6 ways to save $3900 per year on your family's groceries

When Benjamin Franklin said "A penny saved is a penny earned" he was right. But that's because good ol' Ben lived before the 16th amendment to the constitution was passed in 1913 -- the amendment that gave our federal government the power of Income Taxes. So these days, if you are in a 30% tax bracket, a penny saved is worth about 1.43 pennies earned. So if you or I can save $1000 a year, it is the equivalent of earning an extra $1428!

Which brings me to my point. Coupons.
To be specific, let's talk about grocery coupons. I realize some consider them to be archaic in our internet-connect world, but they are a powerful tool for reducing your expenditures (effectively increasing your income).

Consider this. In a typical month, I purchase about $150-$200 worth of groceries for just myself, a single individual. These are groceries I have to buy regardless of whether I have coupons or not. However, by just clipping the coupons from my Sunday paper I can easily save $75 or so from that bill. That's $900 a year in savings, and I'm just a single person. And to my point earlier about income taxes, saving $900 is equivalent to earning nearly $1300.

For a family, the savings are magnified even further. If a typical family of 4 is buying $150/week ($7800/year) of groceries, a savvy couponer could cut that in half. Saving $3900 a year! Remember, in a 30% tax bracket, that's like earning an extra $5570!

Think I'm exaggerating? I'm not. Here are tips to help you take a bite out of your grocery bill.

1. Purchase a Sunday paper and clip coupons for items you already need to buy. Don't fall into the trap of buying stuff you don't need and won't use just because it is inexpensive.
2. Go to stores that double or triple coupons. It's a great feeling to turn a $.75 coupon into a $2.25 coupon just by walking into the door. Stores typically post their coupon policies at the customer service desk, but don't be afraid to ask.
3. Match your coupons with weekly store sales. If an item is on sale for 50% off, matching that sale with a coupon will often make the product nearly free! See below for sites to help you find these deals.
4. Don't be too brand loyal. If you have a coupon for a different brand of Ketchup which makes it 1/3 of the price of your normal brand, give it a try.
5. If you find a good coupon, get extras! There are plenty of ways to do this. The easiest way is to use a service like "thecouponclippers.com" which allows you to order as many specific coupons as you like. Also, if you find lots of valuable coupons in a certain week's paper, you can always go buy another paper. Definitely worth your $1.50.
6. Print grocery coupons for free online. There are lots of online coupon sites that allow you to print grocery coupons. However, almost all of them pull from the two major sites:
www.coupons.com and www.smartsource.com
You can also find some good coupons for Pillsbury products on www.pillsbury.com

Websites to help you along the way:

hotcouponworld.com - Find a forum specific to your local grocery chains and share weekly deals with other users.

couponmom.com - Check the "Grocery Deals by State" section for a list of the best weekly grocery deals from your local stores.

thecouponclippers.com - Coupon clipping service that will mail you any coupons you need for a moderate fee.

OR join a yahoo group of like minded savers:

http://finance.groups.yahoo.com/group/smartspending/

No time for another degree? Free online Berkeley and Stanford classes

Every now and then, I'll find something online that I've seen before, but forgotten all about. That happened this week when I rediscovered the massive webcast directory offered free from the good folks at University of California Berkeley. This directory offers all of us the opportunity to take a class from one of the top-rated schools in the country from the comfort of where ever your internet connection finds you, without paying a dime.

There is a similar offering from Stanford (though only audio from Stanford, no video that I can find) available for free download from iTunes.

While there don't seem to be many related to finances or business, I'm spending an hour right now watching an "Intro to Astronomy" lecture (one of my all-time favorite college courses).

Hundreds of webcasts and podcasts from Berkeley available here.

Free podcasts from Stanford via iTunes.

Audio and Video classes from MIT.

How to calculate: Municipal bonds vs. Federal bonds

Municipal Bonds (or Muni Bonds as they are often called) are bonds issued by a city or county to finance the local budget, usually denoted for specific projects like new schools. Muni bonds are extremely low risk for the investor, since cities can always raise taxes to raise money. (However, there was a famous defaulting of muni bonds in California in 1994.)

