The traditional compulsive gambler is something everyone’s heard about. They are addicted to gambling because of the euphoric high the “win” produces – even if in the long run, they know they’re losing money. That doesn’t matter to them, because while the low of losing is indeed a low, they know they can win their money back on the next play. Frequently, they’ll even gamble away money that was meant to bail them out. When they’ve convinced family and friends to give them what they need to pay off their debts, they convince themselves that they should just make one more try at it. After all, when they win, they’ll both be able to pay down the debt and have a little money to build up their stake again. It’s a downward spiral that doesn’t stop until the Compulsive Gambler is completely out of money to spend on their habit.

That causes a disaster for the family finances, not to mention the personal lives of the Compulsive Gambler and their family. These women gambled away hundreds of thousands of dollars, missed out on their children’s youth, and one even went to prison. These college students racked up huge credit card debts playing in poker tournaments. This man gambled away his retirement savings at age 75 after his wife died. 80% of Compulsive Gamblers have thought about suicide, and 20% have attempted it or actually succeeded.

And it’s not just people who are engaged in actual gambling. One of the bigger problems is that many people gamble with their financial portfolios because of the high they get, particularly when trading stocks. For example, as a part of the “day trading” trend, some people have even quit their jobs to focus entirely on day trading for a living. Others don’t go that far, but still put a high percentage of their money into stocks that are extremely risky. From penny stocks to buying more than they can afford using margin to trading in obscure commodity markets, Compulsive Gamblers who use the stock market to get their high often put their entire retirement portfolios at risk. What kinds of portfolio activity suggest you might be a Compulsive Gambler?

Buying on margin, for one. Most brokerages will allow someone to do this with no credit check or anything as long as you’ve got some money in the account. They’ll let you buy more stock than you can afford, often letting you spend up to double the amount in your account. That means you can gain a lot more with your money than you would otherwise – you can get double the gains if the stock goes up. But you can also have double the losses, and you can lose more money than you actually invested. It’s a high risk trading device that is not used by most ordinary investors.

Selling short is another one. With this investing strategy, you sell stock you don’t own in the hopes that it will go down. So if you think Apple Computer is going to have a bad month, you “sell” the stock – you sell a contract to supply Apple shares at the current price after a certain time period passes. If the stock goes down, you buy the shares at the lower price, and pocket the difference. If it goes up, though, you lose whatever amount the stock increases.

Churning your portfolio is another potentially bad sign. This just means that you are constantly buying and selling stocks at a frequent rate. Most people don’t do this – they buy a stock they like and hold onto it awhile. Some people buy, hold for a few days, and then sell, trying to get a quick gain.

Trading in risky investments can be a sign that you’re a Compulsive Gambler, too. Is all your money in commodities like oil? Are you speculating on currency fluctuations? Again, this is not normal investing activity.

Finally, there’s trading on “hot tips.” People do this sometimes when a friend of a friend tells them a company will be sold, or is making a lot of money. They don’t have any real basis to buy the stock, but instead just buy it on a rumor.

A lot of you may be saying “Hey! I do X, and I’m not a gambler!” That’s true of many people who use these strategies. They are all valid things you can do with your money, and you can make a lot of money with them if you know what you’re doing. But they are SIGNS that you might have a tendency to gamble. What you need to ask yourself next is this: How much of my portfolio is at risk on any given day from these methods of trading? If you have $300,000 in the bank, and you put $5,000 into Belgian Corn Futures because you think you could make a lot of money, you’re probably not a Gambler. If you lose that $5,000, you won’t notice it. If, on the other hand, all your retirement money is at risk on any given day, you’ve got a problem. It may not be an “I’m going to gamble all my money away and commit suicide” problem – but it is a problem for having a healthy retirement.

Why? Because the point of retirement funds is to be stodgy and conservative with them. You aren’t trying to make yourself rich – you’re trying to set yourself up so you can stop working for the rest of your life, keep your current income, and not have to worry about your finances anymore. You might be saying, “But I can make so much more money in risky investment X! I can retire much more quickly! That’s the goal anyway, right?” True, you COULD retire more quickly. But you could also lose all your money. Whatever you call it, you’re GAMBLING. You’re risking your current retirement funds in the hope that you’ll make a lot more money. Whereas if you just put a set amount away each month into something conservative, over time you’d have a guaranteed healthy retirement. If you lose all your retirement money at age 40, you’ve got to start over – and you lose the benefit of compounding, which is the “guarantee.” Anyone who is willing to give up a certain, satisfying retirement that will take some time in favor of a risk of complete destitution in old age coupled with a chance of retiring sooner has a problem they need to address.

If you’re concerned you might be a Compulsive Gambler with your retirement funds, I’d ask these questions of yourself:

1) Do I get a “high” when I make money in my investments? Do I care more about this high than my long term progress?

2) Are my investments risky? How much could I lose as a percentage of my portfolio if everything went wrong?

3) Do I have a backup plan, or am I relying entirely on riskier investments?

If you think you’re a Compulsive Gambler, then you’ve got a couple of things you can do. First of all, if you’re actually gambling in the traditional sense (and not just with your retirement investments), then it’s probably more serious. You really shouldn’t be gambling any amount of money that you can’t afford to lose. It’s not a good idea generally for your finances anyway, but if you set aside $500, consider it blown, and go take a vacation to Vegas, then it’s not really a problem. If you’re doing it every week, you should get help if it starts causing problems in your life. I’d go look at the National Council on Problem Gambling’s page on helping people with gambling issues.

