A Penny Saved

This is a knife.

No, this hasn’t been transformed into a site about Bowie Knives and odd Australians caught out of their element in New York.

Sometimes, the “knife” that you use to cut expenses just isn’t big enough.  Sometimes you have to look at your expenses and say “This is a knife!”

Desperate times call for desperate measures.  When you’ve cut everything you think that can be cut, there will almost always be something else.  Take out your proverbial magnifying glass and examine your expenses very closely.

Do both you and your wife drive seperately to work?  Do you have to?

Do you really need to have that special bread for your sandwiches?

Is it necessary to have the fastest internet possible?  Would a slower speed connection be ok?

Would it be possible to find cheaper rent housing?

Every little bit counts when you’re trying to save yourself from bankruptcy, debtors prison, and bookies. And you don’t necessarily need to be in danger of any of those things to take a close look.  Doing so may allow you to find the extra money to put into your vacation savings that will make the difference between San Diego and Hawaii.  Above all, the further below your means you live the more you can save for things like vacation, college, and retirement.
Take a close look at your expenses, and proudly declare that “This is a Knife!”

Technorati Tags: expenses, budget, vacation, savings, college, retirement

Throughout the world, people desire to be wealthy.  People want to be at the top of the wealth game.  But what defines wealth?  Is it movie stars, sports stars, *ahem* bloggers?

Many people look to the rich and famous to define wealth and riches.  A bigger mistake couldn’t be made.  While it is true that some of the rich and famous are indeed wealthy, many of them will end their careers in worse financial positions than you or I.

What should define wealth?  What qualifiers do you use for wealth?  Many use net worth.  To some, a net worth of more than a certain number qualifies as wealthy.  But what number?  Many use the $1,000,000 mark.  A lofty goal for many.

I define wealth differently.  Wealth to me does include my net worth, but it’s a fluid mark.  For me to consider myself wealthy, I merely wish to live comfortably now and into retirement.  I am still quite a way off from that mark and still have to work diligently on my finances to make strides in that direction.  Currently, if my wife and I were to make somewhere between 60,000 and 70,000 combined gross per year, we could live quite comfortably.  So for now, that’s the mark.

The beauty of it being fluid is that as our debts and bills decrease so does the mark.  Say all my debts were to go away tomorrow.  The mark would decrease significantly.  Perhaps down to the level of income that we make now.

These numbers do include some planning for future, but that is what it would take to live comfortably for now.  And it would leave some for retirement investing.  Enough to keep that level of funds for many years into our retirement.

How do you define wealth?  Do you have a set goal for your net worth that would indicate to you that you are wealthy?

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Many of us invest in stocks.  Some of you invest a lot and others invest very little like myself.  But what it all comes down to for all of us is making money on our investment.  And that’s why, to this day, I tout the benfits of a dividend paying stock.  Not only do you get any appreciation in value on the stock, they pay you to be a stock holder as well!

Here’s a handy dandy little graph courtesy of The Dividend Guy blog.

Take a very close look at it.  It graphs the historical returns of stocks.  The grey line is the historical return of stocks that does not take dividends into account.  The green line is the return of those with dividends added in.

Note the large disparity between the two.  I would imagine that that disparity would get even larger if you took into account dividend reinvestment.

Dividend reinvestment is amazing.  Not only does the company pay you to be a stockholder, they use that money to buy more stock for you.  It’s dollar cost averaging with no dollars from you.

Of course, it’s important to remember that not every stock that pays a dividend is a good stock investment.  But on average, if a stock pays a dividend, they perform better and generally are sounder investments than those that do not pay dividends.

Technorati Tags: dividend, reinvestment, stocks, stock purchase, dividend reinvestment

MoneyDummy at One Money dummy getting smarter says she’s convinced.  One should pay off his/her student loan debt before buying a house or concentrating on paying off a mortgage.

I couldn’t disagree more.  Certainly, there is something to be said about having no other debt except for your mortgage.  However, I think that this is more of a situational decision.  Take my situation for instance.  I pay 3.75% on my student loans.  I pay 6.75% on my mortgage.  By paying on my mortage first and foremost, I effectively earn 3% on my money.  That doesn’t even include the potential increase in value of my home.  If my home increases by 5% each year, that’s an extra 5% I make by paying(or having) a mortgage over just paying off my student loans.  It may not sound like much but when you start thinking about the total dollar amoun of a mortgage or the average total student loans, it can add up in a hurry.

