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The Three Most Important Steps to Saving and Spending Smart Gregory Karp... The 1-2-3 money plan : the three most important steps to saving and spending smart / Gregory Karp.. .7 Is Thi

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The Three Most Important Steps

to Saving and Spending Smart

Gregory Karp

Vice President, Publisher: Tim Moore

Associate Publisher and Director of Marketing: Amy Neidlinger

Executive Editor: Jim Boyd

Editorial Assistant: Myesha Graham, Pamela Boland

Operations Manager: Gina Kanouse

Digital Marketing Manager: Julie Phifer

Publicity Manager: Laura Czaja

Assistant Marketing Manager: Megan Colvin

Cover Designer: Alan Clements

Managing Editor: Kristy Hart

Project Editor: Betsy Harris

Copy Editor: Karen Annett

Proofreader: Debbie Williams

Indexer: Lisa Stumpf

Senior Compositor: Gloria Schurick

Manufacturing Buyer: Dan Uhrig

© 2009 by Pearson Education, Inc.

Publishing as FT Press

Upper Saddle River, New Jersey 07458

This book is sold with the understanding that neither the author nor the publisher

is engaged in rendering legal, accounting or other professional services or advice by

publishing this book Each individual situation is unique Thus, if legal or financial

advice or other expert assistance is required in a specific situation, the services of

a competent professional should be sought to ensure that the situation has been

evaluated carefully and appropriately The author and the publisher disclaim any

liability, loss, or risk resulting directly or indirectly, from the use or application of

any of the contents of this book.

FT Press offers excellent discounts on this book when ordered in quantity for bulk

purchases or special sales For more information, please contact U.S Corporate and

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Company and product names mentioned herein are the trademarks or registered

trademarks of their respective owners.

All rights reserved No part of this book may be reproduced, in any form or by any

means, without permission in writing from the publisher.

Printed in the United States of America

First Printing May 2009

ISBN-10: 0-13-714173-4

ISBN-13: 978-0-13-714173-9

Pearson Education LTD.

Pearson Education Australia PTY, Limited.

Pearson Education Singapore, Pte Ltd

Pearson Education North Asia, Ltd

Pearson Education Canada, Ltd.

Pearson Educación de Mexico, S.A de C.V

Pearson Education—Japan

Pearson Education Malaysia, Pte Ltd.

Library of Congress Cataloging-in-Publication Data

Karp, Gregory.

The 1-2-3 money plan : the three most important steps to saving and spending

smart / Gregory Karp.

p cm.

ISBN 0-13-714173-4 (pbk : alk paper) 1 Home economics—Accounting 2.

Consumer education 3 Budgets, Personal 4 Finance, Personal I Title II Title:

One two three money plan

TX326.K27 2009

For Rebecca, Jacob, and Michael

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Contents

Introduction Telling It Straight 1

Getting from Here to There 1

Simple as an iPod 4

Easy Is Hard 5

When Good Enough Is Good Enough 7

Is This Book Different from Living Rich by Spending Smart? 9

How to Use This Book 10

The Power of Three 10

Chapter 1 Spending Smart Redux 13

What Is Spending Smart? 13

When to Spend Your Money 14

When to Spend Your Money, 1-2-3 15

1 Spend Today 15

2 Spend Yesterday 15

3 Spend Tomorrow 16

Why Pay Attention to Spending? 17

Why Pay Attention to Spending? 1-2-3 17

1 Magnitude 18

2 Speed 18

3 Control 18

What to Spend Discretionary

Money On 19

What to Spend Discretionary Money On, 1-2-3 19

1 Things You Care About 19

2 Experiences 21

3 Things That Rise in Value 21

PART I SPENDING SMART TODAY Chapter 2 First Things First 27

Getting Started 27

Taking Stock 27

Taking Stock, 1-2-3 28

1 Take a Snapshot 29

2 Look Back 32

3 Look Ahead 33

Estate Planning 37

Estate Planning, 1-2-3 37

1 Will 39

2 Durable Power of Attorney for Finances and for Health Care 40

3 Living Will 40

Do You Need a Living Trust? 40

Identity Theft 41

Identity Theft, 1-2-3 42

1 Be Guarded 42

vi The 1-2-3 Money Plan

2 Buy a Crosscut Shredder 43

3 Opt Out 43

What about Fraud Alerts and Credit Freezes? 44

Banking 47

Get the Bank Accounts You Need, 1-2-3 48

1 Get a No-Fee Checking Account 49

Rewards Checking 50

2 Set Up at Least One High-Interest Online Bank Account 52

FDIC Rules: Is My Money Safe? 53

3 Join a Credit Union 54

Bill Paying 55

Bill Paying, 1-2-3 56

1 Use Direct Deposit 56

2 Automate Bill Paying 57

Automation Drawbacks 58

3 Prioritize in a Crisis 60

Endnotes 61

Chapter 3 Get Fit (Food, Insurance, Telecommunications) 63

Food at Home 64

Food at Home, 1-2-3 64

1 Maintain a Price List 64

Is Organic Food Worth the Price? 65

vii

Contents

2 Stockpile Sale Items 68

Freezing Times 71

Cherry-Picking Pays 72

3 Match Coupons to Sales 73

Fun Tangent: Razor Blades 75

Food Away from Home 76

Food Away from Home, 1-2-3 76

1 Make Freezer Meals 77

2 Use Coupons and Discounts 77

3 Skimp on What You Don’t Care About 78

Insurance 79

Insurance, 1-2-3 79

1 Say No to Extended Warranties and Other Junk Insurance 79

2 Refinance Your Term Life Insurance 80

3 Raise Deductibles on Home and Auto Insurance 84

Telecommunications 85

Telecommunications, 1-2-3 85

1 Cancel Your Traditional Landline Phone Service 85

The MagicJack Phone Solution 87

2 Rightsize Your Wireless Phone Plan 89

My Prepaid Phone Story 92

3 Regularly Review TV and

Internet Service 96

Fun Tangent: Don’t Overpay for Audio-Video Cables 102

Chapter 4 How to Buy Stuff 105

How to Buy Products 107

How to Buy Products, 1-2-3 107

1 Read Reviews 108

2 Research Prices 111

3 Reevaluate 113

Price Protection 115

How to Buy Services 117

How to Buy Services, 1-2-3 117

1 Seek Reviews and References 118

2 Research Prices 121

Be Afraid of Commitment 122

3 Reevaluate and Review Contracts Carefully 124

How to Buy Online 124

How to Buy Online, 1-2-3 125

1 Prefer Commodities 126

2 Consider Shipping Cost Versus Sales Tax 127

3 Use a Credit Card 128

Coupon Codes and Rebate Portals 130

Fun Tangent: Eyeglasses Online 133

ix

Contents

How to Buy Used Stuff 134

How to Buy Used Stuff, 1-2-3 135

1 Get Over the “Yuck” Factor 135

2 Evaluate Price and Quality 137

3 Keep It Simple 137

Refurbished Electronics 138

How to Teach Kids about Money 140

How to Teach Kids about Money, 1-2-3 140

1 Give Children an Allowance 140

2 Don’t Tie Allowance to Chores 141

3 Make Rules 142

Chapter 5 Green Means Green 145

Gasoline 146

Gasoline, 1-2-3 146

1 Don’t Spill the Coffee 147

2 Take It Slow and Steady 148

3 Pump It Up 149

Gasoline Myths 149

Home Heating and Cooling 150

Home Heating and Cooling, 1-2-3 151

1 Make a Thermostat Plan 151

2 Seal Leaks 152

3 Avoid Big-Ticket Fixes 154

x The 1-2-3 Money Plan

xi

Contents

Little Things Mean a Lot 154

Little Things Mean a Lot, 1-2-3 154

1 Replace Your Five Most-Used Bulbs with CFLs 155

2 Buy Rechargeable Batteries 157

3 Don’t Buy Bottled Water 159

Should You Buy Carbon Offsets? 161

PART II SPENDING SMART YESTERDAY Chapter 6 Credit When Credit’s Due 165

Your Credit 166

Your Credit, 1-2-3 166

What Is a Credit Rating? 166

Why Your Credit Matters 168

Saving Money 169

Identity Theft 170

1 Get Your Credit Reports 170

2 Get Your Credit Scores (Optional) 172

Get a CLUE: Your Insurance Report 174

3 Improve Your Scores 175

Establishing Credit 180

How You Pay 181

xii The 1-2-3 Money Plan

Noncredit Payment Methods 182

Noncredit Payment Methods, 1-2-3 182

1 Consider Cash as King 182

2 Do Debit Right 184

3 Limit Use of Checks 186

Layaway and No-No-No Sales 188

Credit Cards 191

Credit Cards, 1-2-3 192

1 Never Carry a Balance 192

2 Know Your Perks 195

3 Maintain Your Card 196

How to Choose a Rewards Credit Card 198

How to Choose a Rewards Credit Card, 1-2-3 199

1 Go Online 199

2 Choose Cash Back 200

3 Get More Than 1 Percent 201

How to Get Out of Debt 203

How to Get Out of Debt, 1-2-3 204

1 Quit Borrowing Money 204

2 Quit Saving Money 205

3 Pay Small Debts First 206

xiii

Contents

PART III SPENDING SMART TOMORROW

Chapter 7 How to Save Money 215

Short-Term Savings 218

Short-Term Savings, 1-2-3 218

1 Emergency Fund 219

2 Car Fund 224

3 Seasonal Fund 225

Retirement 226

Retirement, 1-2-3 226

1 Invest Automatically 229

2 Diversify 233

Why Index Funds? 237

3 Hold On 239

401(k) Rollovers 240

Saving for College 240

Saving for College, 1-2-3 241

1 Open a 529 College Savings Account Online 243

2 Select an Age-Based Plan 249

3 Contribute Automatically 250

Community College Route 251

Choosing a Financial Adviser 252

Choosing a Financial Adviser, 1-2-3 252

1 Interview Three Fee-Only Planners 253

2 Ask Questions and Listen to

Your Gut 256

ABCs of Financial Certifications 256

3 Never Agree to an Investment You Don’t Understand 260

Endnotes 261

Chapter 8 Putting It All Together 263

Succeeding with Money 263

Succeeding with Money, 1-2-3 264

1 Never Buy a New Car Until You’re a Millionaire 265

2 Buy a Home That You Can Afford 266

3 Care about Spending 269

Index 271

xiv The 1-2-3 Money Plan

Acknowledgments

W isdom in this book does not come from me

alone.

