Diamonds in the rough roundup 11/29/13

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–Active Income is Much More Enjoyable Than Passive Income by Financial Samurai:  We all dream about making lots of passive income, money that just pours into our accounts without us doing anything.  This, of course, takes a lot of work upfront and is a lot easier said than done.  But can making active income be eventually more fulfilling than passive income?  I believe it all comes down to maintaining a balance, as you can build up streams of passive income (investment dividends, rental properties etc.) while opening up time for you to pursue what fulfills you.

–How accidents can change your perspective on life and money by Moneystepper:  Graham writes a great reflective post based on a recent biking accident he had.  It caused him to re-think and make adjustments to his current goals.  A great reminder that we all have a limited time on this Earth and we never know when it’s going to end.  We should make sure what we’re doing is important and worthwhile, and make sure we are enjoying the journey and not just focusing on the results.  Glad to see he is recovering well.

–Too much bad personal finance advice out there by Punch debt in the face:  Short and sweet post exposing some of the poor financial advice out there.  Financial advice should not be cookie cutter because everyone is in a unique situation and everyone wants different things out of life.  Some people love fancy cars but hate traveling.  Telling a person like that to not buy a new car even if they can afford it and will enjoy it is simply bad advice.  If they are in debt and are not able to afford the car, that is another issue.  But personal finance should be personal, so you have to adapt it to your situation.  With my blog I like to give my take on different issues along with stories of my life.  There are a few financial rules which everyone should follow (see Financial Commandments).  But after that, personal finance should be personal.

–Large Tax Refund!  Oh Wait……..Darn I’m Getting a Large Tax Refund! by Life, Dollars, and Sense:  Getting a large tax refund is a big point of contention for some people.  This post does a nice job of summing up the advantages of NOT getting a large refund.  And that is having more of your money when you need it rather than letting the government hold it for you.  Most people fall on the side of not getting a huge refund because you don’t want to be giving the government a no interest loan with your money.  But i feel for those who have trouble saving, there is some value of getting a large refund but making sure that you spend it on debt or put it into savings.

–How I learned to Stop Procrastinating, & Love Letting Go by Zenhabits:  Short and sweet post that gets to the root of solving procrastination and other mental crutches that we tend to rely on.  By looking into why we rely on some of these crutches and focusing on what habits will get us to where we want to be, we can learn to be a lot happier with ourselves and our performance.

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Student loans: Set it and forget it?

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Graduating with a boat load of student loan debt can really be depressing.  When you finally see that final number which you’ve been ignoring for years, it can really be shocking.  Graduate and professional students like myself can easily come out of school with 6 digits of debt.  The student loan companies will put you in something ridiculous sounding like a 15 or 20 year re-payment plan.  If you get a good job coming out of school, it can be tempting to put the student loans on the back-burner and focus on enjoying your money because you feel you “deserve” to.  Nothing wrong with having some fun, but there is something wrong with paying minimum payments on a debt for 20 years.  This is a pretty bad financial move for most people, because you should hardly ever stay in debt longer than you need to be.

We often think of our debt from solely our point of view.  But it can make a lot more sense if we think of it from the banks point of view as well.  A student loan debt is a contract between us and the bank.  The bank gave us money to go to school and educate ourselves (how nice of them.)  They want us to pay this money back when we’re done with school.  They charge interest to cover themselves in case we don’t decide to make all the payments and to make a LITTLE money themselves.  They would like nothing more than for us to quietly make our minimum payments while they get all of their interest.  What they don’t want is for us to accelerate our payments and save ourselves a lot of money and time.  Which is why this is EXACTLY what we should be doing.

A student loan is an investment in yourself, and the key factor every investor looks for is the return on investment (ROI).  The ROI measures the efficiency of an investment, and investment cost is one aspect of that efficiency.  By opting to pay your student loans over a long period of time and end up paying the maximum amount of interest, you are decreasing the ROI in yourself.  Paying whatever extra you can on your highest interest student loan will effectively increase your ROI and make your education worth more.  Everyone wants a great investment, and paying off your student loans early will help ensure your education becomes a great investment in yourself.

