Question Everything

I don’t mean to speak for anyone but I’d like to think that we work hard for our money and we would like to keep it. That’s why I discussed fraudulent investments earlier and some of their tell-tale signs to help you recognize and avoid them. But people can be really crafty when it’s time to con you out of some cash.

If the proposed investment initially passes the smell test, here are three questions you can ask to further pull back some layers and determine the merits of the deal:

Does the dealer have a license? Even with the best of intention, the market has shown that it cannot be trusted to regulate itself. The best way of ensuring that people and organizations are doing the right thing is to have the threat of severe penalties (usually financial) hanging over their head. Unlicensed advisers are illegal and accountable to no one. Furthermore, we do not know what their qualifications are.

Does the risk/reward structure make sense? “High risk, high reward” is a common cliche, but it is true. If someone is offering a low risk guaranteed investment, the returns will likely be very low. The opposite applies if the rewards are significant. The risk is likely to be high and the returns will not be guaranteed. Anything different is likely a scam, or at best it is misrepresented.

Is the investment registered? It is similar to an unlicensed dealer. Who is tracking and regulating the security if it is unregistered? Personally, I do not like to rely on a company that is financially invested in me being uninformed for the truth. Registering a security ensures that the SEC, an independent government organization will ensure transparency by providing you with the necessary information to make good choices.

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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.

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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.

De-clutter Challenge

are-you-up-for-the-challenge

In a previous post I briefly discussed money challenges and how people use them as extra motivators to either boost savings or pay down debt. Whether you’re saving for a vacation, a house or just want to improve your money management skills, you can never have too many tools or tricks at your disposal. This is why I encourage people to get creative about improving their financial behaviors. Not everyone gets as excited about personal finances as I do, so it doesn’t hurt to find a way to spice it up.

Today’s post is dedicated to the de-clutter challenge.

What is it: This challenge requires a little bit of elbow grease, but besides needing some motivation and patience, it  is not very difficult. We tend to acquire a lot of things over the years and the less we move the more we accumulate. Given that spring is in full swing, I think this timing is appropriate. Regardless of your financial goals, I think anyone can benefit from this activity.

This is spring cleaning with a purpose! Make a pile of everything you have not used in 12 months and separate the pile into 2 more categories. One is what you think you will use in the near future (maybe you broke your arm this winter and that’s why you haven’t used your skis, but you’ll be done with rehab soon and will be hitting the slopes for sure in 2018). The other pile what you don’t foresee yourself using, or anything that you have 2 of (newly weds, this is where you will shine! When I got married, I suddenly ended up with 2, if not 3, of everything. Seriously… I have 2 microwaves & 3 toasters). Take very good pictures from various angles (the more valuable, the better the pictures should be) and post your items on various sites for sale. I use Facebook, Amazon and Letgo. While I generally don’t mind ebay, I do not like that their listings expire every 7 days, making me a slave to continuously have to go back and relist the items.

Outcome: Results will vary, but the more items you have and the better the quality, the higher your revenue will be.

Variations: If you’ve already done that, try the same challenge with unused furniture. This will work well if you live in a college town where young students cannot always afford new furniture.

Why I like it: This is a great way to hit two birds with one stone.

If you love cash and your messy garage has been driving you crazy, this is the challenge for you.

Path to a Million: 2017 Q1

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This is my first update since the initial posts (announcing the start of the series and the pilot post). Things are going well, maybe better than I expected because a great thing happened: tax season! *eyeroll* (take some time to read this post about why it’s not a windfall you should rejoice in).

However, in my case I can rejoice just a little. Part of my big refund had less to do with my lax W4 allowances, but because we had some credits for energy efficient updates, primarily in the form of solar panels and we were able to use the cost of depreciation to offset our rental income.

Tax season came through for some serious debt reduction which had a snowball effect on our net worth. It will reduce our liability (once I get around to actually making the large payment) and free up cash that was normally going to satisfying my monthly student loan payments, to put towards investments/savings. This really does show the positive effects and importance of eliminating debt. Of course, we continued to pay down all our other obligations as well, but using our refund to all but eliminating student loans will make the most significant impact.

 

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Last quarter, I recorded my net worth at $369,922. This time, it’s $389,213, up $19,291. This represents an average increase of just under $6,500 every month. Although most of that is achieved by reducing debt, it’s a start, and a very good one. Debt plays significant role in our financial struggles and if we can consistently decrease our debts over time rather than add to them, we have the right attitudes and the necessary tools to build wealth, because the idea is that, once the debt is gone, we can use the same disciplined approach towards investing to gain even more speed towards financial independence.

*See Pilot post for more info on loans.

Intuit & Personal Finance

Intuit which is a Financial Software company is the parent company of TurboTax, QuickBooks & Mint. I used TurboTax on and off for years and they just keep pulling me back. Their competitive advantage is in the details. The features are user friendly and very educational. As my taxes got increasingly more complicated, I stopped shopping around for the best price in tax preparation software and started looking for the best bang for my buck. I do have to admit that it does not hurt that USAA members get a discount on their product.

