Updated on 03.27.16

Reader Mailbag #2

Trent Hamm

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

As usual, let’s open things up by linking to a few of my older articles that directly address some of the questions I’ve been asked recently.
The only two cookbooks most beginners in home food preparation will ever need
How to get started with a slow cooker and five of my favorite crock pot recipes
My thoughts on Ayn Rand and Atlas Shrugged
How to deal with all of those old 1980s baseball cards in your closet (this actually got carried in Beckett Baseball Card Monthly a few months back)

Also, I asked my wife to write a guest post, but she’s not a speedy writer so it may be a little while. Be patient – she’s working on it.

And now, for some questions.

I have a question that has been nagging at me for a little while. I understand how compounding interest works, but I don’t understand how compounding in 401k’s work. I have around $45,000 in my 401K in stocks, but how does that compound? If the value of the stocks goes up, the value of my 401K goes up, but I don’t see how it compounds? Or doesn’t a 100% allocation to stocks compound? Thanks.
– Joe

OK, let’s say for example that your retirement plan is 100% invested in the Vanguard 500 – I’m using that fund as an example, and the basic principle works for any fund. Let’s say you put in $10,000 at the end of 1997 and haven’t invested since.

If you take a peek at Vanguard’s information abot the fund, it shows that over the last ten years, it’s had an average annual return of 12.69%. That means that each year for the last ten, your $10,000 investment in VFINX has gone up 12.69%. Obviously, that’s not the actual return each year, but we can use it as an approximation.

At the end of 1998, your $10,000 investment has become $11,269 and has earned you $1,269.

At the end of 1999, your initial $10,000 investment has become $12,699.04 and has earned a total of $2,699.04. Notice that the first year of growth was $1,269, while the second year earned $1,430.04. That’s the power of compounding – the annual percentage return during year two has a bigger starting balance to work on than the first year.

Let’s extend this out to 2007. At the end of 2007, that $10,000 investment is now worth $33,025.83. During that final year, the investment earned $3,719.03 – truly showing the power of compounding.

The compounding of stocks works like thus: if stocks go up an average of 8% every year, then over a long period, your investment will grow at 8% compounded annually. In the real world, the market might go up 15% one year and down 6% the next, but over a long period of time, a rate around 7%-8% annual compounded growth will come out, and you can use that info in calculations like the above to see it grow.

This is why it’s important to invest early. If your retirement plan earns an 8% average annual return, putting in $20,000 when you are 25 years old is the exact same as putting in $43,178.50 when you’re 35 years old. The earlier you put your money in, the less you have to put in overall to get the same results in the end.

What is your favorite Wii game?
– Scott

In terms of total time played, easily Guitar Hero III. It’s a social game that pretty much anyone can pick up and goof around with on Easy, it fits in well with almost any age group, and my wife really enjoys playing it, too. In my rare spare moments, honestly? I downloaded Harvest Moon and am playing through it again – I played it a lot in high school and playing it again is a big nostalgic rush.

how do you get things done with constant interruption from kids / babies? My 4mo baby does not allow me to free up my time for more than 15-30 minutes, and for me it is difficult to work efficiently since I have to warm up my work every time there is interruption, and I have to interrupt my work once i become really hot at work.
– Rani

My wife and I both take turns being the sole person with the children while the other one engages in things that need to be done. When I’m home alone with the children, I don’t even attempt to work unless they’re firmly sleeping. My advice? Start pushing your four month old baby gently towards one to two naps a day. Keep the baby awake by actively playing for a long period (the entire morning, say), then cap it off with a healthy meal in a quiet and dark room. Lay the baby down and you’ve got a good one to two hours of naptime in which you can get work done.

In a nutshell, I don’t recommend doing serious work if you’re in a situation where you can’t get into some semblance of flow.

I would like to see advice geared toward people just starting out of college/grad school… My husband and I want to work a lot at first and then cut back. What’s the best way to make that happen?

The first day you go into work, start socking away 50% of your paycheck into a high-interest savings account. I’m dead serious – I’m not kidding in the least. Learn how to live on the other 50% and don’t even think about altering the first 50%.

Then, every year you work, you have at least a year of freedom in your bank account. Work like a mad dog for five years and you have five years of freedom, more than enough time to have a child and care for that child until the baby’s in school. Work like a mad dog for ten years and save your money correctly and you may not ever have to work again if you complement it with some small freelancing work here and there.