What if you only gamble with your investments? Often this doesn’t actually cause problems in your life in the same way as playing the slots every day would. It’s less of a day-to-day problem and more of a long term one, in that you’re risking your retirement. Here’s a few suggestions:

1) It can’t hurt you to try the same counseling programs that gamblers take if you think it’s serious. In fact, it might be necessary if you can’t control it. Would you rather have no retirement funds or have to go to some meetings you don’t like?
2) Put your money out of your hands. If you’ve got a spouse or partner, put them in charge of it – with instructions to stick the money into an index fund or something conservative. Get a financial advisor and have them manage your portfolio. Set a strict rule against buying individual stocks or investments, and only go with funds of various kinds. Any of these can work if you’ve got discipline – and if you’ve only got a minor problem, they could be enough.

3) Limit it to a certain percentage of your money – say 5%. You can put that into riskier buys, but if you lose it, it’s gone and stays gone. Put it in a separate borkerage account. 5% of your money saved each month can go to the riskier investments, while the rest goes to the traditional portfolio.

Some of this advice is imperfect because many people who have a problem with risk-taking won’t admit it – and even if they do, it can be a genuine addiction that is hard to overcome with self-discipline alone. You might be a family member trying to help someone else – in that case, you need to consider it just as if the person had a gambling problem. The roots of gambling on slots or on stocks are the same – the emotional high. The same cause needs the same solution, so if you’ve got a family member who is blowing money on pork bellies, just pretend they were going to the casino every week and check out the various online resources available to deal with family members who have gambling problems. There’s a very good list of them here.

Discuss this on the Free the Drones forums.

Everyone knows people who have a tendency to sponge off other people – free riding has been a problem since civilization got started. We also know people who get into jams and have to ask their friends and family for help. The Moocher takes it to the next level and makes a lifestyle out of it. Friends always seem to be covering the beer tab or the meals – the Moocher will pay you back next week, or he’ll just get the next one. He needs fifty bucks, just to tide him over. He swears he’ll get it back to you.

The Moocher always seems to be “crashing” at the places of a rotating series of friends. That’s only, of course, if he can’t swing the sweetest option: living at home rent free with the parents. He may fit this profile:

Justin goes off to college for a year or two, wastes thousands of dollars of his parents’ money, then gets bored and comes home to take up residence in his old room, the same bedroom where he lived when he was in high school. Now he’s working 16 hours a week at Kinko’s or part time at Starbucks.

His parents are pulling their hair out. “For God’s sake, Justin, you’re 26 years old. You’re not in school. You don’t have a career. You don’t even have a girlfriend. What’s the plan? When are you going to get a life?”

“What’s the problem?” Justin asks. “I haven’t gotten arrested for anything, I haven’t asked you guys for money. Why can’t you just chill?”

When the friends or family don’t work out, the Moocher always has a backup: the boyfriend or girlfriend, who seems to be paying for everything in the relationship from the housing to the food. Even though the couple may be having financial problems, and needs both people in the couple to work, the Moocher is always putting off finding that job. There were some jobs, but none that the Moocher was qualified for. Yeah, they had a good paying one in that ad – but it wouldn’t let the Moocher express creativity. The partner ends up bearing the full load of the family finances, and the Moocher sits at home watching Oprah or playing on the X-box.  

So what should you do if you’re a Moocher – or if you’ve got one in your life?

If you think you’re a Moocher, you need to take control of your own life. You can’t keep going forever by sponging money off of others. Friends will get angry and stop hanging out with you. Your parents will get sick of it and kick you out of the house. And your relationships will suffer, with a high chance of a break up over financial problems. The free ride won’t last forever – and by your thirties or forties, you’ll run out of ways to delay dealing with your own financial problems. You’ll have no friends who are still willing to give you money. Your parents will have long since given up on supporting you. And you won’t be a spring chicken able to find an older, richer partner to take care of you.

You need to have a firm rule against taking money from other people, ever. Supporting yourself is important because people who support themselves end up better off in the long run. It’s not just about preserving your relationships with other people – it’s about forcing yourself to advance in life. People who sponge off of others tend to have jobs, not careers. They don’t ever get ahead because they don’t need to. But at some point in life, they end up having to support themselves – and they’re behind all their peers, living a poorer life than they could have had if they’d just worked for what they wanted. They didn’t get that promotion, kept working in the menial job long after they could have found a better one – if they’d just tried. The only thing you can do to help yourself is pay your own way. If you need more money, work for it and earn it. You’ll end up having a lot more money in the long run that way.

Most of the people reading this, however, aren’t Moochers – they’re the people who have to deal with them. So what do you do?

If you’re a friend, then stop lending money, period. If you think someone is taking advantage of you financially, you cannot salvage the friendship by giving into guilt trips. You need to draw a line – don’t be angry or hostile about it, but sit down and explain calmly to your friend that while you want to maintain the friendship, you think lending money to each other will just get in the way. If they get angry or refuse to associate with you, they probably weren’t a real friend anyway. There are lots of stories about people being used for money this way, and you don’t want to be one of them.

This article in Kiplinger’s has a good suggestion: if you feel like you absolutely must give them money for some reason (emergency, health problem, etc.) – make it a gift, not a loan. Loans between friends tend to break the friendship apart, because you are expecting your money back - and you may not get it. If it’s a gift, then you control how much money you’ve lost. You don’t have to give anymore. And it’s a lot more obvious if your “friend” keeps coming back again and again that there wasn’t a real emergency.  