The other obvious side of paying your loans off quickly is that it frees up money, money you can use for whatever you like.  Now I prefer to keep the avalanche going by using that newly freed up money to attack your next student loan, but if you have an unexpected expense or a great investment you want to get in on, you can use your money on that.  The money isn’t being used to generate interest for the bank anymore, and that’s a plus in itself.  That new money can almost be looked at as a bonus, since you were hopefully able to live without it before.  Creating income is the best thing we can do to become financially free, and paying off student loans is a great way to do just that.

There can be some arguments made against paying student loans off early such as not getting the student loan interest tax deduction or opting to contribute to retirement plans instead.  In most situations, not deciding to pay off student loans can be a pretty short sighted decision.  Paying off student loans early provides a GUARANTEED rate of return, because you are definitely going to be paying less interest than if you went with just minimum payments.  A tax deduction on interest is nice, but pales in comparison to the benefit of not paying ANY interest.  I would recommend contributing something to a retirement account as you have compound interest working on your side, especially up to an employer match if possible.  But again, rates of return will vary with your retirement account, while paying off student loans is guaranteed to give you a positive return.

Obviously, I’m not a big fan of just making minimum payments on your student loans.  In a way, you are selling yourself short by making your education worth less than it can be.  It’s also preventing you from freeing up your money which can be used however you please.  So if you can afford to throw some extra money at your loans, do it.  Your future self will greatly thank you.

 

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401(k)’s: Focus on what you can control

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I remember the day when I accepted my first real job as an optometrist.  There was a lot of excitement because I would finally be making some real money.  Also, I was kind of excited about having the ability to contribute to a 401k account.  I know, not the most traditional thing to get excited about when getting a new job, but a few months before is when I started reading personal finance books which all extolled the wonders of the 401k.  I read that it was the best retirement account around and had great tax advantages as well.  I had to wait 3 months on the job before being able to start contributing, so I used that time to read up on 401k’s and investing in general.

My all time favorite book on investing is The Bogleheads’ Guide to Investing, which expounds upon the investing ideas of John Bogle, the founder of Vanguard.  Vanguard heavily emphasizes the importance of low investment fees and simple asset allocation.  Meaning you shouldn’t pay a lot to invest your money and you shouldn’t have to think about it too often either.  I’m naturally a conservative person, so this mode of thinking is right up my alley.  I thoroughly enjoyed this book and took its values to heart.  After reading other great investment books like A Random Walk Down Wall Street and heeding the words of investment gurus such as Warren Buffett, I was comfortable with the ideas of simple asset allocation, low investment fees and buy and hold investing being the core of my investing strategy.

The 3 months were finally up, and I was able to create my account, look at the investment choices and start contributing!  After reading about something theoretically for a few months, you can’t wait to apply it no matter how mundane it might be.  After logging in I found out that our 401k plan had 33 investment choices.  Not too many but enough for some variety I suppose.  I looked at the 5 year returns of the various mutual funds and didn’t find anything great.  In fact, a lot of them had negative returns.  Why do most of these investments suck?  No matter I thought, as I already know from my research that past performance does not dictate future results.  It was only a couple of years back where we had the financial crisis so that was understandable as well.

Next, I checked what is arguably the most important aspect of keeping more of your own money when investing.  And that is fees!  I specifically checked the expense ratios of all the available funds.  I was surprised (once again) to see that the expense ratios were higher than I would have expected.  The lowest expense ratio was .5%, not bad but not near the Vanguard levels of .1-.3 I was accustomed to seeing.  Many of the funds had expense ratios above 1%, which is much higher than the Vanguard average (though it seems like every fund’s expense ratio is higher than the Vanguard average.)

On top of all that, there wasn’t a very wide variety of funds to choose from.  I learned all about large cap, mid cap, small cap, bonds, income etc.  The vast majority of the mutual funds were invested in domestic large cap funds with only a couple of bond funds.  The rest were target date funds with pretty high expense ratios.  Nothing seemed to be matching up to my idea of the perfect retirement account.

I eventually realized it’s not really worth it to stress about those factors I couldn’t control.  The firm that runs our company’s 401k was not one of my choosing and either were the investment options it contained.  This was all decided by my company’s HR department years ago and unfortunately there was not much I could do to change things.  This is the account my company offered and I had to make the best of it.  I had to focus on what I could control and simply forget about what I could not.  There are two main variables I could control which are also two of the most important variables for retirement success: contribution amount and investment fees.

