Money Savers Archives - The Broke Professional

Find Your New Financial Normal

Make a few adjustments, and create a new financial normal.

Make a few adjustments, and create a new financial normal.

One thing I’ve noticed over time is that humans are very adaptable creatures.  We conform to our surroundings and can make almost any environment feel routine to us after a while.  Animals do this, as cold weather creatures develop features that can increase survival in even the most harsh of environments.

Call it evolution, adaptation or just the way God made us.  The fact is that we can adapt to most situations and environments given enough time and motivation.  Knowing this, we should theoretically be able to improve our financial situation by changing our environment.

We can get by on less

I was accepted into optometry school fairly late into the process, so I had to scramble to find an apartment near the school.  I asked a couple of people I knew if they needed roommates.  No one did.  I started looking for one bedroom apartments in the area but they were way out of my student salary (aka no money).  I was at a loss.

But then I had an idea.  I called back one of my classmates and asked if I could stay in their living room.  He wasn’t planning on bringing any furniture in the living room and neither was his roommate, so he said that would work.  I just got an air mattress and set up shop.  So I had a place to eat and sleep and paid very little rent since we split it 3 ways (I got to pay even less since I didn’t have my own room).

It was tough the first few days.  One bathroom for three guys.  Not much privacy being in the wide open living room.  Not an ideal living situation.

But I made some adjustments to make things easier.  I spent most of my time studying in the library.  Since studying is what I did almost all the time anyway, I just brought some food from home and ate during study breaks.  It became very doable and I made a couple of good friends in the process.  All for hundreds of dollars less per month than if I got my own apartment.

What this experience showed me is that you can get by on less, even if you don’t think you can.  Sometimes we are forced to get by on less because of a job loss or illness.  Those aren’t fun times.  The time to experiment is while you’re healthy and making money.

Cut your cable and see how things go.  Look at some smaller fuel efficient cars when it’s time for a new one.  Try to eat out a little less every week.  Doing things like this will create a new baseline of spending and you may not even notice the difference after a while.

And if you do start feeling the pinch, then you know that particular thing is something you value and can’t live without.  Simply go back to it and try to cut something else.  Not much to lose there.  This process will save you some money for sure but will also simplify your life just a little more.

Create a New Normal

Cutting expenses is all well and good, but how can we use our adaptability to actually save money and supercharge our finances?

The most recent numbers put the US personal savings rate at 5.2%.  The savings rate for the Millennial generation is actually negative!  These are abysmal numbers and unless the average American is making millions of dollars a year, a 5% savings rate is just not going to cut it!  Your working career could end prematurely because of health issues or job loss, so making sure you have enough savings (and insurance) is key.

So what’s the answer?  Move to a cheaper area?  Cut your cable?  Stop drinking lattes?  All of these are viable solutions to keep more of your money, but probably are not the answer for most people.  The answer?

Create a new normal.

If you’ve only been saving 3% of your salary into your 401(k), log into your account and increase it to 6% and try to live on your new slightly less monthly earnings.  You will make less money than before obviously, but through our awesome ability of adaptation, you will most likely get used to it after a few weeks.

You just doubled your savings rate.

After a while, consider increasing your 401(k) deferral again, especially if you get a raise.  You might find increasing it too much is making things a little tight.

That’s okay.  You can back it down a little bit and increase it later when you’re ready.  More than likely you will end up at a much higher savings rate than you started with.

You can apply this to any almost any financial goal.  Want to pay off your student loans quicker?  Increase your payment to principal by $200 every month and see if you can handle it.  Want a larger emergency fund?  Try to set an automatic contribution to take $100 out of your checking account.

After getting used to your new financial reality, you can try to see if you can save some more.  Make it into a game.  And just like a game, you can push reset if things don’t seem to be going so well.

Most of us underestimate our ability to adapt to new and possibly harsh situations.  Try to create a new financial normal for yourself by cutting a service you don’t need or increasing your savings rate.  You’ll be surprised at how easily you can adapt.

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Where to Stick Your Bonus Paycheck

morpheus

What if I told you that if you’re an employee, you most likely get a bonus twice a year?

What if I told you that you get this bonus without doing any extra work?

And what if I told you, that you can use this bonus to take a nice bite out of any debt you may have or just give a little extra padding to your savings?

You would think that I’m crazy to promise such a thing, but all you have to do is look at the calendar.

There are 52 weeks in the year, which means that people who get paid bi weekly will receive 26 checks throughout the year. But if you divide 26 checks by 12 months, you get 2.167, not 2.

So what this all means is that during 10 months of the year, you get paid twice.  But during the other two months, you get paid thrice!  That’s right, you get an extra paycheck twice a year.

Why is this important?