There are some other ways you can reduce friction in the friendship. Is your friend mooching off you when you go out to eat or drink? Maybe they really can’t afford it. Start trying to go to cheaper places and see if it stops. With this kind of situation, it’s best not to bring it up at first, because it can be sensitive. If your friend is willing to pay at the $5 restaurant but not at the $25 one, you might just need to be more careful where you hang out. Often people who become friends at the same income level (in college) gradually earn different amounts as the years pass – and you may not realize that your friend isn’t in the same place as you are anymore.

What if you’re the parents of a Moocher? First things first, you’ve got to get them out of the house. There’s a Dr. Phil slide show series online with some advice on this (yeah, I know, give me a break – this one’s actually pretty useful). You probably can’t just kick them out immediately. But what you do need to do is set a firm deadline. For example, give them a six month timeline. In one month, you stop giving them any money. In two months, you stop paying for gas in the car. In three months, you stop paying for insurance. In six months, they are out of the house – whether they’ve gotten a job or not. The gradual imposition of consequences means it’s easier for you to enforce them. It also gives your kids advanced warning that you’re serious. The problem with most efforts to get your kids out is that they are pretty sure they can safely ignore you. They don’t think you’ll pull the trigger. As the free services get cut off, month after month, it will become obvious that you’re not backing off this time. And that’s the most important thing – you have to go through with every consequence you set. You can’t say “no gas money” and then back down to “well, gas, but only if you’ve got a job.” You have to quit enabling your kid to mooch at some point – and the earlier, the better. There may be short term problems, but the long term ones would be even worse.

What if you’re in a relationship with someone who mooches? Keep in mind there are different male / female standards on this. My guess is that because of the traditional roles of men and women (and the attitudes towards them), men are most likely to be seen as moochers when they’re not getting a job and not doing anything. I’d keep in mind from the start that if your partner is a stay at home parent, you probably don’t have any business asking them to work until your kids are in school. That’s a touch decision, and they really might need to work because of your finances, but they’re certainly not “mooching.”

Some people, however, do – both men and women. You might even be willing to put up with it. If you can support that trophy spouse, go ahead. But most people can’t. If your boyfriend is living in your apartment and you’re paying rent, he needs to contribute. Most families these days have two incomes, and it’s hard for one person to support two able bodied people. There’s an advice column here that has some good reader answers, including this suggestion:

Decide between you which bills he will pay and which you will pay, and discuss how you intend to develop this over time, so that his share is fair. You need to talk with him in such a way that expresses to him that you expect this from him, and that any protests are unreasonable. If you pay all the bills in your name, or you share an account, he has very little incentive to bring the money in. Of course there is a risk that if he doesn’t pay then he will get negative credit, and as someone who lives at the same address you will suffer too.

The credit thing is the most important one to keep in mind – don’t let your bills get mixed up. Above all else, don’t get on the same credit card or bank account as someone who has a tendency to mooch. At some point, you’re going to have to deal with this problem. You may think that it will hurt your relationship if you bring it up or try to force the issue. But realistically, you can’t have a long term relationship with someone who won’t help out when you need it. What are you going to do when you have kids to support? It’s unlikely they’ll suddenly start working then. What about when you get older and need to save for retirement? People who don’t want to work aren’t going to just because you ask. You need to do the same thing as the parents – lay down a consequence and stick with it. If your partner refuses to financially support your partnership, then they’re not really a partner at all. If the Moocher won’t pull their weight, you need to ditch the deadweight. Unless you’re willing to support the family for the indefinite future, you have to give a clear ultimatum: either get a job or we’re through.

The Moocher is one of the saddest cases of a dysfunctional financial personality because it hurts everyone. This is one of those cases where problems in finance spread to become problems with life in general. If you’re a Moocher, you’ve got to get ahold of yourself. If you interact with one, you have to set limits and stop enabling them. Nothing else is going to work.

Discuss this in the Free the Drones Financial Forums.

Today, we’re looking at a new personality type whose love life has spilled over into their finances: the Revolving Door Romantic. These people get themselves into big financial trouble with two aspects of their love life: the tendency to get into serious relationship after serious relationship, and the tendency to go into these relationships without any thought about the finances.

A big part of the problem stems from the “Romantic” part of this personality type. A Revolving Door Romantic simply does not want to think about the money. That kills the “romance” in the relationship. Who wants to talk to a prospective spouse about money? It sounds like you don’t love them or trust them – or are planning on either fighting with them about money or divorcing them. It’s that attitude that leads to problems later on.

These problems can happen during marriage – what if one spouse wants to spend more money than the other? The person who wants to save is unable to do so. What if your spouse is running up credit card debts or not paying your bills and ruining your credit? You didn’t talk about it beforehand, because it wasn’t romantic – and now you get to see the part of the relationship that wasn’t in all those date movies. And it’s also that much harder to come to an agreement. The person who wants to spend may feel justifiably miffed about having to suddenly change their lifestyle. They didn’t agree to that! So you’re stuck trying to compromise after the fact, when it’s a whole lot harder to do so.

Not only is it bad for your finances, but it’s bad for your marriage. The Revolving Door Romantic “revolves” for a reason – those blinders keep them from talking about the very thing that ends up causing the most friction in many marriages. One women’s issues site I found claims that according to divorce lawyers they talked to, more marriages end from money problems than from cheating. So being ”romantic” predictably gets rid of the real romance in the end. You fight about money, you can’t agree on it because you’ve never sat down and come to terms, and you end up breaking off the relationship.  That brings us to the revolving door part. Even with the new financial problems from the breakup, the Revolving Door Romantic will be looking for a new romance. It’s just what people do. And until they come to grips with their financial problems, the new relationship is going to be no better than the last.  