The great thing about municipal bonds is that if you purchase them from the state in which you live and pay taxes, they are state tax free most of the time . (Be sure to check the individual bond you are buying.)

Like other bonds, your profit on a bond is determined by two pieces: the stated coupon rate (the interest rate they pay you), and the price you paid for the bond relative to the par value (usually $100). This is usually calculated for you and stated as the Yield to Maturity, or YTM.

Should you buy Muni bonds or Federal bonds? Here's how to figure it out:

First you need to know your federal and state tax brackets. Pull your tax return from last year (you should keep those somewhere safe and organized) and find your taxable income. Then consult the "tax schedule" for the Federal and State taxes. (I've linked the federal schedule. You'll have to google a term like "North Carolina tax schedule 2007" to find for your specific state.)

For example, if you live in NC and had $50,000 of taxable income in 2006, that puts you in the 25% federal bracket. That also puts you in the 7% NC state tax bracket. That's a total tax bracket of 32%. To compare the return on a federal govt. bond to the return on a muni bond, simply plug in the following formula.

Muni rate / (1- tax bracket)

So if you have a choice between a muni bond paying 3.5% and a federal govt. bond paying 5.4%, which should you choose?

The Muni bond is equal to a taxable bond paying .035/(1-.32) = .035/.68 = 5.14%

Therefore the federal bond is better for you.

However, if you were in the 40% total tax bracket:

The Muni bond is equal to a taxable bond paying .035/(1-.40) = .035/.6 = 5.83%

Since 5.83% is better than the 5.4% you could get from a federal bond, the muni would be better for your situation.

NOTE: This assumes you are thinking of holding federal or muni bonds in a taxable account. If you are considering purchasing bonds for a non-taxable account such as a Roth IRA, you should not consider munis, because interest payments on all types of bonds are tax free.

Teachers: Use a "Summer Savings" Account and save $34,000!

A friend who is a elementary teacher in our local public school system recently told me that most teachers opt to receive their salary in 12 equal payments. However, they could opt to receive it as 10 equal payments, and then receive nothing over the summer.

I ran the calculations, and found that for a teacher earning 34k/year, it would save $144 to take the 10 payments instead of 12 and set aside 1/6th of their salary each month into a "summer savings" account earning 5%. Assuming a 3% salary raise each year, at the end of 30 years, that slight change will have saved $14,000! That's not chump change!


If you rolled the yearly savings into a Roth IRA, at the end of 30 years (assuming 10% interest), you'd have $34,000, tax free!

To make it even easier, most banks and credit unions will do this monthly deduction into a sub-account for free!

The Rule of 72. How long will it take to double my money?

There is a simple mathematical rule that I learned as a kid that I have never forgotten -- the "Rule of 72." This is a very simple way to find out how long it will take to double your money at a certain interest rate.

Here's how the rule works.

Suppose you want to know how long it will take to double your money at 10% interest. 72 divided by 10 is 7.2. Therefore it will take 7.2 years to double your money if you are earning 10%. If you are earning 7%, it will take a little over 10 years. (Because 72 divided by 7 is roughly 10.) There is no need to figure the exact calculation, because this rule is only for estimating -- but what a powerful little rule it is.

Thanks to several readers who pointed out that this rule is mathematically derived from the "natural log" of 2 which is 0.69. So, it could technically be the "Rule of 69," although 70 or 72 seems easier for quick estimating.

Previous Performance is not an indicator of Future Results

Have you ever noticed in small print at the end of every mutual fund commercial or magazine layout they say "Previous performance is not an indicator of future results."? Ever wonder why? While they may be legally bound to do so, there is also quite a bit of mathematical truth to that statement. Let's take one of my favorite examples, offered in Larry Swedroe's "Rational Investing in Irrational Times" book. (A great read, by the way.)

Imagine giving a room full of 1000 kids (or adults for that matter) a coin and telling them to flip it and try to get heads. Half of them would get it right. Taking the remaining 500, 250 could repeat their performance -- getting heads twice in a row. Continuing down this path, half of the kids would flip heads each time taking our winners down to 125, 62, 31, 16, 8, 4, 2 and eventually the final winner on the 10th flip. So did the kid who flipped heads 10 times in a row demonstrate skill at flipping heads? No, his odds of flipping heads on his next flip are still 50/50, just like everyone else. He just illustrated a statistical fact. That random acts produce a bell shaped curve. A very small percentage of kids flipped almost all tails, and a very small percentage flipped almost all heads, but the vast majority were somewhere in the middle. The problem is that at the beginning of the game, there would have been no way to identify the "genius" with the head-flipping "talent."