MINDSET.  When determining their budget or deciding to see if they can afford a service, most people assume they get paid twice a month and calculate from there.  This is just how people are wired nowadays.  This can be a good thing or bad thing depending on how it’s used.

But the purpose of this post is not to discuss the pros and cons of being in a monthly payment mindset.  The point is that if you are in that mindset, you get an extra paycheck twice a year without fail.  But the important thing is to actively decide to DO something with that extra money.

The worst possible thing you can do with that extra paycheck is to just let it sit in your checking account and have absolutely no plan on how to use it.  I’m assuming this is what most people do, because most people have very little awareness of their money is going.

If you just let it sit in your checking account, it will most likely get spent on something you don’t need.  Best case scenario, the money just sits there and doesn’t do anything to further your financial well being.

So what SHOULD you do with this money?  This is something to really think about because this can potentially be a life changing decision.

Here is a little cheat sheet to get you started.  Everyone has different goals and life situations so this may not apply to you word for word, but I feel this is a good way to figure out where to put that extra money:

1.  Pay off family and friends.  Owing people money feels really bad.  But owing family or friends money should feel even worse.  If you borrowed money from a family member and there was no mention of you paying it back, pay them back anyway.  Resentment can build if these debts linger for too long.  These relationships are too valuable to lose and can be difficult to repair.  Use that extra paycheck and take care of that debt once and for all.

2.  Pay off any high interest debt.  No matter what your goals are, keeping around any high interest debt will ensure that you reach those goals as slowly as possible.  Some people don’t feel comfortable with having any debt at all, but I’m okay with having some lower interest debts that don’t stretch you financially.

I classify “high interest debt” as anything with an interest rate above 6%.  So this definitely includes credit card debt and any other type of consumer debt.  It can also include auto loans and student loans depending on your situation.  Make sure the payment goes entirely towards the principal amount.  I’ve dealt with sneaky companies that will apply the payment towards any interest owed first, which does nothing in paying off the balance.

3.  Pad your emergency fund.  I firmly believe that having a healthy emergency fund will help you avoid almost any financial catastrophe.  Some recommend having 3 months of expenses, while others recommend having up to a year’s worth of expenses.  Everyone has different life circumstances and dispositions, but if your emergency fund is not where you would like it to be, just stick your bonus paycheck in your savings account.

While savings accounts don’t generate a whole lot of income, that’s not their purpose anyway.  That money is there in case of an unexpected expense that you can’t cover with your normal cash flow.  Keeping your emergency fund healthy is as important a financial goal as any other.

4.  Increase retirement contributions.  If you don’t have any financial “fires” to put out, it’s time to focus on retirement savings.  Retirement can seem worlds away for most young professionals and millennials, but it is imperative to keep contributing to your retirement accounts because you have time on your side.

Time allows your retirement accounts to grow exponentially, and contributing consistently early on in your career will help provide the foundation for massive growth.  So when you get that extra paycheck, consider increasing your 401(k) contribution or just transfer the money right away to an IRA or brokerage account.  Needless to say, your future self will thank you.

5.  Invest in yourself.  Making an investment in yourself can mean many things.  It could mean taking time out of your day to read or practice a skill.  It could mean networking with influential people in your field.  It can also mean spending some money to buy a product or education that will increase your long term earnings.

Daily improvement should be a a constant goal for everybody, but if that nice little bonus check can cover the cost of tuition or help you buy a product or service that will make you lots of money potentially, then that’s where the money should go.  This is where creativity and consistent hard work come into play in determining how lucrative this investment could be for you.

There aren’t many times you can get “free” money.  But during 2 months out of the year, you can get pretty close by getting an extra bi weekly paycheck.  As with any type of new earnings, try to stretch those dollars are far as they can go in meeting your financial goals.

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Bike Your Way to Freedom!

Hello everyone.  Anum of Current on Currency was kind enough to help me out with a guest post as I get my posting schedule back on track.  It’s been a crazy few weeks with job and life changes abound, but I’m getting back on the blogging grind.  Enjoy this informative post by Anum!

How to Improve Your Health, Wealth and Standard of Living

If you could do just one thing today to improve your quality of life, what change would you make? A new diet, perhaps? Take up meditation? Maybe double the amount you’re setting aside in your IRA for retirement?

While each of these is admirable, they only address one aspect of your overall wellbeing. Luckily, there’s something you can do to be healthier, wealthier and raise your overall standard of living in one fell swoop.

You need to bike to work.

If you require some inspiration to make this leap, check out some of the ways that becoming a bicycle commuter can change your life for the better:

Cycling to Work Lets You Skip the Gym Fees

Riding a bike provides the same important cardiovascular benefits traditional gym activities like jogging and swimming do. Instead of hitting the boring treadmill, you can kill your workout and your commute at the same time, giving you more time and money to spend on something else.