So what are the costs of these relationships? Often they’re astronomical. The Boston Globe had an article on two people who have this personality type getting married, again, to each other. The costs from the past marriage were a big stumbling block to the new one – for example, child support and alimony for the husband:

But McCullough’s alimony and child support payments total another $30,000 a year, so monthly fixed costs are “quite high.” Kelly receives $150 per week from her ex-husband, a construction worker, and she said payment is erratic.

This single excerpt illustrates all the potential financial problems with unplanned parenthood, which are a big part of the problem here. I’m not going to get into any of the huge political or moral arguments that people have about these issues. But from a financial perspective, it’s a bad idea to have kids without planning for them. And even if you plan perfectly, if you’re in a rocky relationship that goes south you can end up paying for it in ways you didn’t expect. 

The man in the Boston Globe article ended up paying $30,000 a year in child support and alimony because of previous relationships. And arguably, he’s not even the worse off of the two - the woman got stuck with virtually no support from an ex who can’t or won’t pay. Both of them are stuck with huge expenses, which are a big burden in trying to start all over again, let alone trying to save for retirement.

But let’s not put all the blame on the kids – it wasn’t their decision, after all. Each relationship you start and end has its own costs. There’s setting yourself up in a new house. The cost of moving. Paying for an attorney if you have to get a divorce. Getting a second version of everything you used to be sharing, from cars to furniture. Often one party gets less than their fair share of the assets. There will be all kinds of expenses you haven’t even thought of. So the more times you start and end a relationship serious enough for you to have moved in together, the more times your life is going to be in upheaval – and you’ll be paying extra for it.

What do you do if you think you’re a Revolving Door Romantic?

1) Ditch the money taboo. Do not move in with someone or get married to them until you’ve come to a detailed agreement about how you’re going to handle money. There are lots of ways to do this, and different agreements work better for different people. Some people want one person who’s better with money to handle everything. Some want it 50/50. Sometimes people will just agree to keep their money separate – it makes them happier to have the control, and there’s no fighting. They each just agree to pay a portion of common bills according to how much they make. What matters is you both have to AGREE. And you also both have to keep talking about money, calmly, on a regular basis. You need to be making plans together and sticking to them. It’s a lot harder for one person to sabotage your goals if they’re specific and on paper.

2) If you’ve got frequent problems with this, get financial counseling. Many people wouldn’t go back to a spouse who cheated without getting a marriage counseler. So why be in a relationship without counseling about money if you’ve got financial problems, which are apparently a much more common issue in breakups? Counseling can make sure that both parties get educated about money (a suprisingly big problem in relationships - lack of education keeps things from being 50/50). It also can help you come to an agreement if you can’t do it on your own.

3) If you’ve been divorced repeatedly, get a prenup. Sound harsh? Well, yes, it is. But if you’re on marriage number two, it’s kind of hard to tell yourself it’s forever. It might not be, and that’s the reality you don’t want to admit – which is why most people try to ignore these financial issues. It’s like conceding that there is a chance the marriage won’t work out. But if you’re in your fifties, and you’ve got a nest egg built up – you can’t risk it being split up if the two of you do. You might end up unable to retire. 

4) Don’t have kids unless you want them and can pay for them.  Again, I understand this isn’t a “rule” that everyone can adhere to because of their own beliefs or practices with regard to religion or politics. But it’s also true that pretty much every set of beliefs I’ve heard of has a way to influence the chances of you having children or not. People do things ranging from abstinence to birth control to abortion to adoption. I’ve got my own beliefs about which of these are OK and you’ve got yours, but, consistent with what you think, understand that it is better to put off having kids until you’re ready, financially and in your marriage.

5) Don’t have kids to try to save a rocky marriage. Chances are it’s going to end badly, for the kids and for both parents. So don’t go out and have kids because you think it’s going to keep you together. If your pregnancy is planned, it should be during a healthy period of the marriage.

6) Don’t jump back into a serious relationship until you’re financially ready. If you’ve been through a few bad ones, take the time to get on your feet first, so that you can start your next relationship without the financial problems hanging over your head. I’m not saying you have to go be a monk for the next four years. I’m just saying that you shouldn’t merge finances with anybody, through marriage or moving in together, until you are ready.

Discuss this in the Free the Drones Financial Forums here.    

How can it possibly be a BAD thing for your finances that you’re a tightwad? I mean, you’re saving all this money! You’re making your own clothes and cutting every 5 cent coupon you come across! You’re pulling cans out of the trash for the deposit – you made a full dollar yesterday from cans other people were going to WASTE!!! You knitted your own comforter! You drive around to garage sales, planning your haggling in meticulous detail beforehand! In fact, you can’t be dysfunctional – you’re the most financially-minded person you know!

Wrong. Now, keep in mind that I’m not saying that it’s bad to be frugal. I’m not even saying that it’s always bad to be a serious tightwad – but in some cases, it is a bad idea from a financial point of view. Why? Because the Obsessive Tightwad isn’t just a normal tightwad – it’s a person who does not understand the concept of opportunity cost.

So just in case you don’t, the very basic idea is this: any time and effort you spend on one thing keeps you from spending your time and effort on something else. Even if knitting that comforter didn’t cost you any money because you pulled the string out of the trash and made the needles from two old nails, you still paid something for it: your time.

