Not Saving Could Cost You Your Life

irma

I am glued to my screen, just like every other American, watching in horror as disaster after disaster ravage the Caribbean and southern states. As I see the images unfold, I watch with sadness but also with frustration as news networks routinely interview people who refuse to refuse to evacuate.

While I understand that some are not leaving because of pride and in part because they may believe that the media is overplaying the seriousness of the storm, I’m also starting to realize that some people are not leaving because they simply cannot afford to. They don’t have the extra funds to cover hotels, gas, and food on the road. While that is not an adequate excuse given that shelters are free, it doesn’t change the fact that shelters do have capacity limits and there will always be a significant number of people who have to pay for a hotel out of pocket.

Despite the glamour of South Beach, the city of Miami which is projected to be one of the most affected parts of the state has its underclass. With Florida having a sizable senior population on fixed income, the fact that it is a red state where wages are lower and the fact that there is a large immigrant population all mean that many of those in the affected areas do not have a lot of disposable income. That usually means that people are not saving like they should be. I am certain I have said this in the past, but if I have not, let me say it now: in a capitalist society, a lack of resources can be dangerous if not downright fatal. Even when hotels are $50/night, that seemingly bargain basement price can seem like an insurmountable sum for someone who is in the red every month.

This storm was announced 2 weeks ago and some people still couldn’t make it happen. The very nature of an emergency is that it is unexpected. We can’t possibly know when every tragedy is going to happen. The best we can do is to be prepared to minimize its impact. Stay out of debt, save and have a plan that fits with the risks of your specific region. Government resources are limited and we cannot anticipate that we will always get help in a timely fashion or that assistance will come at all. Stay ready so you don’t have to get ready. Let this be your wake up call.

My thoughts and prayers are with everyone affected by our recent natural disasters, including the recent earthquake in Mexico. If you are in a position to donate, do so at your local level so most of your funds can actually do some good rather than getting eaten up by large overhead at giant corporations. If you can’t afford to donate, volunteer your time. If you’re too far, please remember people always get hurt in these tragedies and you can give blood no matter where you are in the country.

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No Rest for Dead Presidents: My Dollars aren’t Lazy Bastards

What an awful headline. But I’m not feeling particularly creative today so it will have to do.

money

In an introductory investment post, I liken dollars to employees who must work to make my life better. Money has a significant advantage over us when it comes to working and earning potential. We get tired, we need sleep, our loved ones want our attention. Money has none of those conflicts so what reason is there for it to not be working tirelessly to free you from the rat race? In my case, my little dead presidents’ only duty is to slave away to improve my quality of life. Here are some of the ways I make sure they aren’t being lazy little bastards.

I structure my bank accounts deliberately: Some days I can’t even keep track of how many accounts I have. But the complexities of both life and banking regulations do not allow me to simply have a checking and a savings. While I have a checking account for my every day use, that is the lowest yielding account there is. I can’t keep all my money in a checking account. However, the highest yielding bank account is a CD (learn more about CD’s here and here) and there are penalties for early withdrawals. Since emergencies do not wait for CDs to mature, I also have a money market account which provides me with quick access to cash at a much higher rate than a checking but without the potential for a penalty.

I only use cash back credit cards: Your bank is making money off your use of the card, shouldn’t you do the same? My credit card gives me 1.5% cash back on everything I buy and on a monthly basis, the bank runs some specials at various merchants where I get an additional 5-15% cash back. For example, my tail lights went out a few weeks ago. We have both an Auto Zone and an Advanced Auto Parts in our area. However, our credit card company was running a 10% cash back special at Advanced Auto Parts. When it was time for my husband to replace the tail lights, I told him to make sure he went there. He spent $40 and we ended up getting $4.60 back (10% special + the 1.5% we would normally get). Of course, since there is no annual fee and we pay the balance in full every month to avoid interest, we are being paid to use our card.