Avoiding Traffic Jams Means Less Stress in Your Life

The average American spends 42 hours a year sitting in traffic on their way to work. In addition to wasting your time, commuting can be a major daily stressor. Embrace the calm, quiet trip on your bicycle, though, and you might actually get to work faster than you would have in your car. Even if it takes a little longer, you’ll be more relaxed when you get there.

Cycling Is Much Cheaper Than Driving

Fuel costs, maintenance hassles and insurance requirements all make owning a car incredibly expensive. Every time you bike to a nearby event or store to run an errand, you cut down on the amount you need to spend on your vehicle. Even just cycling on the weekends will have a positive impact on your budget while keeping your annual mileage low.

Bike Sharing Programs Let You Test-Drive Your Commute

If you’re one of those people with a garage full of athletic equipment from past sporting endeavors that you’ve since given up on, no worries. Many cities have bike-sharing programs that allow you to rent a bike to get from one end of town to the other. Take advantage and do a test month on two wheels to see if you like cycling to work — no commitment required.

Biking Beats the Bus Any Day

In addition to helping you burn extra calories, cycling in the fresh air makes you less likely to get sick than taking shared public transportation. Taking the bus is particularly infectious: There are elevated levels of bacteria on public buses, increasing the odds that you’ll get sick. Bacteria on your bike? Practically non-existent.

Cycling Leads to Reduced Healthcare Costs

Because all the exercise from biking is so much healthier than spending hours sitting still in a car, countries with widespread cycling commuting save big bucks on healthcare costs. In bike-friendly Copenhagen, Denmark, healthcare costs are expected to fall by a whopping $60 million thanks to cycling.

Supporting Cycling Helps Build Economies

Cities that have a high percentage of bicycles on the road see money stay in the local economy. In Portland, for example, where 20 percent fewer people drive than other cities, $800 million stays in the local economy. It’s also a whole lot cheaper for cities to invest in bike lanes than in new highways: an urban freeway costs $60 million per mile, while bike lanes top out at just $250,000 per mile.

biking infographic

Whether you take up cycling for your health, your wealth or to do your part to boost the local economy and protect the environment, commuting by bike will make a big impact on the world around you. It’s okay to start with small local trips to build up your skills and your stamina. Soon you’ll want to bike everywhere, and the benefits of cycling will multiply the more you do it. Go ahead and give it a try!

Anum Yoon started and maintains her personal finance blog, Current on Currency. Sign up for her weekly newsletter to read about her financial journey and perspectives on money management, frugal living, and financial trends.

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Death by a Thousand Swipes

razor

Surprised it’s not made in China.

Humans are incredibly adaptable creatures, especially when it comes to money.  If we only have a little bit, we can make do and find ways to survive.  The median household income in the United States is about $51,000.  For those in the upper class, it is almost unimaginable to be able to live on that type of income.  But it is being done by thousands of families all over the country, even if they may be living on the edge financially (paycheck to paycheck).

On the other end of the spectrum, you have athletes and celebrities who make millions upon millions of dollars and still manage to lose it all when the money stops rolling in.  While most people won’t weep at someone who blew millions of dollars, they can have the same condition as a family living on median household income: putting themselves on the financial edge by living a paycheck to paycheck lifestyle.

 Self Inflicted Wounds

So what does death by a thousand swipes have to do with anything?  Death by a thousand cuts refers to a particularly gruesome form of capital punishment practiced in ancient China.  The convicted criminal would be tied to a wooden stake and would have numerous small cuts inflicted upon them until they died.  It was a form of torture/execution that was eventually banned.

Death by a thousand swipes then is when someone slowly and methodically destroys their finances by making many little purchases that add up to their financial demise.  Making one or two purchases doesn’t result in anything serious, but they build up and can eventually kill your financial life.

(Tangent:  With all this new financial technology coming out, what if there was an app that would shock a person every time they swiped their credit card?  I think a cut for each swipe may be a little too much.  But that would definitely keep people from overspending!)

While not as sadistic as the literal from of torture, death by a thousand swipes is equally deadly on your finances.  And it can afflict everybody from the average family of four to the million dollar athlete (Vin Baker for instance).  It can be something as simple as eating out way too much or having one too many Ferraris in the driveway.

The Cure

Financial death by a thousand swipes has a pretty easy fix.  It’s a 2 step process that sounds easy but takes discipline and some life hacking to pull off.

First step is to let the cuts you already have heal up.  This means that you acknowledge that you made some possibly dumb purchases, but you’re not going to make them anymore.  And you might have to trick yourself into doing this.  If your major vice is grabbing coffee twice a day from the local coffee shop on your way to work, take a different route to work.  Overspending is literally an addiction, and after a few days of withdrawal, you should be able to control it.  Whatever it takes to keep you from making those unnecessary purchases and dying a slow and painful financial death.