You advise to pay down mortgage before investing in Index-funds. However, elsewhere, the consensus seems to be to maintain some mortgage for it’s tax benefits. Have you done research to arrive at a break-even point when paying down mortgage is equal to investing in Index funds? Eg. I just got my tax refund; my mortgage is the only debt I have; should I put it towards mortgage (currently paying 6% interest on it) or should I buy Index funds (historically 10% return over the long term)?
– Don

Most families never claim any mortgage interest deduction because the standard deduction provides them with more. If you’re in the (relatively rare) situation where you’re actually claiming the house interest and it makes a difference, then you should definitely calculate things for your specific situation.

Another factor to consider is that the mortgage prepayment is a very stable investment with a clear return. Investing in an index fund carries some significant risk. Look at it this way: if you have $5,000 and you can either invest it at a stable 6% or straight into stocks right now, which would you take? It’s not an automatic answer for anyone, and for most people the steady 6% works much better in terms of sheltering them for the vagaries of a normal adult life.

In terms of smartness in money matters, what would you think is one important difference between you and Warren Buffett?
– WhirlMind

Well, when I read his biography, I couldn’t help but be struck by the difference between how Buffett grew up and how I grew up. Buffett’s natural childhood lessons and role models led him pretty directly to the life he led, as did mine. I see some similarities in how we were raised (self-sufficiency is good) and some big differences, too (I never learned the value of investing money or even how to get started with it).

Do I really *need* to use coupons in order to [be] frugal?
– Valerie

Absolutely not. Coupons are one way to translate a time investment into a financial return. If you don’t feel that’s a worthwhile time investment for you, then don’t do it.

I personally feel a well-constructed grocery strategy balancing coupons and store flyers can easily save my family $100 a week for maybe two hours of extra effort that I can do any time. I just save coupons and match them up with store flyers, as well as plan my meals for the week in advance around what’s cheap in the flyer. For me, that’s an exchange I find worthwhile and very cost-efficient.

Others, particularly people living alone, won’t get that kind of value out of the time investment, so it’s not worth it.

Frugality is about finding maximum value in things, and if you don’t find maximum value in couponing, then don’t do it.

How do you keep coming with such great posts? Do you ever feel scared as to what will happen when there isn’t anything more to write about personal finance, especially given the slew of PF blogs out there?
– Joe

I have more ideas right now than I can ever write about. The last worry on my mind is coming up with ideas – a much bigger concern is making sure that I’m choosing from among those ideas in a way that readers will enjoy, so I usually just listen to what I hear from my readers as a guide for what to write about next.

If you ever feel that I’m being repetitive on The Simple Dollar, it’s for one reason and one reason alone: reiterating key points to new readers. That’s something really important, to make sure new readers do pick up on the fundamental points sometimes.

would you discourage your children from choosing fields of study that traditionally have been lower paying if that is what they loved? art, music, theater, writing(!), etc.
– LC

Never in a million years. All I want for my children is for them to find what they’re truly passionate about and follow it with all their heart and talent. The financial and social resources they need will eventually follow.

I made the mistake more than once of not following my passions and instead following things that “made money,” and it was something I eventually wound up seeing as folly.

Do you have an exercise regimen that you stick to? What does it consist of?
– Grant

Off and on, I’ve used the fitness ladder with quite a bit of success, but I’ve not used it in a while. My firm goal is to start it again the first Monday after I’m done with my job, and also add in a bit of jogging along with it.

When I was younger, particularly in the period leading up to my wedding, I had a lot of success with the fitness ladder exactly as described there.

You have an amazing following on your blog. What are some things that you did early on to recieve this kind of traffic?
– Matt Sullivan

The number one biggest thing I did was write content that I thought others would want to read. I would think of ideas, then honestly ask myself whether anyone else would want to read this. If my gut told me no, I tossed that idea in the trash.

After that, I didn’t really do too much. I introduced myself to bloggers in my topic area. I linked to their blogs when I found interesting articles. I commented on a lot of blogs. And I kept writing stuff using the “would others read it” filter. I never spent a dime in any sort of promotion for The Simple Dollar.

The big catch is that traffic builds slow. I didn’t wake up one morning and have 50,000 readers. Instead, it grew a little bit each week. It takes a lot of patience and some luck, too.