The Obsessive Tightwads reading this right now are thinking, “So? I saved money! Who cares about my time?” Well, that’s where the “opportunity” part of opportunity cost comes in. Your time is valuable because you could be spending it earning money instead of saving money. What most Obsessive Tightwads fail to understand is that many of the things they do to save money take up so much time that they would have been much better off working an hour in a part time job. If you can make $6 an hour at the local Denny’s, and you spent an hour to concoct a home-made cleaning fluid for ten cents that you could have bought for $2, you have not saved $1.90. You have lost $4.10. You spent ten cents, and you wasted a chance to make $6. If you’d worked the hour part time, and bought the Windex for $2, you’d have $4.10 more in your pocket than if you tried to be a tightwad.

Now think about it from the bigger picture. Say you spend 10 hours a week being a tightwad, losing $4.10 an hour on average under this theory. That means that after the end of a year, you would have $2,132 more in your pocket by taking the part time job – money you’ve given up to try to wring every last penny you can save out of your household budget. If your goal is to improve your finances, there’s a clear rule here: if you can’t save more than you can earn in an hour, you shouldn’t be doing whatever frugal thing you’re doing. It’s a waste of not just your time, but the money you could have made.

I’ll offer a few caveats: First, you might just enjoy trying to save money. Some people do – they don’t really want to take a part time job and would, in fact, hate the kind of jobs they can get. So it’s perfectly all right to factor your own happiness into the picture and treat your frugality like a hobby. But if your real goal is money, you need to compare what you’re doing to the job you could be doing. Second, some people can’t easily get a part time job. There’s a reason that most frugal tips are targeted towards housewives – it’s because if you’re a stay at home mother (or father), it’s very difficult to do a traditional job and parent the kids. It’s all well and good to SAY go get a part time job – but if you do, you’re locked into set hours. You might need to be able to put down what you’re doing to help out the kids – you can do that with the tightwad techniques of saving money that earn you $2 an hour, but not with many part time jobs. With that said, here’s a few things you tightwads should keep in mind to avoid wasting money:

1) Ask yourself how much you’re going to save beforehand. If it’s a few cents, you shouldn’t spend an hour doing it. If it’s a lot of money, go for it. There’s another concept called “low-hanging fruit” – it means you’re often better off if you just do the easy stuff, or “pick the low hanging fruit” from the tree. It’s a lot harder to get the stuff that’s at the top of the tree – and you get a lot less benefit from each hour you put into working. So, do the easy things that save a lot of money – but don’t try to squeeze out every last cent if you’ve got another option.

2) Try to find a realistic way you could be earning money part time. This is easier than you think – even for stay at home parents. If you have any craft skills at all, you should be figuring out whether you can make anything that can be sold on E-bay. It might be a better use of your time to take up an artsy hobby rather than try to save every last penny you can. I spent a couple of minutes browsing through E-bay and found several kinds of items you could learn to make. There’s dollhouse furniture for sale there, wood carvings, wooden toys – all kind of things, that either a man or a woman could make. I’ll even give away a golden idea for the guys out there: make wooden rubber band guns. There’s only a few on E-bay right now, and lots of people would buy them. It’s not that hard to do – so there’s your niche. Find anything people want, that you can make, and sell to others. There’s a reason all societies eventually start to barter rather than do everything themselves – the village rubber-band gun maker gets very good at it, and makes them faster and better than everyone else. It’s a waste of his time to try to sew, or cook, or fix the car – because he adds more value doing the stuff he knows very well. It’s easier, and more efficient, to pay someone else to do that. This is an economic concept called “comparative advantage” that explains why trade exists at all.

3) Look over your family budget – and remember that you can only save as much as you earn! If you’re living on $20,000 a year, you don’t have that much fat to cut out of the budget. You’re probably going to be better off working in a job than trying to save money. If you make $80,000 a year, you can probably save a lot more – and it becomes more and more worth it to be frugal as your salary goes up. Another tip: big families get more benefit out of being frugal. Here’s another economic concept: economies of scale. Do thing once, it’s pretty expensive to do. Do it multiple times, it’s less expensive per time. So if you’re going around to garage sales to buy cheap clothes, the mother of five gets a lot more benefit out of it than the mother of one. The mother of five can spend an hour saving money on five kids worth of clothes – it doesn’t take much more time for her to do it. The clothes she gets will get handed down to save even more. The mother of one doesn’t get as much benefit – the clothes are used once and then she has to sell them herself. She also can only get at most one child’s worth of savings at one sale – whereas the mother in the big family can get more.

So there you have it. Economics 101 as applied to the Tightwad. As in all things, strive for moderation. The problem is not in being a tightwad – it’s in being so obsessive about it that you’re pinching pennies when you could be earning dollars.

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The Emotional Spender is a very common kind of personality, and I’d say that most people know the feeling that spurs this behavior on. Emotional Spenders tend to be women, not men – but there are a few males in there too. They spend not because they need something, or even because they really want it, but because they have stress or problems in other areas of their lives. People respond to stress with many different kinds of behavior that are satisfying in the short run but devastating over time. Everyone’s heard of the compulsive eater, who gains weight as food becomes a refuge from life’s problems. Emotional Spenders do the same thing.