After you wean yourself off of the mindless spending, the second step is easy.  And that is to pay yourself first and always.  Notice I didn’t say start a budget.  I have nothing against starting a budget, but if you automatically skim 10% of your take home pay off the top and put it in a savings or money market account, budgeting doesn’t become a big deal.  And since you hopefully ended your spending addiction in step 1, there is little chance you will spend more than you need to.

With these two steps, conquering the sources of your unnecessary spending and paying yourself off the top, you can dig yourself out of the paycheck to paycheck lifestyle in no time.  This will open up opportunities to do things that can super charge your journey to financial independence such as paying off debt quickly or increasing your investment contributions.

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When a Sale Really Isn’t a Sale

What the recent Amazon sale felt like.

What the recent Amazon sale felt like.

Amazon recently had a “flash” sale on July 15 only for its Prime Members (which is pretty much everybody because who wants to wait more than two days for shipping?).  The company and other news outlets were hyping it up a few weeks before, saying this would be the biggest sale that Amazon users have ever seen etc etc.

I was actually thoroughly excited about it because I’ve had a great experience using Amazon over the years.  For example, my awesome new laptop I currently use was bought from Amazon.  I was originally going to buy it directly from the manufacturer as they had some type of sale going on.  I put in all of my custom specs and was excited to finally buy it, but a thought occurred to me to check if there is anything comparable on Amazon.  Lo and behold, the same model with better specs was available for $200 less than I was about to pay.

I would consider that a steal, but this most recent sale by Amazon, not so much.

If you don’t need it, it’s not a deal

When the big day came, I excitedly clicked on Chrome and typed my way right to Amazon.  As expected, the website was full of fanfare and can’t miss deal banners.  But after browsing for a few minutes, I came to realize that all the excitement was for nothing.

Nothing practical was for sale.  We get baby stuff and some household things from Amazon once in a while, and I was expecting to see some decent deals on this stuff but was sorely disappointed.  Most of the sales were for electronics and “services”, which I didn’t even know Amazon had.  Did you know you can order housecleaning services from Amazon?  It is definitely more expensive than finding a housekeeper on your own, but if you can just click and maids magically appear, then why the heck not?

There was even a Kindle on sale for a higher price than when I got it a few months ago!  Not much of a sale after all.  While I was ready and willing to spend some money on things that I needed or even wanted, I didn’t end up buying anything.  And it seemed that only things nobody really needs were the featured items.

Don’t give in to the hype

One thing I’m slowly learning over the years is that despite what the salesman says, this is not the last time a product (car, phone, furniture etc) is going on sale.  This is a classic line that retailers will tell you, increasing the pressure on you to buy now because you may never get a chance later.  This is a bunch of bologna because everything goes on sale again at some point.  Retailers are very good at making us feel that we have a limited time to make a purchase, but if you’re willing to walk away and wait, you will be able to find the same deal, or something even better, later on.

As the recent Amazon “sale” showed, don’t be swayed by pre-sale marketing.  And if you don’t see anything you really need or like, it’s okay to just walk away.

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How Your Credit Score Can Affect Auto Insurance Rates

gecko

Save 15% or more with a great credit score

There are all sorts of myths and ideas out there about what exactly affects car insurance rates.  There are the obvious things like income, history of speeding tickets and how long you have been driving.  There are also those seemingly unrelated things like the color of your car, where you went to college and who your favorite sports team is.  I made that last one up but I could see how being a New York Knicks fan could make me an angry and distracted driver.

Because state insurance laws vary and insurance companies don’t really reveal how they come up with rates, it’s hard to find out what exactly matters.  But there is one factor that plays a role in how much you will pay for auto insurance, and that is your credit history.  Yes, your auto insurance company cares if you pay your credit card bills on time.

“Credit Based Insurance Score”

According to the National Association of Insurance Commissioners, auto insurance companies use a something called a credit based insurance score as a factor in deciding how much to charge an individual for car insurance.  Because insurance companies are run by vampires who hide in the shadows, it is not known what exactly goes into this score and how much it can affect your insurance rate, but it is safe to assume that your FICO credit score is a big factor.

Now what in the world does your credit score have to do with driving a car?  One can only guess as to why exactly insurance companies value your credit score, but any factor that affects insurance rates usually comes down to one thing: money.  As in the insurance company wants to make as much money as possible while giving you as little as possible.  If you look at it from the insurance companies perspective, a perfect customer is one who pays their bill on time every month and never files a claim.  You could then come to the conclusion that someone who has poor credit is not “responsible” so they will be late on paying their bills and likely be a reckless driver.  It sounds a little far fetched, but insurance companies do lots and lots of research and it’s reasonable to think they have found some research that shows drivers with poor credit make more claims than those with good credit.