If you want to know more, read my Building a Better Blog series from a while back.

Normally, I only looked over my account statements. I have not balanced my checking account. How can I start doing this? I have looked on the internet for “how to balance a checkbook”, but nothing tells me how to start balancing after the account has been in use for a while.
– mugunet

You can basically start with any account statement you have. Balancing a checkbook basically means ensuring that your own personal records of what’s in the checking account match what the bank claims is in the account. This way, you’re not in for a nasty surprise.

Starting means simply finding a point where you’re sure that your own personal accounting of your checking account exactly matches what the bank says is in the account and working forward from there. This may be at the end of your last statement, or it may be right now if you look at your account transactions online.

From there, just keep your own tally of transactions both into and out of the account and occasionally reconcile them with what the bank is reporting to you. Often, you’ll find that the balances aren’t equal – that means you have to go through your personal transaction record and their transaction record and find the difference.

What this does is protect you (somewhat) from overdrafting due to checks or payments you forgot about and so on.

Personally, I do what amounts to a checkbook balancing weekly using online statements and my own ledger. I find that using online banking makes this process substantially easier than it used to be back when I was a kid and my mother would start going through her checkbook ledger each month, reconciling canceled checks and such.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

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  1. Saving Freak says:

    Gotta agree on the couponing strategy. It is not easy to determine at what point it becomes useful. When I started using couponmom.com that made the time much easier since the website tells you which coupons go with which sales.

  2. mgroves says:

    My parents always encouraged me in whatever field I said I wanted to go into, whether it was traditionally low paying or not. At various times in my childhood, I wanted to be a trashman, a waiter, a teacher, and a writer. Every time my mom and dad smiled and told me I can do whatever I want.

    I didn’t end up doing any of those things, but the fact that my parents were behind me 100% in whatever I wanted to do helped my confidence and also helps me not to “look down” upon such professions.

  3. Michael says:

    Remember that a share of stock is a share in a business. $10,000 buys a machine which makes $1,200 of profit. Now that $1,200 buys part of a second machine which makes profit on top of another $1,200. Shareholders can’t see the compounding as well as they see interest in a savings account, but it happens when profits are re-invested into the business, just like interest is re-invested into principal.

  4. Carla says:

    I can’t thank you enough for all the great info you post on your site. This was the first PF blog I found, and it has been one of the primary reasons my husband and I stumbled upon Dave Ramsey’s Total Money Makeover. We’re focused and ready to tackle our debt head-on.

    We’ve started the snowball method but I have one question. One of our debts is a 29k loan from a family member. There is no interest and no set amount of time to pay it back. We are being very aggressive and would like to get everything paid off by the time we’re 30 (we’re 27 now). Should we follow the plan and pay everything off in order from least to greatest or focus on the debts which have interest then do the family loan with no interest?

    Again, thanks so much! I know we’ll be turning to your site regularly as we move forward with our financial plans to motivate ourselves!

  5. Frugal Dad says:

    I’ve got a blogging-related question for you. At what point did you decide to go with the two-a-day posting schedule? Was it because you had an inventory of posts built up? Has this enhanced traffic/readership? I’ve been considering a move to post to my blog twice daily, and since it appears you have been using this routine for a while I thought you could share some insight.

  6. Trent Hamm Trent says:

    I used to post six times daily. I slowed down because readers said they were overwhelmed.

  7. Michelle says:

    Would you ever discourage your kids from marrying someone who does not make as good an income as they do or what they are accostomed to? Especially your daughter…this is what my parents are trying to do even though he is perfect in every other way. Is it possible to make it work with a man who earns half of what you do? How will having kids affect this?

  8. JW says:

    Can I get some clarification On the 50% suggestion?
    Say I earn $6000 pretax a month.
    25% comes directly off the top for 401K
    tax and health insurance leave me with a paycheck of $3000.
    $1000 is my monthly home mortgage payment ~$700 of which is principle reduction.

    Do I get to count the 401K and part of my mortgage in to my 50%? Or are you suggesting I live off of 50% of the remaining $2100?

  9. Aryn says:

    I wouldn’t say it’s rare for a person to pay more in mortgage interest than the standard deduction. I think it’s rare in certain parts of the country. In other parts of the country (like California), it’s the norm. When we finally buy, our annual interest will be double the standard deduction.