I believe the best thing you can do with your retirement accounts is actually contribute to them.  I have talked with people who have 401k accounts available to them yet don’t contribute because of lack of knowledge on the subject or because they don’t want to take home a little less money.  The fact is, saving early and saving often is the most important factor contributing to a healthy retirement account.  Sure, investment returns are important, but the theme of this post are things you CAN control, and investment returns aren’t one of them.  Also, deciding to contribute 5% of your income doesn’t mean you take home 5% less money.  That 5% contribution is tax deferred, meaning you won’t pay taxes on it until you withdraw it decades from now.  What that means is if you decide to contribute $100 and you get taxed 30%, you’re actually only reducing your take home pay by $70 not $100, because that’s how much you would have gotten anyway after taxes.  Ideally, but in now way is this guaranteed, you will likely be paying less taxes when you retire so that tax bite shouldn’t be too bad.

Another factor that can guide your contribution amount is whether your company gives a matching contribution.  A “401k match” simply means your company will contribute to your retirement account up to a certain threshold, which is decided by the company.  A typical employee match is a 100% match up to a 3% contribution rate.  This means if a 3% contribution for you equals $1000, your company will contribute $1000 to your account as well.  This sounds like free money.  That’s because it is.  This is a great way to optimize your 401k contribution, as no other retirement accounts will give you extra money just for contributing.  If you can’t decide how much to contribute, contributing up to the match amount is a GREAT start.

The next most important thing you can control is the fees your investments charge.  All mutual funds are now required to clearly reveal their investment fees, so there is no excuse not to pay attention.  Now, while you can’t control what fees the investments charge, you can simply pick the investments with the lowest fees.  Lower fees mean no matter what your investment returns are, a lower percentage will be eaten up by the mutual fund company.  This may not be too big of a deal early on, but if you have a $50,000 account balance with a mutual fund that charges 1% for yearly maintenance, that’s $500 you lose.  A .5% charge means you lose $250.  And it gets more glaring the higher your balances get.  Fees matter, and choosing the investment options with the lowest fees is almost always a great move.

You’re not guaranteed to make money with a 401k.  In fact, you can lose money if you’re not careful.  Contributing an appropriate amount and keeping your fees low will not assure huge gains, but they certainly will help.  My parting advice is that even if your 401k is not the greatest, contributing up to the employer match amount and choosing low cost funds will be the best thing you ever did.  If you have some money left over you still want to invest, that is wonderful.  You can use it to invest with Vanguard and their awesome mutual funds with .1% expense ratios I read all about.  Which is exactly what I did.

 

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Diamonds in the rough roundup 11/22/13

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Being a finance blog lurker for many years before starting my own, I’ve come across my share of awesome and helpful articles.  With the Diamonds in the Rough roundup I would like to showcase a couple of great bloggers and their articles which I’ve found helpful this week.  Enjoy:

–Yes, You Do Need an Emergency Fund by Broke Millennial:  A great article about the importance of having an emergency stash of money in case the inevitable emergency happens.  Also talks about the importance of having an emergency fund even when paying off debt.  This is a slightly contentious issue in the finance world, as some propose forgoing an emergency fund entirely while paying off debt.  I side with Broke Millennial on this one as having an emergency fund will allow you to keep making debt payments if a tough situation arises.

–Predictably Irrational by Mr. Money Mustache:  A review about some of the ideas from the book Predictably Irrational by Dan Ariely.  MMM once again gives some very thought provoking stuff about market norms vs social norms and how we humans are very loss averse.  These traits make it easy for marketers and advertisers to focus their efforts in order to part us from our money.  A unique look on the age old topic of psychology in money.

–5 Steps To Successfully Monetize Your Blog by Frugaling.org:  Blogs are a lot of work, and usually start as a labor of love.  It is nice, however, to be able to make some monies in the process.  Sam gives a great overview of some of the ways he was able to start making some good money from his blog relatively quickly.  A great reference for beginner bloggers.

–The Financial Pros and Cons of Community by The Broke and Beautiful Life:  This is a great post about the financial effects of being entrenched in certain cultures.  In this case, the writer Stefanie talks about her experiences growing up with a Ukranian background.  There can be certain expectations and expenses from being very involved in family and culture.  At the end of the day, I believe it definitely helps being part of a vibrant culture because there is a great opportunity to network and create lasting memories.