I am not an early adopter of technology or financial tools. Not because I don’t see value in  them, but because I prefer to not be a beta tester for something that might be full of bugs and vulnerable to hackers looking to steal my identity or resources. I prefer to let other people take the hit, have the company establish the proper safeguards and then decide whether or not the remedy is sufficient for me to take on the risk of joining. So while my friends used Mint for years, I stayed true to my excel sheet which was less vulnerable to threats since it was not connected to the internet. However, early last year, I decided that Mint was seasoned enough for me to entrust them with my data and it has made my life infinitely easier.

As if that was not enough, as I completed my taxes this year, I found out that anyone who submits their taxes using the self-employed version of TurboTax, gets a one year subscription to the basic version of QuickBooks. I am not one to turn down free anything, so this was an easy decision to make. In fact, the same username and password applied to the QuickBooks account, and it was simply a matter of accepting or declining the offer. The subscription renews with every “self-employed” tax filing. Which means that Intuit is now servicing my household finances, my small real estate endeavors and overall my taxes. They are truly a personal finance powerhouse for those who value a one-stop shop that helps alleviate the burden of financial planning.

Boosting Savings Series: Coin Challenge

are-you-up-for-the-challenge

In a previous post I briefly discussed money challenges and how people use them as extra motivators to either boost savings or pay down debt. Whether you’re saving for a vacation, a house or just want to improve your money management skills, you can never have too many tools or tricks at your disposal. This is why I encourage people to get creative about improving their financial behaviors. Not everyone gets as excited about personal finances as I do, so it doesn’t hurt to find a way to spice it up.

Today’s post is dedicated to the Coin Challenge, also known as the Jar Challenge.

What is is: Just as it sounds, you place any spare change you have in a jar for an entire year. You don’t touch it for any reason and at the end of the year, you roll it and deposit the cash into your bank account. Or get yourself a nice dinner. Your call.

Like the $5 challenge, this is also a more difficult one to achieve as it requires a great deal of cash use. I can’t imagine that it is as popular as the other challenges as we increasing automate our lives. However, it is a fun way to get kids to save as they don’t tend to have credit cards and Apple Pay.

Outcome: Varies.

Variations: Some people do a 5-gallon challenge where you fill up those big blue water cooler gallons. This works best if your whole family is uses cash and the gallon is communal as it will fill up quicker.

Why I like it: As a debit/credit card user and an avid online shopper, I don’t often think of tips and tricks that will benefit the cash fanatics. I like that I am able to find things that will be useful to them.

Debt vs. Savings: What to Prioritize

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Two of the building blocks of personal finance are saving money and paying off debt. Everything flows from these two principles. You can’t invest, start a business or retire if you are not saving and/or you are crippled by a mountain of debt. In an ideal world, we’d be maxing out our 401k and crushing our debt, getting ever closer to eliminating them every month. Alas, we live in the real world with tons of responsibility and a finite amount of money to work with. So how do we prioritize?

While the exact answer might vary from person to person depending on their respective situation, the steps we use to reach the appropriate conclusion are the same. To make it easier, I will eliminate the variables in a hypothetical situation by using myself as an example.

Currently, I have 3 savings account: one is a CD where I get the best return I’m going to get in this interest environment. It pays me 1.25%. The other one is a money market account that pays 0.05%. It’s not as lucrative as the CD but my money is accessible with few penalties. However, money markets have an important restriction. While you can deposit money any time you want, they cap how many times per month you can withdraw before you incur a fee. It’s a fantastic tool that forces you to keep your hand out of the honeypot. But life happens and we sometimes need to access money more often than we want to. That’s where my regular savings account comes in. Hold on to your hat folks, this return might blow you away: 0.01%. I’ll try not to spend it all in one place. If you’re wondering what this has to do with anything, be patient…

The debt that is currently the biggest thorn in my side is my student loan debt. As much as I would love to keep fattening up my savings, the interest rate on that debt is 5.16%. That means, for every hundred dollar I chose to add to my savings (let’s assume we’re talking about the CD since it offers the best rate) over paying off my student loans, I am getting a return of 1.25% that is costing me 5.16%. That puts me in a whole of close to 4% annually on that $100. Of course, student loan interest is tax deductible if you itemize (which I do), but you don’t get all of it back. The IRS caps it at $2,500 gradually decreasing it as your income goes up until it disappears. So we’re talking a saving of 1% to maybe 2%, and I’m being generous, which will then net you a negative return of almost 2% and we aren’t adjusting for inflation.

So what do I prioritize?

  1. Having an emergency fund: This buys you peace of mind and keeps you from falling into debt when tragedy strikes. How much you need depends on your particular situation. But I recommend a minimum of 6 months.
  2. Saving for retirement: The most important part of saving and investing for retirement is time. The longer you save, the more time that compound interest has to work in your favor. Also, the more time you have to recover from dips in the market.
  3. Paying off high interest debt: My student loan debt at over 5% is in stark contrast with this loan I took out for an energy efficient central AC which is a 0% loan. I am in no rush to pay that off. If they want to extend it 10 more years, I’ll take it! However, I am very aggressive with my student loan debt where I send every extra unexpected funds to Nelnet. Whether it’s a raise, a bonus or a tax return check, it goes towards my student loans. I have paid off over $23,000 in the past 18 months and I have no plans of slowing down until it’s gone.

While your situation might be different, for me, this is the least expensive and most sensible order in which I can allocate my funds. If I do anything else, I am not maximizing all of my dollars. Have you taken the time to consider if your debt repayment plan and your savings strategy are optimized?