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Dave Says 10-08-14

We need help with our budget!

Dear Dave,
My husband and I have been living on a budget for a few months, and for some reason there seems to be leaks in our budget. It’s just a few dollars here and there, but added together it makes a huge dent. Can you give us some advice?
Joy

Dear Joy,
This kind of thing happens a lot in household budgeting, especially to folks who are new to the game. Here are some ideas to help stretch your dollars and plug those leaks.
Use the cash-only method, especially when shopping for groceries. Take only the amount you have budgeted, and don’t use your debit card or a check. Also, use coupons only for items you would buy anyway. In addition, you can stock up on items you use often when there is a big sale. These little things will add up.
Try eating out only on special occasions, drink water as your beverage and don’t be afraid to use coupons in restaurants, either. When it comes to buying clothes, make a habit of checking out the sale rack first. You can shop at thrift and consignment stores, and sell the clothes you don’t wear anymore.  
With entertainment, use dollar-off and buy-one-get-one-free coupons whenever you can. See a matinee or a second-run movie, and if you’re going somewhere with a bunch of people, call ahead and ask for a group discount. You’ll be amazed at how much money these tactics will save!
—Dave

Avoid interest on loan?

Dear Dave,
In an attempt to improve my bad credit I recently bought a new car which I financed at 17.9 percent for 72 months. If I make the minimum payment of $468 a month, I’ll end up paying about $13,000 in interest alone. Is there a formula I can use to avoid paying all this interest?
Marcus

Dear Marcus,
There sure is. Sell the stinking car!
Your credit rating and interest rate are lousy because you haven’t paid your bills. And you haven’t paid your bills because you’ve been buying a bunch of crap you couldn’t afford — like this new car at $468 a month.
Listen, you could have more than $5,500 in just 12 months if you just saved up all those car payments. That would get you a good little used vehicle that wouldn’t be an anchor around your neck for the next six years.
Stop believing the lie, Marcus. Going into debt doesn’t improve your life.
—Dave

Asset allocation

Dear Dave,
Can you explain the “asset allocation” theory when it comes to investing?
Matthew

Dear Matthew,
The asset allocation theory is one touted by lots of people in the financial community. It’s also a theory with which I disagree.
In short, the asset allocation theory means that you invest aggressively while you’re young. Then as you get older, you move toward less aggressive funds. If you follow this theory to the letter, you’re left pretty much with money markets and bonds by the time you’re 65.
The reason I don’t believe in this theory is simple. It doesn’t work. If you live to age 65 and are in good health, there’s a high statistical likelihood that you’ll make it to 95. The average age of death for males in this country is now 76, but that includes infant mortality and teenage deaths. So, a healthy 65-year-old man in America can look at having another quarter century on earth. If you move your money to bonds and money markets at age 65, inflation is going to kick your tail. Your money will grow slower than it will devalue, and you’ll have little purchasing power. That’s the problem with the asset allocation methodology.
I advise investing in good, growth stock mutual funds that have strong track records of at least five to ten years. Spread your money across four types of funds: growth, growth and income, aggressive growth and international. These groups provide diversification across risk, as well as a little splash overseas.
Great question, Matthew!
—Dave


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