–Ultimate guide to Cash Back Shopping by Abigail Perry: Buying stuff online is a lot easier and a lot of times a lot cheaper than buying i the store.  Another perk to online shopping is the usage of cash back portals.  Just go to your usual shopping sites through the portals and you can get varying amounts of cash back for your purchases.  As usual, it’s not a deal if you weren’t going to buy it anyway, but a little cash back is nice for your regular purchases.

 

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Dining out: Not as convenient as we think

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Fruits and VegetablesEnjoying a good meal with friends and family is one of the greatest joys life has to offer.  Not many better times can be had than eating a good hearty meal with loved ones and discussing the latest news or just having a good laugh.  Eating with friends and family is a pastime that is enjoyed among all cultures and generations.  With the rising costs of food and transportation, however, people should become more cost conscious about where and what they eat.  Essentially, the choices boil down to dining out, carry out (or delivery) and cooking at home.  And despite the general perception that dining out is more “convenient” or “easier”, that just doesn’t seem to be the case.

Dining out has become the norm nowadays in America.  With the proliferation of long work hours, two income households and extra-curricular activities for the kids, it is becoming increasingly difficult for families to prepare a meal at home.  This shift in dynamics has led to a sharp increase in the number of fast food joints and restaurants, here to satiate humans and make a good amount of money in the process.  Dining out usually costs two to four times more than it would cost to make the same meal at home.  Add on top of that tips and transportation, dining out regularly can definitely cost you.  Not only does it cost you in money, it can also cost you two important things that you won’t see the effects of until it’s too late:  your health and your family.

Fast food and restaurants are not exactly known for their healthy selections.  Meat is usually highly processed, sodium levels can be through the roof and many places give portions that can be enough to feed a small army.  Eating at home can greatly increase the healthiness of your meal, as you can decide how much salt and oil to add and what quantity of food you want to serve.  Using fresh ingredients will increase the taste and nutrition of your food as well.  It’s no coincidence that the obesity epidemic started just around the time that fast food became the norm.

When we do decide to occasionally dine out, there are ways we can minimize the hit to our health.  Eating vegetarian once in a while is great for your health, as we don’t get many vegetables nowadays as it is.  Your body will definitely thank you later for choosing the light veggie sub rather than the same overstuffed cheesesteak.  Moderation is the key when it comes to meat consumption.  (Here is a great post about the savings you can expect from going vegetarian)  Another way to save your health AND some money is to ask to have half of your order to be put in a take-out box right away.  This will save you from eating too much and will give you another meal to have at a later time.  Also, forget the appetizer and dessert by eating a little bit at home before you leave and getting a delicious dessert from the grocery store for about half the price as a restaurant would charge.  These are just a couple of common sense ways to stay healthy even when eating out.

As mentioned earlier, with most families having two full time incomes and not much time to enjoy their hard earned money, eating meals as a family affair has become a rare, if not, impossible activity for some.  This is truly a loss for society because if the family unit is not cohesive, society will be negatively affected.  According to the Archives of Pediatrics and Archives of Medicine, frequent family meals are associated with lower risks of smoking, drinking, drug use and depression.  It is also associated with better grades in school.  This is probably the single most important reason to try to stay home and eat as a family as much as possible.  There was once a time when eating out was associated with very special occasions, and this would actually make those meals out more memorable and enjoyable.  With eating out being the norm nowadays, families are being affected in a negative way.  Even if you are able to eat as a family just once a week, it is much better than not being around the dinner table at all.

Eating out frequently as a result of our fast paced lives seems to be a convenient option, but it is only convenient to the executives of the fast food companies who are making billions of dollars at the expense of hard working people and their families.  A community is simply made up of a group of families, and there is not better act to bring a family together than having a nice meal as a unit.  It is in these family dinners that issues can be brought up, questions can be asked or a light hearted joke can be told.  This is one step that we can do that will bring our families together, save some money and help our health in the long term.  Eating together in the comfort of one’s home is sure to cultivate affection and concern for each other, much more than eating an unhealthy meal in a faceless fast food place.

 

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Filed Under: Money Savers, Self Building

Yakezie Challenge…commence!

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Today I decided to take the 6 month Yakezie Challenge.  It essentially challenges you to get a certain ranking in Alexa, which ranks webpages based on what they decide is popular.  It is a pretty reliable and widely used ranking system.  Knowing my love for Japanese stuff and wanting my blog to grow, I decided to undertake the challenge.  It would be great to beat the challenge, but it is going to be a great kick in the butt nonetheless.