I get educated: It’s hard to make or save money when you don’t know what benefits or features are available to you. I’ve discussed my solar adventures in the past. We got thousands of dollars in rebates courtesy of the U.S. Government for our investment in solar panels (if you pay taxes, thank you!). Although we would have eventually taken the plunge, we might have missed the opportunity for our big tax credit if we waited too long. There is no guarantee that the program will be available indefinitely or even beyond 2020. We also learned about the energy credits which we are on track to receive quarterly for 10 years. While they are small amounts, they will be offsetting nearly half of the cost of the system. So not only did we get a 30% subsidy, we are also selling some of the credits we produce over a period of time to offset the remaining 70% of the cost. That does not include our actual energy savings which have been pretty substantial (my March 2017 electric bill was $38. I live in a 3,100 square foot house in New England).

I pay debt aggressively: Debt is slavery. It’s crippling because it’s expensive. The best way to handle debt is to get rid of it as quickly as possible. My student loan interest is 5.16%. It makes no sense for me to carry that balance for 10 years (standard repayment) if it’s costing me as much as a moderate investment portfolio would cost. So when I graduated from an MBA program with a balance of $47k and change, I was determine to get rid of it by any means necessary. Two years later, my balance is  $11,600. I have saved myself thousands in interest and the amount that I did have to pay, I have able to deduct it from my taxes. So I have used the money I have in the bank and the money I earned working both my regular job and real estate to cut my balance and reduce my interest.

I keep cash to a minimum: ‘Minimum’ is relative.  It doesn’t mean I only have $1,500 in the bank. I keep a fat emergency fund which correlates with my low risk appetite. The more risk adverse you are, the more money you want available to weather unpleasant unforeseen events. For me that number is a year’s worth of living expenses. Before the recession, the recommended amount was 3 months. After 2008, financial experts were recommending 6 months. I like to be cautious, maybe overly so, thus, I choose 12 months. Anything above that number is invested in various types of projects (or debt payments) that are meant to increase cash flow (or cut my interest expense).

Think of the ways you can make your money work for you. Idle funds are being eaten away by inflation and are not doing anything to improve your bottom line and get you closer to financial freedom. This is the value equivalent of throwing your money away.

Should You Pay Your Children’s Higher Education?

higher-education

I had this discussion with a co-worker a few months back when he said that he was at odds with his wife over their daughter’s tuition bill. She did not think it was a good idea for them to co-sign a loan for her. I wasn’t sure if he was asking for my opinion or just venting, but I wouldn’t be me if I didn’t put in my 2 cents. So it became of matter of to pay or not to pay.

I came up with a little test to help you figure out which way you should go. It’s as simple as answering YES or NO to the following questions:

Are you debt free? – Credit card debt, your own student loans, car note, etc.

Is your primary home paid off?  – No other bills besides taxes, utilities, association dues, etc.

Are your retirement accounts maxed out? – The IRS released the 2016 401K contribution limits here.

Do you have enough in an emergency fund? – Minimum 3 months of living expenses.

Are you adequately insured? – Health, life, personal property, car and homeowners.

If you answered YES to all of these questions, you can afford to take whatever money you have left, after meeting all your obligations and putting food on the table, to pay for your child’s high education. If you have enough to pay the entire bill, more power to you. If you’re just contributing to part of it, well your kid should be grateful nonetheless.

If you answered NO to any of these questions, you CANNOT afford to pay for your child’s school and he or she needs to figure it out. Why? Because your creditors are not going to care that it ain’t cheap for Junior to go to Stanford. They’re going to want their money and they will make your life miserable, as well as ruin your credit to collect their funds. Because it would suck for Junior to come home for thanksgiving break and find you homeless after a foreclosure. Because the older you get, the less time you have to work and save for retirement and NOW is always the right time. Because an emergency could set you back financially for years to come. Because not having appropriate insurance can put you or your survivors under extreme financial strain.