I was told once that student loan money is the cheapest money you’ll ever borrow.  MoneyDummy refers to Dave Ramsey in her post.  Dave is the same person who pushes the “snowball” payoff method.  In that method, Dave almost always suggests putting the debt with the highest interest rate first for payoff.  I can’t see any logical reason why student loans would be an exception.

As further evidence for my arguement, I ask you, would you ever get a home equity loan or refinance your home to pay off a debt that had a lower interest rate?  Even if it were a credit card?  Student loans are also unsecured debt.  They cannot repossess your education if you default.  They can repossess your home.

It still comes down to a personal decision, but my opinion is that paying on the mortgage and other debt with higher interest rates makes better money sense.  Student loans truly are the cheapest money you can borrow.  Leave them for last on your payoff schedule.  You’ll be making money on the deal.

I should point out that I am not a financial professional and any thing that I write here should not be taken for financial gospel and the only advice I am legally qualified to dispense is this: Consult a financial professional.

Technorati Tags: mortgage, student loans, dave ramsey, dave, financial, interest rates

When I saw the post by Amanda at Young and Broke, I just couldn’t help but jump on the meme.  Who hasn’t thought about what they would do with a million dollars?

So, here goes:

Starting money: 1,000,000.00

Student Loans(wife and I): ~82,000

=  918,000

Current mortgage: ~42,000

=  876,000

Credit cards: ~11,000

= 865,000

Car Loans: ~ 13,000

= 852,000

Misc debt: ~ 12,000

= 840,000

New house: ~ 200,000

= 640,000

College savings for son: 100,000

= 540,000

College savings for future children: 250,000 (if no more children, this becomes investing/fun money)

= 290,000

fun money: 50,000 (vacations, fun toys, etc…)

=240,000

Invest the rest.  Once the debt is paid off, the rest is really gravy.  Potentially, the rest could be invested and given a nice enough return on investment, could become income for one or both of us to quit our jobs.  At 5%, the return on a cool mil would very nearly replace our current incomes.

Ah, dreams.  What would you do with $1,000,000?

Technorati Tags: million, what would you do with a million dollars, investment

This is the final article of a three part series on the book by David Bach “The Automatic Millionaire.”  In the first part, we discussed the “Latte Factor” and how to find the money to begin.  We followed that up in the second part with the essentials of making your finances automatic.  In this part, we’ll discuss a few of the finer points of the Automatic Millionaire plan.

Mortgage Miracle:

One of the best asset’s an Automatic Millionaire can have is his/her home.  Instead of throwing away mounds of cash on rent, you can be putting money into your home.  Some think of a home as a poor investment, but there are not many other investments that have exceeded a 10% growth in recent years.

David gives us a simple and easy way to not only own our own home, but to do it sooner.  He introduces the concept of every other week mortgage payments.  The math on this is simple.  If you’re making monthly payments on a mortgage, you make 12 payments.  If you begin making half of your payment every other week, you will have made 26 payments.  26 half payments amount to 13 regular payments.  You will have paid one extra payment in a year.  It may not sound like much, but if that extra payment goes to principal, it could mean a savings of over $100,000 on your mortgage.  Consider a $200,000 mortgage.  If you pay it off as the bank expects you to, it will take you 30 years to own the house outright.  The average homeowner in the U.S. only lives in any one home for 10 years.  Another interesting fact is that for the first 10 years, nearly every payment you make to your mortgage is almost entirely interest.   If you only live in your home for 10 years, you will have built up almost no equity.  If you cannot afford to make that extra payment, David suggests adding 10% to your payment each month.  Doing so will end up at nearly the same place.  Following this plan could pay off a 30 year mortgage in as little as 7 years.

Tithe:

When most of us think of Millionaire’s, we don’t necessarily think of giving money away.  But David points out that a vast majority of the millionaires throughout history have been dedicated tithers.  Not necessarily to a church, but to some non-profit charity.