Is it unfair?

Some argue that taking into account someone’s credit score to determine auto insurance rates is unfair.  I agree somewhat, because there are many reasons that someone could have poor credit that have nothing to do with irresponsibility or recklessness.  People with egregious medical bills that have no way to pay them are just one example.  Another example is someone who has been a victim of fraud and has had their credit dinged in the process.

Immigrants are also affected unfairly by this.  They usually have little to no credit history when entering the country, so even if they are the most responsible person in the universe, having insufficient credit history can affect them.  Indeed, there are some states (Massachusetts, Hawaii and California) that have banned auto insurance companies from using a credit based insurance score.  So there is some sentiment out there which feels this is an unfair practice, but most states do allow it so I don’t see it going away anytime soon.

Bottom line

If you live in a state which allows this practice, you need to make sure your credit score is pristine.  There are many many reasons to have a great credit score, and this is just one more reason to add to the list.  Having a good credit score gives you a chance to have lower auto insurance rates, an expense every driver will have for the rest of their lives.  Even a savings of $10 a month can have a profound effect on how much you spend on auto insurance over a lifetime.  So do what you can to keep that credit score high because it can help you in more ways than one.

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Credit Card Churning and a Free Credit Score

Know the score

Know the score

I love samurai movies.  My favorite movie of ALL TIME is The Last Samurai.  I also love the classics like Seven Samurai.  I also really enjoy the fantasy genre.  I can’t tell you how many times I have watched Lord of the Rings and how many times I will continue to watch it.  I also really enjoy martial arts.  I have dabbled in Aikido, Taekwondo and Muay Thai, and my ultimate goal in life is to become a full time martial artist.  I greatly admire Bruce Lee and his work ethic.

So why am I giving you all the proof you need to call me a nerd?  That’s because it helps me break down things in life into a battle of good against evil.  It makes really dull subjects sound pretty darn epic.  I previously wrote about how inflation is a beast and you need to slay it.  I’ve also written about the monstrous nature of student loans and the need to keep attacking them.  Noticing a pattern?

The next beast I would like to attack is credit cards.  But this is not just simple attacking and killing it by not getting into credit card debt.  We are actually going to take this beast and make it our pet, turning it into an easy source of tax free income year after year.  How do we accomplish such sorcery?  Through credit card churning of course.

Battle plan

It is said that the battle is won even before the first strike.  This usually means that victory goes to the most prepared.  When it comes to credit card churning, I couldn’t agree more.  We want credit cards to work for us, but the fact is that most people end up working for credit cards.  This is not an easy task but all it takes is a good battle plan and good execution.

For the uninitiated, many credit card companies offer sign up bonuses with their most popular cards.  For example, one of my favorite credit cards is the Chase Ink Plus.  It gives you 5 points for every dollar spent on TV/internet bills and purchases at office supply stores.  This is a decent percentage of my monthly expenses, so it helps me to use it every month.  But the key point is the sign up bonus.  Currently, Chase is offering 50,000 Ultimate Reward points for signing up for this card and spending $5,000 in 3 months.  That seems like a lot, but it comes out to spending $1,666.67 a month for 3 months.  Some people spend that much in a week.

50,000 Ultimate Reward points translates into $500 cash back at the minimum, and can save you even more if redeemed for travel.  To keep things simple, let’s assume we’re only using the points for cash back, as redeeming for travel presents a whole other realm of possibilities.  So in essence, you got $500 for doing your normal spending.  Not a bad deal.  Now find another credit card with a sign up bonus and repeat.  This is what credit card churning essentially is.  It sounds like a dangerous game, and it really can be if you’re not careful.  But if you follow just two rules, you’ll be be able to turn this dangerous beast into your little pet puppy:

1.  Know your Credit Score

This is the most important weapon to have in your utility belt.  Having a GREAT credit score will almost ensure your approval for many of the awesome sign up bonuses out there.  Having a poor credit score will keep you out of the credit card rewards game entirely.  There are a number of factors that help in increasing your credit score, but one of the most important things is to be able to monitor your score.  You can get your score from the FICO website for $20 a pop, but that can get to be a little pricey if you want to check your score every month or so.

Credit Sesame allows you to access your free credit score anytime.  I have been using it for a couple of years and it works great.  It uses some demographic that you provide to get your score.  While it is not an “official” score, it is almost exactly the same as my real score.

I’m a skeptical person by nature, because I know companies offer sales or “free” products in order to make some money for themselves.  So what’s the catch?  The catch, if you could call it that, is that Credit Sesame makes its money by suggesting certain credit cards or accounts that may benefit you based on your information.  You certainly don’t have to accept those offers, and even if you don’t, the credit score is always free.  Pretty simple business model.