  10. LC says:

    My husband makes about half of what I do. It’s not who makes the money, the question is whether you are both ok with it and whether it is enough to support your lifestyle. There is a growing number of women who earn more than their husbands, and many men are fine with it. Unless you or he has a problem with it, don’t worry about what your parents say. If they are still worried, tell them that you like your job and reassure them that you have enough to support yourselves.

    When it comes to children, I would discuss whether he is willing to stay home with them and make sure that the total income (or one salary if that’s what you choose) is enough to provide for them. However, kids are not nearly as expensive as many places lead you to believe.

  11. Phil A says:

    I can give that saving 50% of my income a try. It will mean having to give up electricity (I will have to use candles). I will also have to live on bread and water alone. I might be able to splurge on some salad ingredients every few months. I will also have to cancel my health insurance. All these things are going to be difficult. Major sacrifices for that 50% of income saved.

  12. Looby says:

    @ Phil A- miaow.
    My take home pay is under $2400 per month, I save at least $1100 of that each month. I eat excellently, even dining out occasionally. I live in a central location in a large, expensive city, granted it’s in Canada so I pay only $50 for health insurance but an extra $100/month for medications. I don’t feel deprived at all. Maybe cut back on the catty comments and try and live frugally?

  13. Brian says:

    I am having difficulty reconciling the asset _location_ (versus asset _allocation_ issue). As a young investor (25), I understand that my retirement horizon is 40+ years away, and I should have an AA to match–which I do, as I’m invested in the Target Retirement 2050 in my Roth IRA (AA: 90% stocks/10% bonds). However, I’ve read in many places that certain types of funds–including bond funds–should be held in tax-advantaged accounts (401K, traditional IRA) for tax reasons. How does this reconcile with non-retirement investing goals? If I want a 60/40 asset allocation for a 10-year investment plan for a house down payment, I certainly don’t want to put the 40% bonds into a traditional IRA. Do I just swallow hard and take the tax hit by holding the bond fund (total bond market index) in a taxable account?

  14. Avani says:

    I relocated to US sometime around last December. Still new to this coupon thing. Which are good money saving coupon options? Some I checked were mostly related to restaurants. And we don’t eat out much. Are there some good sites that can be used ?

  15. Kacie says:

    @ the reader who mentioned the mortgage tax benefits: I’m no expert, but aren’t you paying 75 to 85 cents per dollar for that tax benefit?

    In other words, if you’re in the 25% tax bracket, isn’t the tax benefit just .25 per dollar of tax?

    I don’t know how to explain it. Arg.

  16. Phil A says:


    I am extremely frugal. I don’t buy things I don’t need. I own a modest apartment that is just the right size for me and I don’t have a car payment. I am able to save 10% of my income which I am proud of. I can save 50% of my income but that would mean doing those things I previously described. I simply think people should save what they can after the essentials are met.

  17. JBS says:

    I definitely would like to see support on the “rare” use of the mortgage interest deduction. I live in a state with no income tax and high property tax. Even without a mortgage, we will always be best served by itemizing deductons and I suspect this is the same for most states without income tax…

  18. Andrea says:

    @ Looby:

    I also live in a central location in a large, expensive city in Canada, but my take-home pay is only $1600/month. I don’t think I need to break-down any expenses to show you that living on $800/month is just not possible. I spend 75% of that on rent and public transit alone, nevermind bills, and food.
    Just becuase it’s easy for you to save 50% of your income doesn’t mean it’s easy for everyone.

  19. Elliot Wilson says:

    You are getting close to 30,000 RSS subcribers. I think I have 2 RSS subscrivers. Granted I have only *just* started blogging… but that is a very good stat Trent!

    My question is, how much money do you earn from this blog and is blogging a viable business model?

  20. LC says:

    The sunday paper of any city usually has 1-3 inserts with coupons for grocery items. There are also sites online. Just search for “grocery coupons”. You may want to check out couponmom.com and grocerygame.com. However, I have found that shopping at a bare bones store (Save-A-Lot, Aldi, etc) saves me about 50% over the major chains with no sacrifice in quality and no coupon clipping. Good luck!

  21. Tracy says:

    Hi Trent,

    Although I liked your advice to start socking away 50% of your income after college/grad school, I don’t think it’s necessarily realistic.

