Work Hard, Save Harder

[workhardsaveharder]

A real life "Wolf of Wall Street"

Sometimes all you can say to a situation at first is "Wow."  That's how I felt when a very close friend of mine, who shall remain unnamed, allowed me to look through her personal finances.  I was focusing on the investments which are 100% managed by an investment manager (let's just say “broker” so I can type less) from a firm that shall also remained unnamed.  Since my background is in Market Risk Management, it did not take me very long to notice something strange which at first I thought had to be my mistake.  Upon closer inspection, however, I found out first hand why Wall Street has a bad reputation.

My friend's broker participated in an IPO for her without her knowledge, in an enormous size relative to her portfolio, only to sell 75% of the position three days later.  In case you aren't familiar with these things, IPOs usually tend to be riskier "investments."  I put the word investments in quotations because IPO plays usually are more speculative - let's not forget that if you are buying an IPO it's only because the insiders are selling out at what they believe may be the top!

But what was really strange was the selling of 3/4 of the position so soon after buying.  The reason the broker did this, as I learned, was because he gets to pocket a hefty 2-4% fee on the original size of the position.*  So my friend takes 100% of the risk on a very large bet, and the broker gets to keep an egregiously large fee for something that is by no means appropriate for her portfolio.  It's no wonder my friend mentioned that she was shocked by how nice of a home he had in the same neighborhood she lived in!

Digging deeper, we found two more examples of this in her portfolio, and he had only been with this broker for a year and a half.  One of the examples was an IPO** of a private security, which means that it’s less liquid and potentially even riskier.  To make matters worse, every time the broker did this, he lost a lot (usually more than 15%) of money on each bet.  Low and behold, a few days after we discover this, she gets a call from the broker that he is moving firms because he just doesn't like the current firm and the way they treat customers.  He claims in the new year the current firm plans to raise it's fees, and he goes on and on about how much he genuinely cares about her and wants to keep her costs low.  Ha!  This guy could be the mini Dexter Morgan of wealth management with his kind of sociopath behavior!  (Sorry, I'm binging through Dexter on Netflix these days and felt the need to throw in the reference.)  Keep her costs low...yeah, sure***.

I hope I haven't completely scared you away from investing your money because you really must do so.  Inflation alone will kill your wealth if you fail to invest.  Just make sure you do so wisely and if you hire someone to do it for you, check in on their activities.  I've met plenty of great people in this industry, but like any industry, bad apples exist.  If you are concerned this specific activity may be happening in your account, check for any securities you hold that are difficult to find on a simple Google search****.  If the security is difficult to find, it may mean that it is a private security.  If you do find it, check when the IPO date was and compare that to when it was purchased on your behalf.  If you still don't know what to look for, ask someone who does that you can trust.  Even if your accounts are growing, like the case for my friend here, it does not mean you aren't getting robbed blind.

  *Luckily, upon investigation with the firm, the company undergoing the IPO apparently pays the fee, not my friend.  Though I have my doubts that is always the case.

**I say IPO, but technically an IPO is the public offering of a security.  The security was not offered to the public, but rather to her brokerage house which then offered to subscribe qualified investors.  To make this even more absurd, the only quote on the street for this security was from the firm that sold it to her.  Imagine buying something that you can only sell back to the person you bought.  You think that’s going to work well for you?

***It was later discovered on the FINRA site ("an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly") that this broker was terminated for allegations of overcharging customers.

****Or even better, do an SEC EDGAR search.

[workhardsaveharder]

Stop being an "economic girly" man!

Alright, let's get the quote in the title out of the way first because it's awesome.  I want you to think about the quote - but not the politics behind - "Don't be economic girly men" while you read today's post.

http://www.youtube.com/watch?v=SUzUbtIptqQ

Today one of my Baby Savers suggested to me that it should be considered perfectly fine to make lazy mistakes in terms of spending as long as you are saving in other ways in your life.  For this person, that specifically meant taking a cab a few times per week instead of public transportation and never cooking his own lunch.  At first I wanted to ignore the comment out of frustration because that kind of attitude could not be more opposite of what I want to inspire through writing this blog.  But after a few deep breadths it occurred to me that maybe I can use this for constructive purposes.