Had a bad day at work? Well, buying a new purse will make you feel better. A rough week where you worked really hard? You deserve those new clothes. Emotional Spenders buy things because they get a short adrenaline rush when they do. Often, they know it’s a really bad idea – but they use rationalizations to justify the behavior. It’s just a hundred bucks. I’d buy it in a few months anyway. I NEED it. I’ll buy this, but no more splurging for a week! I mean a day! I mean…

How do you cope if you’re an emotional spender?

1) Address the underlying cause. This is a personal finance blog, not a psychology blog or relationship blog or whatever is causing your other problems. But you need to identify what is stressful in your life and do something about it. Sometimes there will be something stressful you can change fairly easily – if your job is stressful, maybe it’s not worth the extra salary to work there – especially if you’re blowing your money on junk anyway. If you’ve got more serious issues, then do what needs to be done to learn to cope. This could mean a support group, a therapist – whatever.
2) Spend on SMALL stuff. I get urges to go spend money sometimes when I’m having a bad day. I want to blow some on a video game or a book or SOMETHING to distract me from whatever’s going on. The solution I’ve used: go rent a movie. You can usually find something interesting there for $4 that will distract you until you don’t feel like wasting money any more. You might find something else you like that’s cheap – spend on that and not on the $400 shoes.

3) Make sure you don’t have any money to spend. Use automated savings programs that take money directly out of your paycheck and into your retirement plan – and max them out. Get rid of credit cards so you don’t have credit to fall back on. And generally, put your money some place you can’t get at it when you start to slip. Paying down the house, putting it into stocks that would take several days to sell, etc. are all examples of this.
4) When you feel the urge to spend, do something else! Go call up a friend and hang out. Do something that doesn’t cost any money, like taking a walk or talking to someone on the phone when it’s free. It should be something that is emotionally comforting to you – so the free thing can take the place of the destructive spending habit.
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The Foot Dragger is a very common personality type. Foot Draggers are defined by their constant procrastination of any thought or planning related to retirement. They just don’t want to think about it, and so they don’t. They go through life carefree until they hit their fifties – when suddenly retirement looms, and they haven’t saved much, if anything. This often results in panic and a last-minute attempt to figure out a retirement plan – which may or may not be possible, depending on how long they’ve waited.

Early in life, Foot Draggers spend pretty much everything they make. They may make token efforts at saving – a few hundred dollars here and there. Usually, though, they treat saving like a fad. They do it, and then get tired of it, and then put it off for just a little bit longer. They probably don’t know that much about personal finance early in life – and this is usually the big part of the problem. It’s rarely that they’re lazy – it’s that they don’t realize how much they really need to retire, and how hard it can be to get there. They think that if they save for ten or fifteen years, they won’t have any problems. They put off learning the details of retirement planning until they think it’s the right time – only to realize they’ve waited 25 to 30 years past when they should have started.

So what do you do if you think you might be a Foot Dragger?

1) Learn the basics of investing. If you’re young, read number five VERY carefully. You need to understand the concept of compounding – because this single concept is what causes most people to incorrectly think they should be waiting until they’re older to start saving for retirement.

2) If you’re young, start saving. You should start as early as possible – but age 25 is really the “must-start” date for retirement savings. That’s when you should be out in the world, making money – and you’ve still got 40 years for your money to grow. That’s a long time, and even a small amount of saving will let pretty much anyone, on any salary, have a decent retirement if they start this young.

3) If you’re under 50, come up with a detailed retirement plan. You still have time to start saving – but the older you are, the harder it will be, and the more likely you’ll have to live on less when you retire. The key point, though, is to plan. You need to know exactly how much you want to earn in retirement. You need to know how much money you’ll have to have saved up, and in what investments, to get there. You need to know how much you’re going to be saving every month, and what you’re going to put that money into. You can’t put off the planning part any longer – because if you find out you’re going to come up short, you need to be aware of that and try to cut your consumption to let you save more money.

4) If you’re over 50, make sure you plan your retirement as well as your savings. Here’s the sad truth: if you’re over fifty, on an average salary, and you don’t have anything saved up for retirement, it’s going to be very difficult for you to retire at age 65 with an income you are comfortable with. You need to come up with a savings plan – but you also need to start cutting how much you spend, and figure out if there’s any way you can retire on the cheap.

One way to do this is to ease yourself into retirement. You can keep working until 67 or 70, which is becoming very common nowadays. You can try taking on a part time job when you hit 65, so that you still have an income stream but don’t have to work full time anymore.

You might look into retiring to another country. This is a common choice among people who were Foot Draggers – many other countries cost much less to live in. In fact, there are places in Costa Rica and other countries that cater specifically to American retirees, and have large communities of older Americans living there. This can let you plan to live somewhere nice even if you don’t have much money to live on. We’re not talking about Iraq or Ethiopia or someplace – just poorer countries where the money goes a lot further.

Another “quick-fix” that helps many Foot Draggers is to move to a cheaper part of the U.S. – and take advantage of your home equity. If you’re living in a bigger city and own your own home, chances are you’ve got enough equity to downsize when you hit 65. Many people living in more expensive areas, where home prices are sky-high, find out that if they sell the house, they’ve got a few hundred thousand dollars of their own money from it. That’s more than enough to buy a cheap house in a rural area or a smaller town. Move to El Paso or Tulsa or someplace similar. Buy a house for $70,000 to $80,000 – which may be even nicer than what you were living in. Now you’ve got no mortgage, you’ve got some extra money in the bank, and your monthly expenses are a lot lower. It’s suddenly a lot easier to retire.