    When I graduated from college, I had a really hard time finding a job – especially one that paid well. After I’d been out of school for a year (and working odd jobs) I finally found a good full time job that paid $30,000/year. This was in 2002 and living in San Diego. I found a roommate, but my rent was still around $600/mo. (Living with my parents was not an option.) Add in school loan repayments, groceries, car insurance, gas, and utilities, and there wasn’t much left over for savings. (I also had to put together a professional wardrobe of suits – I bought them at 70% off or at discount stores like Ross, but they were still expensive.) In fact, many months I ended up putting groceries on my credit card just to get by.

    I’m not saying I didn’t make some bad financial decisions in the process (and throughout college). I did. However, even if I’d made better financial decisions I still wouldn’t have been able to save 50% of my salary.

    For me, learning basic financial management skills at an early age (before college) would have really helped me. I probably would have chosen a different major in college (or double majored) and I would have tried to work college jobs/internships related to my field of study…not to mention saving the money I earned in high school and college instead of spending it on weekend fun (most of which I don’t remember!).

    I am currently in the process of paying off the $20k in credit card debt I accrued since graduating from college (I accrued $19k of that $20k after graduating). In 2 years I’ve been able to pay off about half of it, but I’ve budgeted to pay all of it off by January 2009 (YAY!!!).

    – What advise do you give people who are in similar situations to mine after graduating from college (i.e. – college loan debt repayment and low starting salaries)?

    – What advise do you give people who are in my current situation (i.e. – made bad choices and paying for it now)?

    (My fiance is in a similar financial position as I am and we have agreed to pay off the debt together as quickly as possible (this year) while also saving $1000/month as a security fund. Once we’ve accumulated a few thousand dollars in the bank we plan to invest it in high interest savings certificates and eventually we’ll invest in other higher yield investments while still keeping that emergency fund.)

  22. JW says:

    Andrea @, Phil
    When I found myself in a similar situation, (not having enough money to save 50%)I crossed a pay-yourself-first line that for most of my friends and family was unthinkable, I got roommates. I had just bought my house, then landed in a bad financial situation. Anyway, renting 2 rooms brought in $700 a month for 3 years, allowed me to build up a cushion again. If you are on the other side of the coin, (people renting the rooms), I have to imagine you could save several hundred a month if you willing to live with someone.

  23. guinness416 says:

    Well, whether you make it to exactly 50% or not, the point is that maximizing the amount you save when straight out of college is a huge advantage down the line. At that point you’re probably not married, no mortgage, are used to living with room-mates, have the energy to work a weekend job, etc. And it definitely makes things a bit easier if life gets more complicated (or expensive!) a few years later.

  24. Sandra says:

    I have to second the point about encouraging kids to follow their heart and passion. I went through school as a music major and now have my own sort of business as a musician. I’m 24 and only pull in about 12-14k a year (I live in a cheap area), but I’m happy as a clam and wouldn’t trade it for a boring, higher-paying job. I would hate to be stuck in something I didn’t like that much for money. Thanks for these posts, by the way, Trent. I’ve been reading for about a year now and have learned so much.

  25. Tom says:

    Awesome mailbag! The blog question, you hit it right on the head. So many people want to make it online but if you don’t have the patience, you won’t make anything. So many people want instant results and this is what makes blogging NOT for them.

  26. Bella says:

    @ JW
    As mentionned in Sab’s question, they are just starting up in life! They have no real obligations! The matter is to do it as if they had only half what they truly have! It’s differing your own salary!

  27. ama says:

    Thanks, first of all, for this blog. You’ve helped me finally be ready to grow up and take responsibility for my money and my family’s future. I wonder if you have any advice for talking to loved ones, spouses in particular, about making big money/lifestyle changes. I’m not sure I know how to open up this dialogue with my husband in a way that doesn’t make him feel scared, threatened, accused, or confused. I want to communicate how excited I am at the idea that we are really going to be OK, that we don’t have to be out of control anymore. Any tips for starting the conversation would be very much appreciated…and again, thank you.