To borrow a term from the very awesome, very Hard Saving, Mr. Money Mustache, that's just not Badass enough for me.  If you really want to minimize the amount of years you need to work, you have to work at saving.  Sometimes that means you need to toughen up like the Terminator and take the bus or stay up an extra ten minutes at night to prepare a cheap but delicious and nutritious meal for the next day.  While these small expenditures may seem like just too much to avoid after a hard day of work, or like they just won't add up to make a difference, the arithmetic never lies.

Consider this, the maximum amount of money you could possibly save in a given year is your income less taxes and cost of living.  If your income and taxes are constant, the only variable you have immediate control over is your cost of living.  Reduce that variable to as low a figure as possible and you will find financial freedom much sooner in life.

Next time you are about to hop in cab, throw away $15 on lunch you don't really care about, or buy that new stupid gadget society demands you need to buy, say to yourself, Self, "Stop being an economic girly man!"

[workhardsaveharder]

Brake with the gas!

This post is for all my drivers out there and it's going to be pretty short but pretty sweet.  It's about learning to break with the gas pedal and can be used in any type of car; standard or automatic.

When I say break with the gas pedal, I mean learn to anticipate the flow of traffic and let your car coast long before you need to apply the breaks.  This is easiest to do on the highway, but can even be done on local streets.  To make it most effective, you should get in the habit of leaving more distance between yourself and the car in front of you.  The average American driver leaves an absurdly small amount of distance, and I know this because whenever I look in my rearview mirror, 95% of the time I can tell what kind of cell phone the driver behind me is texting on while driving (argh!!).  When you are on the highway, pick an object such as an overpass or a sign and start counting Mississippi's when the car in front of you reaches said object.  If you reach it in less than two FULL Mississippi's, you are following too closely.  If you disagree, ask yourself why on earth you feel the need to follow any closer?  Is it going to get you there sooner?  No.  Will it make for a less relaxing drive?  Yes.

Now that you have ample distance, when the traffic begins to slow, watch how you can release the gas and usually slow down enough that applying the break is not even necessary.  This safer driving behavior will save you money over time because you will increase your gas mileage and decrease the wear and tear on your brakes.  It will also make your passengers happier because it decreases sudden and abrupt changes in speed which causes motion sickness.  If you are driving a standard transmission vehicle, you can also take advantage of downshifting to reduce your speed.  Done correctly, this will not significantly wear your clutch down and will do no damage to your engine or transmission.

Finally, if you are finding more people are passing you and filling in that beautiful gap you created with their atrociously expensive vehicle they probably financed on credit, take a deep breath and remind yourself that what you are doing is safer AND Hard Saver.

[workhardsaveharder]

Understanding and maximizing your credit score, part 2

Last week I promised I would give you some tips and tricks to "game" the credit scoring system.  In case you haven't noticed, the system is pretty messed up and at times very counterintuitive.  It's meant to be designed to quickly summarize a person for a lender in order to evaluate riskiness, but instead it can encourage poor financial behavior.  For example, closing a credit card will negatively impact your score, at least in the short run.  That's right, opting OUT of this crazy consumption focused culture and deciding NOT to have a piece of plastic that will let you consume way past your means is looked upon negatively.  It makes me want to say "Yeah, Federal Government and Credit Bureaus, that's a good idea, yeah" in the voice of the awesome Adam DeVine from "Workaholics."

It would be one thing if closing cards only hurt your score if the cards were under a certain age to discourage people from opening cards just to get a quick benefit such as 30,000 free miles on American and then closing them.  But no, no matter how old the credit card, you will get dinged for trying to consolidate your cards and reduce your participation in an insane consumer driven society.

So what's a Hard Saver to do?  Answer: (legally) game the rigged system however you can.  Here are a few neat, and some really boring, tricks I've learned that you can apply:

Always check your credit score before shopping for a new credit card.  Figure out what range your score falls into and only apply for cards that match your range.  If you shoot for the sky and apply for a card marketed to excellent credit scores (like that American Airlines card I linked above) but your credit score range is Average, you're going to get rejected and then the genius system is going to knock your score even lower for attempting that.

Never pay the minimum balance on your credit card, and never pay the full balance.  Paying the minimum means you are going to take a mini loan out from your credit card company that is serviced by this small payment.  The statement balance will carry and you will pay interest for ages until it's paid down.  Paying the full balance is for Baby Savers because you are paying more than what is due.  Why pay the credit card company a month early when you can invest the money?  Just pay the statement balance on time.