So while I agree that some investors have more skill and prowess than others, scores of academic studies have shown that chasing the "hot hand" on Wall Street is an unwinnable game for multiple reasons, but here are the two biggest:

1. Previous performance was enhanced by chance, and not purely a result of skill.

2. As more money flows in due to success, the manager must find more and more opportunities. The more money the fund manages, the less likely they will be to beat their benchmark.

All of that to say that you really should pay attention to the mutual funds when they say "Previous performance is not an indicator of future results." It's quite true.

5 Questions to Consider When Choosing a Mutual Fund

1. What are the goals of the fund?
Before you select a mutual fund, you first ought to know what your goals are and make sure you select a fund with similar goals. Obviously, every fund's goal is to make a profit for the investors, but how much risk you are willing to take and what industries you want to invest in are up to you. There are many fund families that now offer "target retirement" or "life strategy" funds which change with you as you get older. This is a great way to simplify your diversification if you don't feel comfortable doing that yourself.

2. How much are the fees?
Every mutual fund is required by law to disclose their fees to you in the prospectus (that booklet you are supposed to read before you invest). Typically funds come in two flavors, "loaded," and "no-load". A "loaded" fund will typically charge a fee either when you buy ("front-end loaded") or sell ("back-end loaded") the fund. This comes out of the money you invest. Typically these fees are about 5%.
The second type of fee is the yearly fee the fund charges to be a member of the fund. These fees can range from 0.05% up to 3%. There have been several academic studies to show that the only accurate predictor of which funds will produce better returns for their investors, are the ones with the lowest fees. Makes sense, right? If all managers basically perform the same over time, you, as an investor, will do better with the one that charges you less fees.
The third, and often overlooked source of fees comes in the form of transaction fees. While in a sense these are transparent to the investor, the effects are felt nonetheless. As the fund managers buy and sell the stocks in the portfolio, they create expenses both in the form of trading costs as well as taxes. So funds with a higher turnover percentage (for example, 50% would mean they turn over half of their portfolio every year, holding an average stock 2 years) would generate more of those fees, and create more drag on your total return as an investor than a fund with a 10% turnover.

3. Is previous performance an indicator of future results?
The short answer is, no, they are not an indicator of future results. And even though every fund is required by law to remind you of that, people pour billions of dollars every year into the latest "hot" fund. Again, the only proven indicator of better future results in the future is lower fees. Interestingly enough, the one rule that does seem to hold true is that poor performance over several years does seem to be an indicator of poor performance in the future.


4. How does this fit with the rest of my portfolio?
This is a crucial decision. When I was a younger, less experienced investor, I thought I was diversifying my portfolio because I had 4 or 5 mutual funds. However, I had no idea how those funds fit together, and how it affected the overall picture known as my "portfolio." Each fund will list in their prospectus the percentage they invest in each type of stock and bond, and you should track the percentage of each in your overall portfolio. Furthermore, you should have targets for Domestic and Foreign equities, Small/Mid/Large caps, and Bonds. There are various guides for helping you decide your allocations, but mostly it is an individual decision based on your beliefs about the market and your financial picture (such as when you will need to begin withdrawing money).

5. Would I be better off in an ETF?
ETFs (Exchange Traded Funds) have come on the scene in the last few years and made quite an impression. Although they act much like a mutual fund (holding baskets of stocks), they trade on the stock exchange like a stock. The good news is that for most small and medium investors, their is very little difference between a mutual fund and an ETF. ETFs generally track a certain index, although as time has gone on, those indicies have gotten more and more non-traditional. Because they are generally not "managed" funds (following an index instead of active management), the fees are typically lower than a managed fund, and about the same as an indexed mutual fund. Be careful, however. Just because it is an ETF, doesn't mean it is well diversified -- some can be quite narrowly focused.