  28. Looby says:

    @ Phil, perhaps I misread your comment, the part about candles and bread and water came across as quite sarcastic to me.
    @ Andrea, I never said it was easy- I believe you live in the same city as me, we have had a similar exchange on GRS if you are the same Andrea. My previous salary here was under 1100/month and I still managed to save small amounts. I live with a partner but I have single friends who are still on that wage who are surviving and saving. My share of rent and utilities (incl internet) is $500, health insurance and medications $160, transit pass $80, groceries $150-200. So no it wouldn’t be easy to save half your earnings but you could come close and certainly if you were inclined you could try and that was the point I was trying to make.

  29. Quatrefoil says:

    In an email to me you said that you thought it was easier to make frugal choices if you were single. I’m not sure that I agree. I can see that it’s easier if you don’t have dependent children, but from my point of view it seems much more expensive to live as a single person than as half of a couple. For example, I pay a lot more rent for a one bedroom flat than I would pay for half of a two bedroom flat, or even half of a three bedroom house. I also have to run a whole car, a whole fridge, a whole washing machine, etc. and don’t have the option of sharing those expenses. I realise that I could solve some of those problems by sharing a house, but I’m at an age where the opportunities to share with friends are rather limited. I’d like to know your reasoning for the argument that it’s easy to be frugal if you’re single. I think it could make an interesting blog post.

  30. Frank Kelly says:

    “If you take a peek at Vanguard’s information abot the fund, it shows that over the last ten years, it’s had an average annual return of 12.69%”

    No it hasn’t the ten year return on VFINX is nowhere near that (although I wish it was). Check again! :-)
    You must mean the 5 year return pre-tax.


  31. Nina says:

    Got a question for you:
    How do you discuss finances with your partner? Mine spends a lot of money on his family while I am being frugal because I have a dream that I am saving for. I really dont know how to bring this topic up for discussion – Its a very touchy area! :(

  32. Hana says:

    I have a question re: compounding. Is there a relatively simple formula to figure out how much one would have after a certain number of years? For instance, if I have $10,000 and make 7% interest how much would I have in 20 years? Thanks so much.

  33. Laura says:

    Hi Trent

    I have a question. In the process of clearing out all of the clutter in my house, I noticably have a tiny room that has turned into what my kids have termed, a computer grave yard. There is a giant prehistoric monitor, old towers, printers, etc. How do I safely get rid of stuff no one wants? I live near Des Moines IA, so I figured you might know more about this than I do.

    Thanks Laura

  34. James says:

    @ Hana

    The formula for compound interest is:
    A = P*(1+r)^t

    A = final amount
    P = principal or initial amount ($10,000 in your example)
    r = the percentage rate as a fraction of 1 (0.07 in your example)
    t = time in years (20 in your example)

    so, the solution to your question is:
    A = 10000*(1+0.07)^20 = $38,697

    This equation is precise only if your are compounding on an annual basis. However, it is still a pretty good approximation when compounding on another basis, such as monthly or quarterly (there is a slightly more complicated equation which can do this exactly, but in most cases, eh, why bother :-) )

  35. Brian says:

    Regarding the mortgage interest deduction, I don’t think this is “rare” by any means. It may be more rare in certain areas, such as where Trent lives and also where I live, but as you begin to get into more densely populated areas with higher costs of living, it is definitely used in much greater proportion.

    In my area, a nice single-family 3/2 home can be had for $150,000. I’ll assume a 10% down payment of $15,000, financing $135,000 @ 6%. Which means approximate mortgage interest of $8,055 in the first year. Still leaving another $2,000 to come up with in itemized deductions to beat the standard deduction, and that is the FIRST year on the mortgage. As time goes by, and you are paying more principle and less interest, you will need even more itemization to beat the standard deduction.

    However, if you moved somewhere where you were financing, say, $300,000 for your home, the numbers change significantly. You’ll be paying almost $18,000 in mortgage interest in Year 1. Bye-bye standard deductions.

    It’s all in location and life factors – if you have significant donation write-offs or medical write-offs, plus the mortgage interest, it’s pretty easy to beat the standard deduction.

    However, if you live in a fairly inexpensive area, and you sock significant money away in pre-tax avenues, significantly lowering your tax burden anyway, then the mortgage interest deduction isn’t always the best route. I wouldn’t call it “rare” to not use it, but like everything it has to be weighed as an option.