If you have excellent credit (or if you are a teenager with parents with excellent credit then have them read this), put your child on your credit card in their name.  This means they get a card linked to your account that you pay.  By doing this, your child will benefit from your credit score and begin earning credit and developing a credit history before they even finish high school.  I am not suggesting that you give them the credit card (which you may want to do for emergency's only anyway), all you need to do is put them on and occasionally make a payment on that card.  This is what my parents did and I graduated college with a credit score of 800, having never had a job longer than an internship or a summer and having never opened a credit card on my own.

For the advanced, you can learn when your bureau's take a snapshot of your credit card accounts and adjust your payment date so that you pay down the balance before the snapshot is taken.  This will make it appear as though you utilize less credit than you actually do, which as discussed in my previous post, is a good thing.  To do this, sign up for a service like CreditSecure  (I've been using this for years) which, for $15/month, allows you two pulls of your credit report each month.  Compare the balances shown in the pulls to your credit card online statement and back into roughly the date where the snapshot was taken.  Then adjust to pay the statement a day or two prior each month.  EDIT: I received a message from a reader about two websites, CreditKarma.com and CreditSesame.com, that will let you see your credit score for free.  I subsequently cancelled my CreditSecure service and plan to try one of these sites out soon.  While these are less flexible (one check/month instead of two; only one score instead of all three), I am always for good ideas to save money, and this looks like one of them.

Never cancel your oldest credit cards.  History is very important with your credit score and keeping the older accounts active will maintain and build on this.  This is why you should think long and hard before opening a card.

Find mistakes in your credit report and take the time to report them to the appropriate bureau.  Here are the three dispute links for each bureau to save you time:

Transunion: Dispute via phone or mail.

Experian: Dispute online.

Equifax: Dispute online.

  Got anymore clever ideas?  Slap 'em down below in the comments.

[workhardsaveharder]

Understanding and maximizing your credit score, part 1

Your credit score is an important part of your life and can make a big impact on your ability to save for and obtain financial freedom sooner.  It's important because it's used by lenders to determine how risky of a borrower you are. As your score increases, lenders will perceive you as less risky and offer lower interest rates on loans.  Also, the higher your credit score, the more likely it is you will be able to obtain awesome credit cards, like my personal favorite mentioned earlier.  So think of a credit score as another financial tool in your repertoire with primary purposes of facilitating your ability to borrow money at lower costs and allowing you access to better credit cards that can give you more perks and benefits.  Additionally, it also plays important roles for landlords in deciding to allow you to rent an apartment, employers in deciding to hire you, insurance companies in deciding to insure you (and at what cost), and utility companies in deciding to provide you with service.

The FICO score (most common credit score in the United States) ranges from 300 to 850 where excellent credit is 720 and up.  Since it's impossible to say exactly how much what activities will negatively or positively impact your FICO credit score (it all varies person to person and the formulas used are private), I'm going to try to simplify the Do's and Don'ts to improve your score.  Even this will get a bit complicated though because some actions will have different affects depending on the person.  Before you get started though, I highly advise checking your credit score for free here.  This site is recommended by the Federal Government and is sponsored by the three credit rating agencies, Equifax, Experian, and Transunion.

Do:

Check your credit score as often as you like.  Doing so has no impact on your credit score and it is important to be well informed so that you can dispute incorrect information.

Pay down all debt as fast as you can and on time.  The purpose of a credit score is to help lenders predict whether or not you will miss payments in the future, so keeping your record clean is a very positive factor.

Generally speaking, it is beneficial to have at least one credit card in good standing.  If you do not have one yet, check your credit score and only apply for credit cards that are marketed towards your range of credit.

Pay all your credit card bills in full, or in other words, carry a $0 balance.  If you have a balance, focus your efforts on reducing it as quickly as possible.

In many circumstances, obtaining a mortgage can improve your credit score because a long history of successful mortgage payments is looked upon positively by lenders.  In addition, lenders recognize that obtaining and maintaining a mortgage requires more skill and discipline than other account types. People who have mortgages and pay them on time tend to see an increase in their credit worthiness.

When choosing credit cards, make sure to pick a card that you are comfortable keeping for at least a decade.  Longer history of timely payments to your credit card company will improve your score

Try to open enough credit cards to have roughly 10x more credit extended to you than you actually use on a monthly basis, but check Don't # 2 first.  For example, if your credit cards statement averages $1,000 per month, make sure you have at least $10,000 in available credit across your various cards.

