quite often, I stop in my tracks and make a better choice.

This goes hand-in-hand with thinking about my future self, since it’s that picture of the future that I want to have that I use when I hesitate.

How can you do this? Work hard on establishing a habit of hesitation. Whenever you’re about to spend any money or you’re about to spend some time, stop for ten seconds and ask yourself why you’re doing this and what you’re hoping to get out of it. Think about what else you could do with that time or that money.

You won’t always make the “good” decision – no one does – but you’ll start increasing the frequency of making “good” choices.

In the end, it’s all about practice and establishing good habits. The more you do it, the more natural such choices become and the easier it gets to accomplish something great.