2.  DO NOT OVERSPEND

Credit card debt is one of the worst things in the world.  Credit cards charge very high interest rates and you usually have nothing to show for the debt except clothes and electronics that go stale in a few weeks.  Don’t start spending more than usual and get into debt because of it.  If you don’t want the pet dragon to turn against you, you would be wise to remember this.  Just do what you’re comfortable with.  If you only want to do one sign up bonus every 4 months, that’s fine.  If you feel confident in hitting sign up bonuses for 6 cards every 3 months, that’s fine too.  I’m somewhere in the middle, around 3 cards every 4 months or so.

Again, do what you’re comfortable with.  It’s not worth a few hundred dollars in rewards to find yourself in debt to Visa.  I find credit card churning fun, and once you start overspending, the fun is over.  That’s when you call it quits and focus on getting your spending back in order.

This post provides a very basic overview of credit card churning to get sweet, sweet sign up bonuses over and over again.  There is SO much more to the process, such as finding the best sign up bonuses and ways to meet spending requirements without actually “spending” money, but those topics will be for future posts.

Just remember to keep an eye on your credit score to make sure it’s nice and high, and absolutely do not spend more than you usually do.  With this knowledge in hand, the beast doesn’t stand a chance!  Get your credit score and get started.  Remember that you can ignore the other offers and stick to just getting your free score.

Get your free Credit Score and More

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My Financial Kryptonite

This hood ornament only cost me $20,000!

This hood ornament only cost me $20,000!

There are so many ridiculous things people buy in this world which makes them less of a person.  There are people that buy cigarettes regularly every day.  These will burn a hole in your wallet as well as your lungs.  Then there are those who get endless subscriptions to magazines they never read, costing them money every month and destroying forests in the process.  There are also the people who sit in idling cars every day to get their daily fast food fix.  This wastes gas and makes you fat and lazy.

There are many more crazy things out there that people spend money on, but there is one object of people’s affection that is my biggest financial foe.  I call it my Financial Kryptonite.  Not because my finances are like Superman, far from it.  But because I want to stay as far away from this purchase as I can because I know the destruction it will cause, not just on my current finances but on my future as well.  And that bane of my existence is:  luxury cars.

When you spend thousands of dollars on something, you want that thing to be very useful and to (hopefully) appreciate in value.  A house, for example, is such a thing.  You and your family can live in it for years and years and have lots of lasting memories.  Many people in the world don’t have a roof over their head, so if you have one, count yourself among the fortunate.  Houses can also appreciate in value over time, hopefully turning you a profit when it comes time to sell.  This, generally, makes buying a house a good investment.

This is unfortunately not true with cars.  Cars certainly are useful.  They allow people to get to work and run errands to keep their house and lives in order.  They allow you to travel to friends houses and new locales to keep life exciting and fresh.  But what they don’t usually do is appreciate in value.  As soon as you sign the contract for a new car, it IMMEDIATELY loses value because now it’s a used car.  Every mile you drive it and each piece of wear and tear will lead to a further decrease in value.  While this doesn’t sound too appealing, cars are almost a necessity for people who don’t live in cities and don’t have access to reliable public transportation.

The luxury curse

Now, are you interested in wasting EVEN MORE of your money for something to get you from Point A to Point B?  Get a luxury car.  Luxury cars are simply slightly souped up models of your every day Toyota and Nissan, and usually only souped up on appearances.  I’m not exactly a car nut (and I’m glad because that’s an insanely expensive hobby), but from some conversations with car nuts I have found out that luxury models and their corresponding mainstream models are almost exactly the same under the hood.  What you’re paying for is strictly appearances, and boy will you pay.  Here are some ways you’ll end up paying more by going with a luxury brand over a mainstream one:

Higher sticker price.  An Internet search found that a 2014 Toyota Camry runs for about $22,000.  A 2014 Lexus RS, which is essentially the same car except shiner and more leathery, is about $36,000.  That means you’re paying $14,000 extra for shiny!

Higher gas prices.  Many luxury car makers say you need to use premium gasoline for their cars.  While this is debatable in some circles, a gallon of premium gas is around 40 cents higher than regular.  That comes to about $5 more per tank of gas for the privilege of driving luxury.

Higher maintenance and repairs.  While luxury cars are almost identical to their mainstream counterparts, many luxury cars use parts that will only work in luxury cars, and those parts are usually more expensive or bought through the dealer.  In any case, you will be paying more for 4 new tires on your Acura than on your Honda.  Even regular maintenance, such as an oil change, costs more with a luxury brand.  Again, paying more for the “privilege” of driving luxury.