Similar to #7, consciously decide to spend much less than the credit extended to you.  Lenders see this as a sign of responsible credit behavior and are likely to extend you additional credit as a result.

  Don't:

Close credit cards unless you have cards that charge you annual fees you wish to cancel.  Oddly enough, closing credit cards on your own has a short term negative impact on your score because it generates a hard hit on your credit score.  First, you should try to cut up the credit card or put it in your drawer.  After a few years the credit card provider may cancel it on their own due to inactivity.  This will not hurt your credit score (as long as the amount of credit extended to you post card cancellation is at least 10x the amount of credit you use each month), and neither will not using said credit card.

Open credit cards or loans frequently.  If you want a new credit card make sure to do ALL of your homework.  Whenever you apply for a new card, it generates a soft hit on your score which can worry lenders because it is a sign that you may use credit and loans to supplement your income, and might be spending beyond your means.  Further, closing said credit card can hurt your score, so don't open a card you aren't comfortable having for at least a decade.

Fail on your obligations to lenders or landlords.  Both entities can report your failure to pay to any of the three bureaus which will have a disastrous affect on your score.

Put your head in the sand like an ostrich if you have too much debt to pay.  Contact the lender and try to work out a plan to consolidate or adjust payments.  Also, make changes to your lifestyle to allow yourself to pay down the debt.

Take out large loans if at all possible.  Installment loans usually carry large fixed monthly payments. Keeping your credit report clear of these major monthly expenses tells lenders that you have more money available to take on the additional debt of a new account.

Max out your credit cards.  Always avoid utilizing more than 90% of the available credit on any given credit card.

  Whew, that was a lot!  I'm sure I missed something, but hopefully that can help you plan better to improve your credit score.  Like I said, make sure you obtain a credit report to a) check it's accuracy and b) see what you can do going forward to raise your score.  It is possible that not everything above will apply to you, or that things that I said to do may result in short term decreases in your score.  Just remember that it's a long run game and the only thing you can do is to avoid making dramatic changes when you know you are close (perhaps within half a year) to applying for a mortgage because you want that score as high as possible to save you thousands on interest payments.

My next post will give you tips on how to "game" the system.

[workhardsaveharder]

Debts that have to go at all costs and debts that can stay for a bit

Certain debts have to take the top priority in eliminating, while some debts are actually OK to keep around for a little while.  Some debt will keep you poor forever until it's repaid and some debt can actually do you good, to an extent.

Credit card debt, for example, is the worst kind of debt you can have.  It hurts your credit score (which has a compounding negative impact on your life when you try to get a loan or mortgage) and costs a lot - A LOT-  of money.  Most credit cards have a prime rate (i.e. the lowest possible interest rate only given to people with excellent credit scores) that is higher than 15% APR.  That means if you have $1,000 in credit card debt and only pay the minimum (usually 2% of the balance), you will pay $20 every month.  But more than $12 will go towards interest payments.  At this rate, it will take you over 4 years to pay off that debt for something that you already forgot about a few months after buying.  If you have any credit card debt at all, it is imperative to pay it down in full as quickly as you can.  If that means cancelling your TV service, walking to work, or not going out socially for months, too bad.  Get it paid off immediately.

Student loans: Credit card debt is probably the scariest in terms of outrageously high interest rates, but student loan debt can be pretty scary in terms of principal owed.  Even if the interest rate on your student loan debt is very low, you should still make this a high priority to prepay.  Instead of paying the minimum amount due, double or triple the payment if you can, or at least increase your payment to something you can handle.  The LAST thing you should ever do is ignore your loans and act like an ostrich with your head in the sand.  Most student loan providers will allow for an instance or two of forgiveness in the event of missed payments, but at a certain point there will be no turning back.  Eventually you will be in default and your credit score will be extremely damaged because of that.  This means that you will not be able to get another loan (think mortgage when you want to settle down!) very easily, and certainly not cheaply.   Be sure to get all of your loans organized because many people find that mini student loans that somehow slipped past their eyes - loans they could have easily paid off - fall into default simply because they were accidentally ignored.  And any loan falling into default status, no matter how small, can haunt you for decades to come.