I ask for your support by simply reading, commenting and sharing any posts you may find interesting.  If you could sign up for my email list and/or follow me on Facebook and Twitter, even better.  Thanks to all those who have supported me and I hope to have many more supporters in the near future!

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Financial Commandment #3: Avoid credit card debt

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Put these on ice if you are in debt!

Put these on ice if you are in debt!

In the third installment of the sacred Financial Commandments, we talk about the biggest thing to avoid.  This is in contrast to the more proactive Financial Commandment we mentioned previously, Pay Yourself First.  Just like a winning football team needs a good offense along with a good defense, a great financial plan needs to proactively go out there and make you more money, while at the same time preventing big money blunders from ever happening.  Commandment #3 is to avoid one of the biggest financial holes you can get yourself into:  credit card debt.

It is known that not ALL debt is bad.  Student loans can help you get an education which you can hopefully leverage into greater income potential for the rest of your life.  A home mortgage will allow you to own a home that hopefully appreciates in value when you sell.  If not at least it gives a roof over your head.  A car loan, though tied to a product which will almost always depreciate in value, lets you drive a car, which you can use to get to work or wherever you would like to go.  These types of debt are not always the best to get into, but AT LEAST you have something of potential value to show for it.  This is known as leverage, as you can use your debt to potentially multiply your money in the future.  Interest rates on these types of loans are usually pretty manageable as well.

Credit card debt is a whole other story.  You almost never have any leverage buying consumer goods with your card (unless you can find a black market for Snuggies).  So the chance of you making some money off of your debt is not very good.  Credit card interest rates are also very high compared to most other forms of debt, ranging from anywhere around 10 to 30%!  If you have a revolving balance, meaning you don’t pay off your balance in full and always have some debt incurring interest, you are really getting hosed.  You are probably paying a very high amount in interest payments, payments that were easily avoidable and with money that could be used for much better purposes.

If you do find yourself in deep credit card debt, start praying to your Lord of choice for help.  When you’re done, it’s really time to buckle down and pay off the debt.  Another reason credit card debt is so dangerous is that it’s so easy to accumulate.  Credit cards are widely available and banks love giving them out because they are a very profitable item for them.  So if you do find yourself in debt, the absolute first step is to stop using the cards!  Sounds simple enough but it can be hard to implement for some people.

After forbidding yourself from using your cards for a while, a credit card repayment plan is very simple:  Use cash only, pay the minimum on all of your balances, and pay whatever you can on your balance with the highest interest rate.  Once that balance is gone, move to the next highest interest rate.  Rinse, lather and repeat.  This is the most efficient way to pay back your debt, despite what those “credit counseling” companies say.  They will essentially set up a similar plan for you, and charge you for it.  Bypass the middle man and follow the formula above to pay off credit cards quickly.

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Filed Under: Credit cards, Financial Commandments

3 ways to max out your credit cards

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Almost everyone in the civilized world has had a credit card at one time or another.  A credit card can be a powerful tool.  It is essentially a 30-day loan from the credit card company (Visa, Mastercard, American Express etc.) with a certain limit to buy whatever you want.  Responsible users use credit cards to pay bills and buy things they already use such as gas and groceries, and then pay the bill in full every month.  Irresponsible users think of a credit card as an invitation to a shopping spree and buy stuff until they reach the credit  limit.

This article isn’t about that type of maxing out.  It’s about maxing out RESPONSIBLY.  That is, maximizing your credit card use to get the most rewards as possible.  It is actually the opposite of the traditional way of maxing out a card.  This type of maxing out is only done by responsible credit card holders who know that it is vitally important to avoid credit card debt at all costs, and also know how to get the best rewards quickly.  Here are the top 3 ways to fully unlock the reward potential of your reward credit cards:

1.  Sign up bonuses

Any reward credit card worth its salt will give you a bonus when opening a new account.  For example, as of this writing the CashRewards card from bank of America gives a sign up bonus of $100 after you spend $500 in 90 days.  Between money spent on gas, groceries, phone bills etc., spending $500 in 90 days is not that hard for most people.  Doing it with this card will give you a $100 bonus to be used on anything.  It’s usually best spent as a statement credit, essentially saving you 20% on a $500 credit card bill.