Higher insurance.  Car insurance companies will factor in nearly everything to determine your premium, and that includes if you drive a luxury car or not.  Luxury cars are usually more pricier, so it stands to reason that you will pay more to have them insured.  Yet another sneaky increase in cost of ownership of a luxury car.

Conclusion

The higher sticker price should scare most people away from buying a luxury brands, but knowing how much more the cost of ownership is should send everybody running for the hills.  But it doesn’t.  And that’s because the luxury car makers are marketing geniuses.  Luxury car commercials throw around words like “elegance” and “refined” to describe their cars.  This makes people feel good and will get that dopamine flowing once you sit in one for a test drive.  They play to our emotions and desire to be pampered, which keeps people coming back.  As I’ve heard from many people who have bought luxury cars themselves, once you go luxury, you don’t go back.

Now I’m not one to find joy in shaming people’s financial decisions.  While it can be fun at times,  everybody makes mistakes and everybody has purchases that they regret, myself included.  But I will make an exception for luxury car consumers.  If you consistently buy luxury car brands, you’re in need of therapy.  Your money can be used for so much good for yourself, such as paying off debt or investing for your future.  The fact that you’re risking your family’s financial future for some pieces of leather and a temporary pang of superiority shows that you have went off the deep end.  Your Lexus is exactly the same as your neighbor’s Camry, but the difference is your neighbor can afford to drive himself and his family on vacation a few times a year while you can shuffle your car to and from work to make up the price difference.

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Why The US Government Should Read Personal Finance Blogs

We like blaming the government for a lot of things that go wrong in our life.  From Obamacare to yearly tax law changes, many people start thinking that the government is out to get us.  All they want is our hard earned money and those greedy bureaucrats will do anything to get it.  While I do agree that greed is the name of the game in politics, I don’t think that every law the government makes is a cohesive concentrated effort to steal money from its citizens.  That’s because the US government really has no idea what it’s doing.

After perusing any reliable financial books and/or blogs, you will come across certain themes.  Spend less than you earn, cut your expenses and save for a rainy day.  I really think the members of the Federal government need to start taking a look at the many great financial blogs out there because they are breaking every rule in the book.  According to a recent report by the Congressional Budget Office (go ahead and read the whole thing here if you have a free 5 hours), it is almost inevitable that the US is heading towards a fiscal crisis.  While the country’s deficit has gotten a little smaller since the recession in 2009, the report states that there is NO scenario that the debt will decrease in the next decade.  That sounds pretty grim.

The Big 3 Expenses

What really shocked me was reading about how the expenses of the US government are divided.  Every individual, family, company and government has expenses.  There is no way around them.  We just need to minimize them as much as we can.  But according to the report, 85 percent of the governments expenses come from only three things:  health care, Social Security and interest payments on loans.  That means only 15% of the country’s money goes to little details like keeping roads maintained and national defense.  This is mind boggling but it does remind me of a predicament that a lot of people find themselves in personally.  There are a few expenses that can really dominate, and the big ones that come to mind are mortgages, transportation (car loans, gas and maintenance) and debt.  If you’re not careful, these expenses can really bust your budget and affect how much money you really bring in.

The way to tackle this is to take a long and hard look at your biggest money suckers and find ways to decrease them.  Bought a shiny new gas guzzler that’s taking a toll on your monthly budget?  Sell it and get a more fuel efficient used model.  Bought too much house and living in a high cost of living area?  Try to downsize while moving to a lower cost of living area if possible.  Can’t get a handle on your credit card debt?  List all of your debts in order and attack the one with the highest interest rate.  There are simple fixes to all of these personal finance issues that the members of Congress would do well to apply to our government’s expense problems.  But there is a problem.

It will never work.

And that’s because the members of Congress would like to remain members of Congress.  When you and I cut an expense that’s siphoning money from our accounts, there may be a little resistance just because old habits are hard to break but we know that it will be for the good of our financial future.  It might even be unpopular with our spouse or children but we know it’s for the good of the long term financial health of the family.  Congress doesn’t think like that because they are only making decisions based on the next election cycle.  They want their constituents to vote them in office again, so proposing to make any major changes to any type of government program will result in a backlash, most likely losing them their seat in the next election.  This can be seen with the passage of the Affordable Care Act as many people are calling for the President to be impeached!

The bottom line is, the only way to make your financial situation better is to make more and spend less.  If Congress tries to make more (raise taxes) or spend less (cut Social Security), they will make millions of people angry.  Instead, they enact short term fixes year after year and “kick the can” down the road.  Unless a group of lawmakers buckle down and make the hard choices when it comes to the budget, the US is in for a tough few decades ahead.  I will forward my blog to Congress and see if that can get things going.

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How much do you REALLY make?