Car loans would normally also fall into the category of unnecessary and damaging debt.  My ethos is that if you can't pay for a car in full, it's too expensive a car for you.  That does not mean that you shouldn't accept financing if the deal is attractive.  For example, a close friend of mine with excellent credit financed a car he purchased (and could afford to pay in cash) because they APR was .01%.  With interest rates that low, you actually would be a bit foolish to place your savings so quickly into a depreciating asset.  Instead it is wiser to invest those monies, and pay for the car in full a month or two before the APR is scheduled to increase, as it almost always eventually will.

A mortgage is one of the few types of debt that can actually serve you well, to an extent.  The interest payments are tax deductible, lowering your taxable wages, and having a mortgage can also improve your credit score because lenders view it as proof that you are a responsible borrower.  An improved credit score can lend itself to a lower interest rate on your mortgage which can save you thousands very quickly.  Even still, if you can afford to over pay your mortgage payments, you should.  You shouldn't over extend yourself so that you have no emergency funds, but dragging out the mortgage for the full 30 years will result in a lot of money wasted on interest, even though it was tax deductible.

In a nutshell, you can see that debt is generally bad and should be avoided or cured.  Under certain circumstances, however, it can be a smart financial decision to responsibly maintain or take on debt.  Smart debt is the kind of debt with very low interest rates (interest rate paid is less than interest earned on investments) and/or some kind of tax benefit.   Bad debt that should be paid off ASAP is the kind of debt with interest rates close to or much greater than interest earned on investments of equal value that have no tax benefits whatsoever.

[workhardsaveharder]

Guest post: Follow this guy's five steps to be a Harder Saver

Hey Hard Savers, I've got a friend with a similar sense of style.  He was nice enough to write something I wanted to share with all of you.  It's good advice and great ideas to throw into your New Year's resolutions!

  I have read many an article over the years offering sound advice on saving money.

The following is a culmination of those tips that I have read in what I feel is the most sensible strategy to ensure your financial security to cover most events.

1 - "Setting up": Ascertain what is a comfortable savings amount for you. This is a very hard formula for me to advise anyone on because it's a very personal choice.

Coming from a financially conservative background I like to ensure at least 33% of my net pay is saved a month. This comes down to personal preference though. At a minimum I would say 20%.

  2 - "Rainy Day Fund": Simply build a rainy day account. This was probably the most brilliant concept that I came across whilst simultaneously being the most simplistic. Have a rainy day fund of cool hard liquid cash (but in a bank account).

Personally I feel $1,000-$1,500 is a good amount to have here. This money is going to facilitate those unexpected large expenses such as a car repair, large phone bill etc.

  3 - "Oh no I lost my job Fund": Over the last few years we have all been hit by the recession in some shape or another. In the industry I work in its all about being let go. This is more often than not out of the blue. With that in mind we need to ensure we are prepared for this. Even when the possibility is slim to none I still recommend always aiming for this.

The way that I have personally done this is to have 6 months worth of living costs stacked aside and invested. Easy to work out, not so easy to save! I appreciate this may well be a huge milestone for some, however, if you start off aiming for 1 month and grow from there you can most definitely achieve this. Again 6 months is my guidance, increase or decrease this as you feel necessary.  Be sure to invest this money so that it does not decrease in value due to inflation.

  4 - "401K": Again a no brainer. Most companies to an extent offer a match contribution. That equals free money. Do not turn this free money down, it is essential to your security upon retirement. Whatever 401K flavour you go down just ensure you are putting in whatever it takes to cap out your employer contribution!

I have met so many people that do not do this from the get go and as they get older the idea terrifies them because they feel they are losing that money as accessible income. Guess what silly billy, that money is still yours just in the future! Add on top that most 401K plans offer opportunities to borrow for emergencies or home purchases.

  5 - "Cash is king - WRONG": I am guilty of this more than most. We are taught that cash is king and when it comes to savings we do not want to risk losing all of our hard earned cash.

Guess what, by current interest rates Vs inflation you are already losing that hard earned cash. By nature of the interest you can earn on your bank accounts (including savings accounts) versus the average inflation rate for the year, those of us who held on to cash have already lost value.

My opinion, for those averse to risk, find a security that is low risk, whilst I do not particularly see the point in a CD or low interest rate bond there are some solid funds out there that will outperform inflation. My suggestion is to do your own research here, I do not want to be held liable for any bad investment choices!

  So concludes my milestones for now. I hope that they in some way are useful if for no other reason than to scoff at!

Happy Holidays!