The great information herein can be largely

attrib-uted to the many experts who have agreed to talk with

me through the years

Wisdom also comes from readers of my national

newspaper column, “Spending Smart,” and my

previ-ous book, Living Rich by Spending Smart Literally

hundreds of readers have called and e-mailed to ask

questions, share their collective wisdom and

experi-ences, or just thank me for providing straightforward

advice, which is the only way I know how to give it

They are a continuing inspiration to tackle new

spend-ing topics each week in my column and pursue larger

publishing projects For all of those collaborators, I am

grateful.

I’d also like to thank editors at the Morning Call

newspaper in Allentown, Pennsylvania, where I work

Editor Ardith Hilliard and managing editor David

Erdman have been supportive of my national

newspa-per column, “Spending Smart,” which is published in

Tribune Company newspapers They have also made

allowances for my nonnewspaper writing.

Thanks to Jim Boyd, executive editor at FT Press,

and reviewers Russ Hall and Michael Thomsett A

spe-cial thanks to Jeanne Bonner for meticulously reviewing

the manuscript.

Thanks, too, to Clark Howard, author and host of

the Clark Howard Show on radio Clark’s encyclopedic

knowledge of consumer issues is an inspiration One

conversation with him, in particular, led to the idea for

the format of this book—of providing just three tasks

for each money topic.

To family, friends, and colleagues who have taken an

interest in my books, thank you Your support means

a lot

Most important, thanks to my immediate family—

Rebecca, Jacob, and Michael—for your support and

accommodation as I finished two books in 15 months

Your love and understanding mean more than you

know.

xvi The 1-2-3 Money Plan

About the Author

G regory Karp is an author and journalist of 20

years His national newspaper column,

“Spending Smart,” is published in papers that

together have millions of readers The weekly column

appears in the Chicago Tribune, Baltimore Sun,

Hartford Courant, Orlando Sentinel, Allentown

Morning Call, and others The column has twice won a

Best Column Award from the Society of American

Business Editors and Writers, in 2006 and 2008.

He is also author of Living Rich by Spending Smart:

How to Get More of What You Really Want.

Greg’s advice on spending money smarter has

appeared in national magazines, such as Newsweek and

SmartMoney; television broadcasts, such as WCBS in

New York, WSB in Atlanta, and WPVI in Philadelphia,

and literally dozens of newspapers nationwide, from the

Los Angeles Times to Newsday in New York.

He maintains a Web site at www.gregkarp.com and

blog at SpendingSmart.net.

Greg lives near Philadelphia with his wife and two

sons.

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T his book is, admittedly, a low-tech device But it’s

meant to offer advantages you find in a high-tech

GPS navigation system for your vehicle and an

iPod audio player.

In navigating money and spending issues, especially

in these challenging economic times, I hope you’ll find

this book as helpful and succinct as a GPS device that

gives driving directions in an unfamiliar region And in

simplicity, it’s meant to be as easy to use as the

ubiqui-tous iPod music player.

Fortunately, you don’t have to be a gadget lover to

use it.

Getting from Here to There

I like my GPS navigation system, a Garmin Nuvi I

sug-gest you buy one, after you get your money life in order

and are spending your money smarter every day.

No It doesn’t have to be that brand or model of GPS

navigator There are many good ones—ones with

differ-ent features and less-expensive ones that still get the job

1

Introduction

Telling It Straight

done But, the Garmin Nuvi is a very good line of GPS

systems for nearly everybody And if you drive often in

unfamiliar areas, you should buy one.

This brief suggestion is indicative of this book I

intend to give you very specific advice about spending

and handling money.

“Garmin,” as I unimaginatively named my GPS

sys-tem, tells me, turn by turn, how to get from where I am

now to where I want to go I don’t mean that it lists

directions and a map on a screen While I’m driving, a

voice inside the small box mounted on my dashboard

speaks directions and road names—albeit, sometimes

with butchered pronunciations.

Garmin doesn’t care where I started, even if I’m lost

to begin with And it doesn’t always give me the

absolute-best route to where I’m going But Garmin gets

me where I’m going, almost every time.

Garmin also provides me peace of mind While

driv-ing in unfamiliar areas with confusdriv-ing traffic patterns, I

don’t care that Garmin isn’t providing the absolute-best

directions—directions that might get me to my

destina-tion two minutes sooner I care that it gives me clear,

understandable directions and gets me where I’m going

safely.

In an unfortunate parallel world, Garmin might have

a fatal flaw It might have a Shakespearean Hamlet

complex, contemplating “To be or not to be.” It would

be much less useful.

What if at every intersection it spoke something like,

“Turn left on Maple Street…or go two blocks and turn

left on Main Street…or, if you’re in a hurry, avoid the

2 The 1-2-3 Money Plan