Finally, start pinching pennies now. You want to lower the amount you’re consuming BEFORE 65, so it’s not as big a shock when you hit it – and you’ve got more saved up for when you do.

Discuss this on the Free the Drones Retirement Forums here.

A Mattress Stuffer is someone who is perfectly good at saving money, and in fact is often quite diligent about it. What could be wrong with that? Well, the Mattress Stuffer is putting it in all the wrong places. They’re terrified of risk – and they don’t trust anything but the most conservative of investments. Like people in the aftermath of the Great Depression who hid cash at home to avoid the risks of keeping it in a bank, a Mattress Stuffer shuns stocks in favor of CD’s, bank accounts, or other other rock-solid but low yielding investments. Most Mattress Stuffers don’t have a problem with saving – they probably don’t spend excessively, and they are usually actually pretty diligent about putting money in those bank accounts. What could be wrong with that?

Lots, actually. In their excessive fear of risk, Mattress Stuffers lose out on a lot of money they would have otherwise had. My Grandmother had a classic case of this – after about 30 years of saving regularly on low salaries, she ended up with about $100,000 in the late 1990′s, mostly in CD’s that paid very little interest - a paltry amount of money and nowhere near enough to pay for the care she ended up needing.

Let’s use that to make a hypothetical. Suppose her plan was to save $3,000 a year and put it away in those CD’s, earning 1.5% a year (about what she was getting). Let’s say she did that for 30 years, putting the money away safely each year in a CD – low interest, but virtually no risk. At the end of that 30 years, she ends up with $112,616 – she put in $90,000 of her own money and earned $22,616 in interest over that period. And now she’s got maybe three or four years worth of savings for thirty year’s work.

What if she hadn’t been so conservative? Let’s say she invested in a generic index of the stock market – the Standard and Poor’s 500, and just bought a mutual fund that tries to match the S & P index. I’ve looked around and found various numbers cited for the S & P’s average annual returns since the 1920′s, but they’re all between 10 and 12 percent before inflation. Let’s assume Grandma would earn 10 percent per year on her index fund, on average, and she does the same thing as above – puts in $3,000 a month for 30 years. How much does she end up with now? $493,482! Nearly five times as much as she would have had with the conservative, “safe” investment! Now she’s got enough money to earn about $25,000 a year in bonds, which would give her a decent retirement with social security and drawing down some of the principal each year.

Now, there is really only one solution for a person who thinks they’re a Mattress Stuffer: invest your money in stocks. Not just any stocks, because you’re obviously going to be concerned about risk – get an “index fund,” which is a mutual fund that does not trade stocks actively but instead just invests the money so that it mirrors a major stock market index such as the Dow Jones or the S & P 500. You’re basically investing in the market as a whole, and not in a particular stock. Since WHAT you need to do is easy, I’ll give you the reasons WHY just in case the example above didn’t convince you:

1) The stock market is not risky. This is pure myth. Investing in the stock market as a whole is NOT a risky thing to do – IF you’re investing over a long period. Why do people think the stock market has a lot of risk? Because they hear about crashes causing people to lose all their money. But if those people had just held onto the stock, they wouldn’t have lost anything. Even if you’d bought an index fund just before the 1929 crash, the biggest in history, you would have had your money back and then some if you’d held onto the stock for 15 or 20 more years.

The reason people most often lose money in the stock market is because they try to be clever. They try to ”beat the market” by doing better than the market as a whole – picking riskier stocks like the Internet stocks in the 1990′s. Some stocks are riskier than others – but owning the stock market as a whole means you don’t have much risk at all.

The best advice is to invest in the stock market, and gradually put more and more of your money into bonds as you get within 10 years of when you want to retire. That gives you extra safety as you get to the point where you’re going to have to cash out and aren’t able to wait 15 years for your money anymore.

2) CD’s ARE risky. In fact, you are certain to lose money because they don’t earn more than inflation. If you earn less than 3 percent on your money each year, you are losing money on that investment. That’s because a dollar loses value as each year passes – it’s worth an average of 3 percent less each year. So far from being safe, the CD was actually costing Grandma money each year she had it.

3) If a big stock market crash or economic collapse happens, you’re in trouble anyway. I hate to break it to you if you think your money is safe from financial problems in low return investments – but in a big stock market crash, everyone gets hurt. The Great Depression didn’t just destroy the savings of people with money in stocks. People who had money in banks lost it all when the banks went under. Everyone suffered from the years of financial pain that followed. So why would you give up higher returns on your money when there’s always going to be some risk?

Another way to think about it is this: by the end of 30 years, you have accumulated nearly $500,000 with the stock market approach, vs. $113,000 with the “no-risk” approach. Even if there’s a sudden crash right before your retirement, it would have to wipe out nearly 80% of your money for you to be as bad off as if you hadn’t invested in the stock market. Anything is possible – in the 1929 crash, stocks lost 90 percent of their value between 1929 and 1932. But the point is that for a crash to hurt you more than a slow investment, it would have to be Great Depression-level. And because taking the slower investment results in you having 80 percent less money when you retire, what’s the difference between investing in CD’s and suffering a market crash anyway? 

The overall point is: if you’re worried about risking your money, you shouldn’t invest in specific stocks. But a generic index fund is not a big risk. In fact, it’s one of the least risky investments around. Conservative investors should put their money in index funds, not in CD’s.

Discuss this in the Free the Drones Investing Forums here.   

One of the most important principles of personal finance for anyone to learn is this: it’s easiest to save money when you don’t spend it.