This is a nice little bonus, but in the grand scheme of things it’s not too much.  The fun starts when you are able to sign up for multiple rewards cards which offer bonuses.  Doing this can net you a couple of hundred dollars easily.  While you can usually only receive a bonus the first time you sign up for a card, there are always new bonus offers coming out so this can be a nice little perpetual bonus machine.  Obviously, it’s important to remember to get only enough cards where you can comfortably afford the spending limits.  Otherwise you potentially force yourself to buy things you never intended.  Also, signing up for multiple cards doesn’t really hurt your credit score in the long run.  This is because paying your bills on time is the most important factor in having a good credit score according to myFICO.

2.  Category bonuses

There are all types of rewards cards offering different types of category bonuses.  What that means is that you get extra points back for buying stuff in certain categories.  For example, the American Express Blue Cash Preferred offers 6% cash back on groceries and 3% cash back on gas.  This is a great card if gas and groceries comprise a large amount of your spending.  Having these category bonuses is nice because they give you an additional bonus on top of the standard 1%.  If you have cards with bonuses for things you already pay for such groceries, gas, eating out, cable bills etc., you can really maximize the points you receive just by spending money on the things you already buy.  There are many different cash back and points cards out there for different categories, so it definitely pays to look around and find the one that suits you.

3.  Use cards for everything

No, this doesn’t mean buy everything in sight with your cards.  It just means wherever you can use your card, use it!  There’s no need to use actual cash unless they don’t accept credit cards or they charge a “convenience” fee for using one (this is one of my biggest pet peeves.)  Using a card for everything you buy has two main advantages.  One, it maximizes the number of points that you receive.  Especially good when spending with sign up or category bonuses.  Two, putting all of your purchases makes it really easy to budget and see where you exactly are spending your money.  It takes a special kind of person to enjoy carrying around wads of old crumpled receipts in their pockets all day.  A credit card makes it easy to avoid this, as you can just get online or even on your phone to check on your transactions.

Some say that having a credit card can make you spend more than usual.  But if you use them responsibly, it can be the exact opposite and actually help you budget.  Maximizing your credit card use with sign up bonuses and category bonuses can give you a nice perpetual bonus.

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How to make your money work for you

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If you want to hire people to work for you, then you need a business of some sort.  However, even if you don’t yet have a business big enough to hire people, you can have employees work for you.  These employees work 24/7, don’t complain about parking spaces, and don’t leave the office microwave a mess.  They will work hard at any job you tell them to, and will try to get more of them to work for you.  Where do you find such ideal workers without outsourcing to a foreign country?  They are actually currently sitting in your wallet/purse and in your bank account.  These employees are your money that you work so hard to make.

“Make your money work for you” is a phrase that most people have heard but not many people do.  Getting a paycheck and using that money to pay for your expenses and nothing else is just going to keep you on the conveyer belt of consumption.  Putting some money aside in a savings account regularly is a great idea, but even that won’t make you money as the monster known as inflation will make that money less and less valuable over time.  To really make your money, well…make you money, you can put it to work into different types of accounts depending on what your goals are.

If your goal is to increase your retirement savings, there are some accounts that are great for that.  Assuming retirement is a few decades away for you, putting your money to work in a 401k would be a wise move.  If you don’t have one at your workplace or your 401k just isn’t that good, another option is an Individual Retirement Account (IRA).  There are many brokers that offer an IRA (Vanguard is my favorite one because of its low fees and ease of investing), but the important thing is to invest according to when you will need the money.  In general, the farther off retirement is, the more you should be invested in a broad array of stocks because stocks have a good chance of making you money in the long term.  If you need the money soon, then your money would probably be better off invested in “safer” investments such as bonds or money market accounts.  There are of course billions of variations in between, but you’re much better off following these general rules than not doing anything at all for retirement.

If your goal is to have some money for college expenses for your kids, a 529 plan would be a good place to start.  Most states offer their own 529 plans, and some give tax breaks for doing so.  The investments in 529 plans can be geared to the year your kids will be expected to start college.  If you start early on, it is easy to have a nice fund by the time the little guy or girl is going off to school.