  36. John says:

    I think your right Frank. According to the website Trent linked to in the article, the annualized pre-tax return for the past 10 years is 5.83%, today. Based on that number, I calculate that you now have $17, 623. Of course, that’s before taxes and any fees for selling the shares. And of course, inflation, while low, will make also take its toll on how much return you make. I’d guess you’d end up with an actual return, after taxes and adjusting for inflation, of about 20 – 25% over that ten year period.

  37. Anne says:

    It is a terrible fallacy to extrapolate from the average annual return and call the result “compounding.”

    Let’s say you are looking at a fund that gained 100% in year 1 (i.e., you doubled your money) and lost 50% in year 2 (i.e., you lost half your money). The average return over 2 years is (100-50)/2, or 25%. Sounds great, right?

    If you invested $10,000 in that fund at the beginning of year 1, at the end of that year you doubled your money to $20,000. But then, at the end of year 2, you lose half of the $20,000 and are right back where you started, at $10,000. Your ACTUAL returns over the 2-year period are ZERO.

  38. John says:

    @ Anne

    That a great point. I think the annualized 2 year return would be reported as 0%, though I could be wrong about that.

  39. Michael says:

    Brian, $2,000 in additional deductions is not much. Real estate taxes are often more than that, as are state income/sales taxes. Charitable contributions, cash and non-cash, count too. None of these are reduced, so even $1 counts.

  40. WhirlMind says:

    Thank you for answering my question on Warren Buffett.

  41. Nathan says:

    I’m looking to read up more on Global Warming, what books would you recomend?


  42. JP says:

    Trent – I do have another question. How do you feel about the 75k cutoff for the tax rebate(reductions start at 75K)? I know I make more than 75k and live frugal – I did work my way through college and graduate school with no debt and don’t feel I should be penalized now. I already pay higher taxes and yet continue to subsidize lower income workers. I don’t want to seem crude – but I worked my butt off and now the government seems to penalize the responsible people and reward the irresponsible (either in business – currently banks – and personal)

  43. Andrea says:


    I don’t think I’ve ever had this conversation before, so I don’t think I’m the same one. And I don’t think we live in the same city if your transit pass is only $80 b/c mine is $110.

    I DO live with someone, in a one bedroom apartment, and my rent/utilities is about $600/month. Add $200 for groceries and I’m already at half of my take home pay. I do manage to save/pay off debts with most of the other half, but I was just trying to point out that there is a certain base number to cover living expenses and if 50% of your income doesn’t cover that base, then it’s not so easy to save half of everything that you make.

  44. Elaine says:


    I really enjoy your articles, but you talk about being relatively young and happily married with 2 children, making good money.

    Your ideas are great if you are young and make good money. I have lived frugally…ALWAYS…I make ok money, nothing great…and so does my husband…between the 2 of us…we make around $100k…I am currently going back for my masters. We have 1 child together, and we have 3 children that we pay child support for (over $1000 a month)….one is going off to college, which we will help as much as possible. We have 2 cars…both paid for, but both on their last leg and no money saved for a down payment when necessary. We have all our bills paid for except are mortgage and we are barely making it. We live in the Chicagoland area. We have no savings. We both have small 401k’s. We do not have cable, internet, or any extras. My sister cuts are hair and we rarely buy clothes, unless their is an occasion (interview, wedding, etc. We both bring lunch to work and eat by our parents twice a week (free meal). Our treat is going out to dinner once a week (date night – and my parents babysit for free)and we usually use coupons….2 for 1 deals. My daughter is in daycare only 3 days a week and my parents babysit the other 2 days for free. We both have cell phones with the smallest package. We both work side jobs. What are we doing wrong! Any suggestions

  45. Tina says:

    This is part financial, part personal: When it comes time to deal with the bills, I get a sick dread that makes it very difficult for me to do more than the simplest tasks. Luckily most of my bills are on direct debit so I don’t have to think of it, and I finally made a ‘payday’ list of the bills I need to pay manually each month after the paycheck comes in. Even doing these 6 tasks each month (which take maybe ten minutes tops) requires an effort, but trying to make a budget or track my spending causes me serious distress. I deal with it by being very frugal in my spending in the hopes that I won’t be overdrawn by the end of the month, but obviously I could do a lot better if I had a plan. I know this. I’m very organized in other areas of my life. But when it comes to financial stuff, my anxiety is costing me and I don’t know how to defeat it.

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