Debt Reduction:

If you’re in debt, maxing out your 401(k) might not be the best idea.  Save as much as possible to your retirement plan, but make sure and start paying as much as you can to your debt.  And make it Automatic!  When you get rid of your debt, you can make even larger contributions to your retirement than you already are.

I don’t want to cover every point that David makes in “The Automatic Millionaire” because I really think that if you’re interested, you should pick up a copy.  Read it through.  Maybe do it again.  Learn the methods that David teaches and begin applying them immediately.  The sooner you get on the Automatic road, the richer you will be.  It’s not an instant thing and  you’ll have to work at it, but it will all be worth it in the end.

Pick up a copy of “The Automatic Millionaire” at Amazon.

Technorati Tags: the automatic millionaire, automatic millionaire, david bach

This is part two of three articles on the book “The Automatic Millionaire” by David Bach.

In the first article, we discussed finding the money, via the “Latte Factor”, to make yourself an Automatic Millionaire.  Today, we’ll discuss how to turn that money into an Automatic wealth maker.

Make it Automatic.

David makes one of the best analogies in his book.  It’s a comparison between a budget and a diet.  If you’ve ever dieted, you’ll immediately understand.  People on diets “budget” their calories in an effort to reduce their intake and trim fat.  People on budgets do something very similar where they budget their money in an effort to reduce spending and trim debt.  In a majority of the cases, both end up the same way.  People on diets go on a eating spree and people on budgets go on a spending spree.

Budgets are inefficient for many people.  If you can keep to one, all the more power to you.  David’s arguement is that most people cannot.

So, if we can’t trust ourselves to control our money via a budget, how do we control our money?  We make it automatic.  Take advantage of every ability to save and spend automatically.

First the saving.  If you work for someone, chances are that you have the ability to have payroll deductions made.  You are even better off if you have a retirement account that can be funded by payroll deductions.

If you do, set it up and forget it.  It’s a bit like a Ron Popeil oven.  “Set it and Forget it!”  Begin putting as much as you can into your retirement accounts.  Each and every dime you don’t will cost you exponentially down the road.  David suggests that you should take the percentage of your salary that you think you can spare and then add half again to it.  So if you think you can save 10%, you should save 15%.

Do the same for your emergency fund and any savings that you plan on having.  Try and keep 3-6 months or more in your emergency fund.  And, once again, Set it and Forget it.  A super sale on clothes does not an emergency make.

Now for the second bit.  The debt payments.  Again, our aim is to make things as automatic as possible.  If you have the ability to have your payments taken out of your account through either a bill payment or eft service, do so.  If you don’t have to write the check, there is less chance that you will cut the payment back or forget to send it altogether.  While you’re at it, see if you can add 10% to all of your payments.  Start with your mortgage.  It could save you hundreds of thousands of dollars.

So now we’ve talked about where to find the money (Latte Factor) and the first step in what to do with it once we find it. (Make it Automatic)  In the next part, we’ll talk more in depth about the different thing that David writes about that can further you’re journey to becoming an Automatic Millionaire.

Read Part One: Find the Money

You can pick up a copy of The Automatic Millionaire at Amazon

Technorati Tags: automatic millionaire, make it automatic, debt reduction, save money, save, retirement, bill payment

This is the first of three short articles based upon the principles and plans in the book “The Automatic Millionaire by David Bach.  Read my full review of the book!

Everybody want’s to be a Millionaire right?  So, besides winning the lottery or having wealthy aunt Harriet die, how do we accomplish that?

David Bach has a few ideas in The Automatic Millionaire.  His simple plan can be broken down into three easy sections.  This is the first.

Find the Money.

You can’t be a Millionaire with out a million dollars. Sure you have to save money.  You have to make your money work for you too.  But where does the money come from?

David introduces the readers to “The Latte Factor” early on in the book.  “The Latte Factor” is a really, really simple premise.  There is something in your daily routine that you spend money on that can easily be cut out.  For some, it’s a morning Latte.  A normal Latte can cost upwards of $4 each.  If you buy one 5 days a week, that’s $20 a week.  $80 a month.  So, David says, if we merely cut the Latte out of the daily routine we free up $80 a month for investment.