Finally, if your goal is just to save up for a vacation or something else which is a year or two down the road, an online savings account is a good place to put your money.  The interest rate can be low for savings accounts, but the money made from interest is just a bonus as the main objective is to have a place to stash money to be used relatively soon.  A Certificate of Deposit (CD) account is also a good choice as they can offer slightly higher interest rates  as long as you don’t withdraw any money for a specified period of time (usually 1,3 or 5 years).

These are just some of the ways to make your money work for you.  If you give your money a job, such as saving for retirement or saving for a vacation, you can usually find a good place to put it to work.  Once you pay money for expenses like car insurance or a cell phone bill, that money is gone and can never work for you ever again.  If you can pry some money away from expenses and re-direct it to work for you, it will do you a world of good.

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Filed Under: Financial know how, Investing

Down with student loan debt!

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This article appeared in a slightly different version as a guest post on frugaling.org, another great website for financial info.

 

I’m an optometrist and I love my job.  Like many professional jobs in the medical field it has a good starting income and great potential, especially if you become a successful business owner.  As much as I love my job, there is one thing I hate about the process of becoming an eye doctor: student loan debt.  And we graduated with a lot of it.  I graduated with around $150,000 in debt myself.  I have colleagues who are in well over $200,000 in debt.  The story is similar for graduates of medical, dental, pharmacy and law schools.  According to a report by the American Association of Medical Colleges, the median level of debt for graduates in 2013 was $175,000!

The main problem is of course continuously rising tuition prices which probably won’t be going down any time soon because there is too much money to be made for the banks.  Just to get a glimpse on the current status of medical school tuition, here is a US News report on the 10 most expensive medical schools.  Looking at these numbers makes it easy to see how students can routinely graduate with well over $200,000 in debt!  Rising tuition rates are a highly charged political issue which probably won’t be resolved anytime soon.  But there is something we can control, and that is how fast and how strong we decide to attack our debt.  Most lenders put you in a 25 year payoff plan.  This is a ludicrously long time and will lead to hundreds of thousands of dollars in interest that can certainly be avoided.  Here are five quick and relatively painless ways to cut your expenses. These methods have personally helped me to attack my student loan debt and greatly reduce my lifetime interest:

1.  Ditch the gym membership:  Like most people, I thought getting a gym membership was the responsible and healthy thing to do.  With the rows and rows of treadmills and dumbbells, getting in shape was an inevitability.  But after a while I found myself not enjoying the workouts and then making up any and all excuses not to go to the gym.  There was the whole process of getting ready, driving to the gym, finding a parking spot and finding the least sweaty machine to use.  This was going on for a few months until I decided to sit down and evaluate my gym usage.  I realized the workout I enjoyed doing at the gym the most was playing basketball.  I cancelled the membership and focused on playing outdoor basketball and running outside, two almost free activities that I actually have fun doing.  Savings: $80/month

2.  Look at your wireless plan:  I’ve been with Verizon Wireless for a while now and have been happy with their service.  Calls are rarely dropped and their customer service is pretty good (as good as you’re going to get with a cell phone company anyway).  When they changed to their limited data program, I was defaulted into the 4 GB data tier, mainly because it didn’t really change my wireless bill.  After a few months I decided to check how much data we were using, and it was well under half a GB!  I get a WiFi connection both at home and work, so I’m not really using cellular data all too much.  I switched us into the lowest 1GB tier plan and haven’t felt a data pinch even once.  Easy savings.  It can pay to check the current status of your wireless plan.  Savings: $30/month

3.   Run that car into the ground:  For most Americans getting a new car every 3-5 years is normal.  It is almost a rite of passage.  It is also one of the worst financial decisions you can make.  A car is NOT an investment, yet people are content with paying tens of thousands of dollars or getting a high interest loan on a product that will give you a guaranteed negative return.  Yes, cars are definitely needed to get you to and from work.  But there are other alternatives such as public transportation or not buying an expensive new car.