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The ability to manage and master your finances is simply based on two factors: what you bring in and what goes out.  Income versus expenses.  Earning versus spending.  Though this may seem like an oversimplification, this is essentially what personal finance boils down to.  If you spend more than you earn, this puts you in debt and leads to a precarious financial situation.  This is the unfortunate truth for many in America today, as the allure of easy credit and excessive consumption keeps many in debt.  On the other hand, earning more than you spend puts you in a position to save and invest, and saving enough will help you weather almost any financial storm or life changing event that comes your way.

Getting that first job after college and seeing all those numbers that represent your yearly salary can be exciting at first.  It’s usually more money than you have ever seen before, so it can be an exhilarating time.  But appearances can be deceiving.  Though that nice big round number may look nice, it’s not all going to hit your checking account.  If you’re not careful, you might not even get half of it.  To make things simple for the purpose of this post, we will not be considering the effect that taxes have on your take home income.  For the purpose of your life, you should not do that.

There are many associated, and often times hidden, costs for any job.  They will of course vary depending on the person’s situation, but some associated costs jump right out at us.  Knowing what these costs are will help you determine your real hourly wage, that is, what you make per hour after all of the associated work expenses.  The fact is, if you were not working at that particular job, you would not have to spend money on all of the associated expenses.  The biggest factor people usually associate with jobs is the commute.  Whether it is driving or taking public transportation, there is going to be some cost of commuting to your job, unless you work from home of course.  Most of us would just calculate how much we spend for gas and be done with it.  But there are other hidden costs to commuting such as wear and tear on the car which can lead to increased trips to the shop, money spent on tolls, and increased frequency of oil changes due to driving every day.

Another big factor is money spent on food.  This is not just money spent on lunches, which can be pretty high in some cases, but also includes the daily coffee we get from the shop on the way to work, “rewarding” ourselves with a treat after a stressful day, and money spent on take out when we do not have time or are too tired to prepare dinner at home.  All of these are associated costs relating to food.  There are many other costs which would take up too much space here such as the need to take vacations from a stressful job, hiring outside help such as yard workers, maids, and tutors, money spent on entertainment to unwind from the stresses at work and the list can go on.  Let us go through a simplified example to see how much having a certain job can actually cost you.

Let us say you have a friend who makes 20 dollars per hour.  They tell you they seem to be struggling to make ends meet but they are not sure why.  You ask him how much he makes per week.  He simply multiplies 20 dollars an hour by 40 hours per week to get 800 dollars per week.  But knowing what we know about job associated costs, we go deeper and find out what he is actually making.  We calculate that with money paid for gas, tolls, and wear and tear on his car, he is spending an average of 100 dollars per week on commuting related expenses.  We then move to food and find out that with his daily latte, occasional lunches and eating out with co-workers, he is spending an average of 50 dollars a week on food directly related to his job.  We also find out that he has a habit of seeing a movie with a co-worker after a long day of work and rents movies weekly to decompress after work.  This comes out to 30 dollars per week.

His job also has a dress code, and sometimes he has to wear a suit to meetings.  He is normally a T-shirt and jeans kind of guy so he is spending an average of 20 dollars per week on work related clothes.  He also takes a yearly vacation just to get away from it all which averages out to 40 dollars a week over the year.  Last but not least, he also hires a cleaning service because he has no time to thoroughly clean his apartment.  This comes to about 25 dollars a week.  There are other associated costs but these are the ones that stick out so let us work with these.  Our friend said that he makes 800 dollars per week.  After applying just these associated costs we went over, we find out that he is actually making $535 per week after work related expenses.   This means after associated costs, he is actually making a little over $13 an hour instead of $20!

Though this example had simplified numbers and categories, it shows that job related expenses can really take a bite out of your bottom line.  Now most importantly, what can we do with this information?  Right off the bat it is easy to see how we can use this when comparing multiple job offers or contemplating getting a new job.  If we see our real hourly wage, we can more easily find which job will be best for us.  We can also use this information to examine our destructive money habits and try our best to change them.  In our example, if our friend just made coffee at home and stopped going to the theaters to watch movies after work, that could easily save 30 dollars or so a week.  Making little positive changes here and there can really add up and help to improve our situation.  Visually seeing what steps we can take to improve our financial situation is very empowering, and this exercise can provide that.

Finally, this exercise can show us how important it is to spend our money on the things that matter most.  If we know that our real hourly wage is 12 dollars an hour instead of 20, maybe we will think twice before we drop down 20 bucks for a movie ticket and popcorn for 2 hours of fun or 40 bucks for a video game we will only play once in a while.  Instead of spending our money on frivolous things, maybe we can save it and spend some time exercising, learning a new skill or just spending time with our family.

Successfully graduating with a bachelor’s or any advanced degree takes a lot of work.  It is vital to find the job that suits  you rather than going for the first big salary you see and later realizing you’re not making as much as you thought.

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