But this guy asked about student loans, not tuition. The answer is no. Don’t do it. Let me make this clear: NEVER CO-SIGN A LOAN FOR YOUR CHILD’S TUITION. If they die, you are stuck with the payments. If they default, you are stuck with the payment. If they drop out of school and default, you are stuck with the payment for a degree they didn’t even get.

I graduated college at 21 and started working 2 weeks later. I later got an MBA while continuing to work. So I have worked uninterrupted ever since undergrad, and I plan on retiring at 65, sooner if I do well on my investments. That’s 44 years of potential for full time work where I can earn enough money to pay my own bills. My parents are in their 60s and my dad is thinking about retiring within the next 2 years. Do you think it would have been fair for him to be looking down the barrel of 10 years of loan payments? Who can afford it the most? My father or myself? Even if I lose my job, I probably won’t be out of work for 30 years. My parents will be if they live 30 more years (which is not too far fetched because my grandma is 90 and my grandfather died at 94).

They have the rest of their lives to work and pay back their school loans. You have maybe another 15-20 max left of working and saving for retirement. How much blood pressure medication co-pays do you think your social security checks will cover after you’re done paying for your child’s student loans?

If you don’t believe me, maybe you’ll believe someone who already made the wrong choice on that one.

The Balancing Act

I logged into my bank account this morning to pay some bills as well as make some transfers. Then I started to think… We often hear people say that we have to save both for short-term rainy days as well as our golden years when we may not have as much earning potential as we did when we were younger. However, many of us are in debt. This has to be one of the most severely indebted generations in American history. So how do we decide what to prioritize? If you’re wondering how you can possibly save when you have creditors breathing down your neck, I have to say you are certainly not the first to wonder that. I asked myself the same question in the past, which has allowed me to come up with a system that makes sense.

It all comes down to balance, common sense and some basic math.

Many people who find themselves in debt, are in that position because they indulge. But that’s not representative of everyone. Some people simply live paycheck to paycheck and a minor emergency subsequently morphs into a gremlin they can’t control. A bad flu landed them in the hospital with a high co-pay, a busted transmission on a car that was paid with a credit card, a broken AC system, can all conspire to derail even the most disciplined.

This means, your first step is to eliminate one of the primary sources of sudden insurmountable debt. If you had a leak in your house, would you start mopping up the water before plugging the hole? Because you can mop all you want, but if you don’t take care of the source, you’ll be mopping every time it rains. The best way to tackle that is to have a decent emergency fund. That will mean you’re prepared to pay for an emergency without having to charge your credit card. Some people recommend 3-6 months of living expenses, others have said 8-12 months. I think it depends on your personal situation but I’m a fan of the 6-month guidance if you have a spouse, and if you are single and on your own with no one to help contribute to your salary, I’d say err on the side of caution and have 9 months stocked away. Of course, you’re not going to accumulate that quickly, but it’s ok to take your time. What matters is that you’re working towards it.

Next, pay your debts, and do it aggressively. For example, my student loans are $400/month, but I pay $800. The extra $400 gets applied directly to my principal, shortening my payment period and reducing the amount I have to pay interest on. If something happens (i.e. breaking my dishwasher and paying $500 for a new one), I can choose to not pay the extra $400 for the month I have the unexpected  expense. I make sure the minimum amount is on auto-pay, and the remainder is paid at my convenience. The more you pay, the shorter your payment term and the less it costs you in the long run, helping you get out of debt faster and cheaper.

Finally you can start saving! Why is saving for non-emergencies dead last on the list? Think about the interest rates banks are paying us these days. In fact, think about the BEST advertised rate you’ve seen in recent weeks or months. What was it, 1%? Maybe 2%? What sense does it make for me to save at 1.5% and not paying my loans which are costing me 5.9%? I’m actually losing 4.4% overall. It really makes no fiscal sense. I already have an emergency fund, a home, and two solid cars. This means, anything I save beyond is money I’m not paying my debt with.

What’s your balancing act?