I currently drive a Chevy Cobalt, which is a relatively fuel efficient car. It is paid for and has not given me any major problems.  I get regular maintenance in it according to the recommendations in the manual.  Luckily, my commute to work is less than 10 minutes each way so I don’t forsee anything MAJOR happening to the car as long as I get regular maintenance.  And I plan on using it until I can’t drive it anymore.  This is because I don’t want another car that can do the same thing my car does but has a monthly payment.  I don’t want higher insurance premiums.  And I don’t want to go through the hassle of getting a new car.  These are reasons enough for me to keep my current vehicle and avoid future monthly payments for as long as I can.  Savings: At least $200/month

4.  Shop around for auto insurance:  The only thing good about auto insurance companies is their commercials.  Most of the auto insurance companies are pretty much the same when it comes to customer service.  If you look at reviews online, pretty much all the companies have as many decent reviews as bad ones.  Sure some people have had terrible experiences with one company or another, but as a whole customer service is pretty much the same across he board.  This means that price is the overriding factor in choosing auto insurance, and in my experience it really is worth it to shop around.

I was with Nationwide for around 4 years.  I originally signed up with them because a family friend worked for them (probably my first mistake).  I pretty much accepted their rate (a little over $200/month) and was relatively happy with their service (except for the fact they charged a fee to pay by credit card).  In any case, I didn’t think much about switching until a few months ago, when I decided to get a quote from GEICO.  It was $120 less per month than my current rate.  That’s over 50%!  It seemed too good to be true so I got quotes with other companies and was consistently getting much lower rates than my current one.  And most of the quotes were for even more coverage than I was getting at the time.  I knew I needed to switch and after all the numbers were crunched, I ended up saving a little over $100/month.  Plus it’s cool to have that little gecko on my side now.  Savings:  $100/month

5.  Get a credit card that pays:  Optimizing credit card use is a mini-obsession of mine.  I enjoy finding ways of getting credit card rewards on stuff I already spend my money on.  Which is why I get flabbergasted when I see people paying for stuff with cash when a perfectly good rewards card would give them some money back.  The most rudimentary rewards cards give 1% cash back, which is $10 back on $1000 worth of purchases.  Not amazing but better than nothing.  The key is finding cards with higher rates for certain categories like groceries or gas stations and cards with sign up bonuses for certain levels of spending.  This can easily get you a few $100 a month here and there.  Plus it’s nice to get something from the big banks.  You do need to be careful not to increase your spending just to get some rewards, as this would wipe out any benefit from the card.  Savings: $10-$100/month

These 5 easy savings tips produced over $400 in monthly savings.  Applying that directly to your highest interest rate student loan payment can make a world of difference.  For example, a student loan balance of $30,000 with a 6% interest rate and $200 monthly payment would take 23 years to pay off with just the minimum payment.  Applying that $400 on top of the minimum payment, the loan would now take just 5 years to pay off!  (Calculations done on unbury.me)  Truly astounding numbers and proof that making extra payments can drastically reduce the length of the loan and interest paid.

The other, and potentially more lucrative, side of debt repayment is making more money.  You can only save a finite amount of money but earning potential can be endless.  Making money can be more difficult and usually requires more work upfront, but the rewards can be well worth it.  To go along with the theme of this post, however, here are a few painless ways to make more money that have worked for me and helped me pay down my debt faster:

-Work more:  This is kind of a no-brainer but it is an option that is overlooked a lot of times.  It really depends on the type of work you do and how much you get paid, but working just a few more hours a week can really help boost your monthly income.  Some people recommend getting a second job to make more money, but that can have more costs associated with it such as a new commute, wardrobe etc.  This should only be a temporary solution though as maintaining a good work-life balance is essential.

-Sell stuff:  This can be a great way to make some extra money as most people have a bunch of things lying around the house that can fetch some money.  Old cell phones, video games, TV’s and furniture can make some decent money when sold on eBay or Craigslist.  It takes some time to find what sells and what doesn’t, but it can be some nice bonus income once done right.  De-cluttering your living space is a nice side effect to this option.

-Use your current skills:  Making more money usually involves gaining new skills.  But there is money to be had using the skills you already have.  Have you always been really good at math or any other school subject?  Find out if you can join a tutoring service or advertise on your own.  Do you enjoy writing about sports or any other particular subject?  Scour Craigslist for opportunities to write articles or reviews.  All you have to do is think about what you’re really good at and find a way to make some money off of it.  This can take some creativity but opportunities can range from consulting to tutoring a friends son.

Combining pain free ways to save and make money and applying that extra money to student loans can make all the difference in the world.  It’s also important to know that getting rid of loans frees up even more money to attack more loans (my preferred choice) or for anything else you want to do.

Please leave a comment and share your saving and money making tips that can help pay off debt!

 

 

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Filed Under: Money Savers, Student Loans
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