Most people who are new to saving money have lived for a long time by consuming at or above the level they earn. This means that you spend everything you earn (or more, if you have credit cards), and then you start coming to sites like this either when you find yourself drowning in credit card debts or when you are approaching retirement and realize that you need to do something to start saving. In other words, most people who are trying to learn about personal finance are people whose lifestyle choices haven’t done very well for them – they’ve spent themselves into a corner, and in the end realize that it isn’t sustainable.

Now, if you’re one of these people, there are a lot of different reasons you could have been spending. It’s going to be up to you to figure out why your finances aren’t in shape and what was behind your own problems. This post will focus on just one of these reasons: being a peacock.

There’s a tendency among many people to think that being wealthy is a game of perceptions. If you don’t show it, you don’t have it. A peacock is a person who buys into this idea and decides that it is extremely important that everyone around them know that they’ve got lots of money. Like a peacock, they alert everyone else using an ostentatious display. You’re a peacock if you buy rolexes, $1,000 suits, new cars every year, vacation homes in areas where all your friends summer, or any other things that are designed solely to make other people think you’ve got money.

Often, people who fall into this category actually earn fairly high incomes. The problem is that they just don’t save any of it. In fact, it’s usually the high income itself that leads to that behavior – most of their friends will live in fancy areas, and they’ll feel the pressure to keep up with them. They may be a professional who worries about their appearance and what clients will think about them. They may buy into the “you have to show money to make money” philosophy that has burned so many in the long run. They may just be bad with money - doctors seem to face this problem especially. But peacocks end up flashing money around on the theory that it’s the only way anyone else can see it. They often don’t save much if anything at all from their income. The excessive spending catches up to them in their fifties, as they start looking to retire and realize they haven’t done anything at all in terms of saving. They’re staring at retirement in a few years with no real way to catch up.

So what do you do about it if you think you’re a financial peacock? Here are some things you can do to change your ways:

1) Realize that you don’t have to spend money to make people think you’ve got lots of money. Since peacocks mostly care about the impression they give off to others, they shouldn’t be worrying so much about whether they actually spent tons of money or not. There’s a good article along this lines called “9 Ways to Look Rich But Live Cheap” on MSN Money here. I’m not sure the advice there goes far enough – I think a lot of people would tend to just spend all their money anyway. But if you can’t stop yourself from trying to posture to other people, at least take the advice that:

Given how many discount stores and Web sites there are, it’s ridiculous to pay full price for anything. You can dress like Vogue editor Anna Wintour for a fraction of what she pays, just by shopping at Target, which features super-cheap but trendy duds by high fashion designer Isaac Mizrahi.Other ways to enrich your wardrobe: shop at consignment (aka “secondhand”) stores, but only in tony areas. Christine Sparta, a free-lance writer in New Jersey, bought a Christian Dior suit at just such a place for $58. No, I didn’t forget a zero.Learn to work the Web. “If I see a pair of designer shoes at Bloomingdales,” says deNicolais, “I know I can find the same exact pair for $50 or $60 less at SHOEbuy.com.” I like to go straight to the “clearance” section of my favorite retailers online — from L.L. Bean to Victoria’s Secret to Crate & Barrel. I’ve gotten amazing deals.

2) Go read the book The Millionaire Next Door. This book is written for you. Particularly telling are the contrasts between two real-life doctors who both make around $700,000 a year. One doctor has a net worth of $8 million or so – while the other has a net worth of only $400,000, less than his salary! Despite making a ridiculous amount of money, the second doctor will have an incredibly difficult time retiring. The basic difference between the two was that the second doctor was a peacock – he spent $40,000 a year on a country club membership to show off to his friends, hundreds of thousands on new cars, suits, clothes, and other random junk he didn’t need that he thought would make him look wealthy. Despite making all that money – he’s actually nowhere near rich. If he could just change his attitude towards money, he’d be rich in a couple of years. The basic concept of the book is that some people tend to under-accumulate wealth relative to their salaries, while others tend to overaccumulate it. You want to be one of the ones who saves more money than is normal at your salary range.

3) Knock some sense into yourself and go on a strict budget. Fixing your problems is ultimately going to be about willpower. You need to sit down, run the numbers, and come up with a set amount you’re going to spend each month on luxuries. And most of all, you need to never go over that amount – EVER. It’s very easy to start letting things slide and get back into your old bad habits. If you spend $500 and clothes and your budget is $500, then if you want to spend more you need to just sit and wait it out. Next month you’ll get the new stuff. This month you are just going to have to make due with what you have. Make a category for each thing you tend to spend on that you don’t absolutely need. Car, clothes, electronics, video games, eating out – all these kinds of things should have a category. And all should have a strict limit.

4) Have a spouse? Well, then “we need to talk…” You will never make this work unless both of you get on the same page. One person in a relationship can spend the household into the poorhouse. And the biggest problem for the peacock is they tend to live in pairs. You are going to have to sit down and figure out some way to convince your spouse that a secure retirement is more important than the second Porsche. This could well be your hardest task. Maybe the best advice I can give is to focus on how unpleasant it’s going to be when you hit 65 and suddenly have to live on Social Security because you didn’t save anything.  

5) Get some new friends. If the people you are friends with really care that much about what you’re spending, I’ve got some bad news for you. They’re not your friends! Real friends do not care about how much money you have, and they aren’t going to worry about some kind of competition with you to see who can rack up the most toys. Stop trying to impress shallow people and go hang out with somebody else.

Discuss this on the Free the Drones Personal Finance Forums here.