It’s not just Lattes either.  If you don’t drink a Latte every day, maybe it’s a pack of cigarettes.  Or a donut.  No matter the vice, cutting it from your daily routine could get you on the right track to becoming an Automatic Millionaire.

What’s your “Latte Factor”?  How much is it costing you?  If you account for growth, $80 a month could add up to hundreds of thousands of dollars over 20+ years.  Is that Latte that important to you?

Come back Monday, July 10th 2006 for part 2: Make it Automatic.

Read my full review of the book, The Automatic Millionaire.  Pick a copy of it up at Amazon.

Technorati Tags: The automatic millionaire, save, retire rich, retirement, david bach, the latte factor, millionaire

As I mentioned before(here), I am currently reading David Bach’s book “The Automatic Millionaire“. I haven’t quite finished it up yet, but I’m certainly getting close.

The biggest point, as is obvious by the title, that the author tries to make is to automate as much of your financial life as possible. Automate your retirement, your savings, your debt payments, etc…

In the spirit of inspiration, I’ve been trying to get as much of my things as automated as possible. My retirement(401(k)) has always been automatic. My Credit Union now has bill pay and I’ll be adding as many of my bills to that as possible over the next several months. And I’ll also be trying to set up a more automated method of savings as well.

So the question that I have is this. How automatic are you? What do you still have that isn’t automatic? Do you have anything that is automatic?

Keep an eye out, as I’ll post a review of The Automatic Millionaire as soon as I get it finished. You can pick up a copy at Amazon!

Technorati Tags: millionaire, david bach, automatic millionaire, savings, retirement, 401(k), billpay

Experiments in Finance received a question and has opened it up for group conversation on the myriad different ways that it could be answered. All the related posts will be posted on Experiments in Finance.

The Question:

I like to setup my finances on a “purpose” basis. I create a separate account for each specific saving target. I have 401ks or IRAs devoted to long-term savings. A checking account (and a small savings account at the same bank) to handle day-to-day expenses. Some CDs as a safety net in case I lose my job. A separate savings account for spur-of-the-moment spending.

This keeps things tidy and reduces the tempation for my spur-of-the-moment spending to hamper something important (like next weeks groceries).

This works great for short-term or long-term savings. But not so well for mid-term savings. Things that are maybe 3-7 years out. (Like buying a new car or saving for home remodelling.) I can’t figure out what the best vehicle is for carrying this out. I can take more risk (and want better return) than savings accounts and CDs, but it’s not so long that I want too much stock exposure.

It just doesn’t seem like there’s a good way to create a single account to handle this sort of time-horizon.

Maybe the answer is on your site somewhere and I haven’t been able to find it. Any suggestions?

My suggestions:

It sounds like you have your current accounts under pretty good control. Depending on the rates you are receiving from your bank, you may want to look into a high-yield savings account. These accounts are currently paying in excess of 5%. Doing so will increase your yield on your short-term savings and could become a part of your mid-term savings.

There probably is no “one account” solution to your mid-term question. If you’re comfortable with some risk, you could invest a portion of that money into the stock market. The downside to that is that there will most likely be fees and tax ramifications when you sell those stocks to use the money and there is risk. 3-7 years isn’t the best time frame for keeping the average gain in stocks. A nice mix of CD’s and high-yield savings could bring you into the 5-6% yield range pretty easily. The addition of some stocks and bonds could even bring that higher, but again there could be fees and tax problems upon selling.

ADDED: It might also be beneficial to look into treasury bonds(a.k.a Savings Bonds) which are currently paying in the 1.5 to 3.5% range.  Again, not as good as a high-yield savings, but higher than what your bank is probably paying you.

If you’re interested in high-yield savings accounts, be sure to check out HSBC.com, emigrantdirect.com, ingdirect.com and virtualbank.com as they seem to be the front runners at the moment. All currently have savings accounts in the 4.35% to 5.05% range.

Best of luck with your saving! You sound like you’re on the right track. Keep it up!

Technorati Tags: savings, high-yield, high-yield savings, cd, certificate of deposit, savings rates, rates