-Amar Keshani

[workhardsaveharder]

Budget all year for a painless holiday shopping season

If you're finding this year's holiday shopping stressful, that's good to hear - you're human.  It can be so hard to find the right gift for someone that they actually want and haven't already purchased for themselves.  But if you're finding this year's holiday shopping unaffordable, then get out a fresh Excel spreadsheet and pay attention to what I'm about to say, you wussy saver.

Three words: Budget, budget, and budget.

The only reason you should ever find the holiday shopping craze unaffordable - i.e. you are unable to save your predetermined amount this month - is if you failed to budget all year long.  A proper budget should list all of your regularly recurring costs, such as groceries, utilities, gas, etc.  It should also include less regularly recurring costs, such as car insurance which I pay twice a year because it is cheaper than paying monthly.  Take a look at this mock example that I made for a person with an income of $60,000 per year:

Gross Income               $      60,000.00

Net take home/month  $        3,000.00  

Item Cost

Rent                       $               850

Internet/TV/Phone $               175

Electric                  $                 45

Groceries               $               250

Savings Plan          $               650

Gas                        $               200

Car Insurance        $                 83

Cell                        $                 85

Gym                      $                 50

Commuting           $               112

Chipotle                $                 27

Total                    $             2,527  

Discretionary        $               472

  Notice that I was conservative with the take home pay per month, implying a total cost of taxes/benefits/401k of 40%.  Further notice, that like the author, this person likes to go to Chipotle for a meal 3 times per month.  If you have something like that, add it to your budget because we are trying to capture all the regularly recurring costs.  Even if you only do that thing 2 times instead of 3 in a given month, put your best guest conservative average.  It will take time and multiple passes at your spreadsheet to make sure you haven't forgotten an item, but put in the effort because you can only analyze your outflows if you have them all organized.

Finally, note the Discretionary line item.  This is the amount of money left over each month after paying for all budgeted items (which includes saving!).  For this Hard Saver, there is a fairly good amount of money put to the side for entertainment, especially when you consider that one generally only has time to spend it on the weekends.  The trick here, though, is not to set the goal of spending that money every month, but instead enjoy whatever amount of the money you feel you need to enjoy within reason.  Try not to spend it all, and that which you don't spend can be moved into your dedicated savings account.  This way, surprise expenditures, such as that gift for Uncle Nick you just remembered to buy won't have any impact on your savings pool.

This exercise will show you how you simply cannot do it all.  Priorities in life have to exist, and most people, including myself, who do this as a first time exercise will be surprised to learn that in order to adhere to their budget, they simply need to say no to spending urges, be them social dinners or consumer based purchases.

[workhardsaveharder]

Cut out the inefficiencies

When I first started living on my own, one of the first things I did was sign up for internet and cable TV with the optional DVR box.  These days, it’s hardly necessary to have cable TV with the DVR thanks to the many options like Netflix and Amazon Prime, but if you feel it’s a non-negotiable expenditure I can still save you money.  The DVR box that the cable company sends you is outrageously inefficient.  Even when the DVR is off and you are not watching TV or recording shows, the hard drive spins and consumes lots of energy.  The little box consumes so much energy that it’s comparable to running your refrigerator (Google search this claim, you will see many people agree).

I tested this claim myself back in the early days when I literally only had a refrigerator, DVR box, and cable internet modem.  I unplugged my DVR when I was not using it, which is really not that big of an inconvenience when you want to watch something because it boots up in a few minutes.  Back then I managed to cut my electric bill nearly in half, but that was because it was so low already.  Still, the savings each month amounted to roughly $15-20, which when you multiply by 12 months equates to a free $180 -$240 you otherwise would not have.  This is an exercise in frugality but also in responsibly caring for your environment.  Clearly the cable companies could care less because they don't pay your electric bill.  To leave your DVR running when you will not be watching or passively recording is like leaving the lights on in multiple rooms when you leave for work; it’s just unnecessary and wasteful.

Look around you and see what else you can cut out that you don't need running 24/7.  Perhaps you can plug certain electronics that you use at the same time into the same power strip, so with a flick of a switch you can quickly save power when they are not in use.  For example, have your internet modem, router, DVR, and TV all plugged into the same power strip and when you leave for a long weekend or for work, just flip the switch!

[workhardsaveharder]

Eat well, save well

As you may have learned by now if you've been following along since the beginning of this blog, my first year in the working world was my worst year for saving.  And in this case, my savings and health went hand in hand.  I found myself buying lunch everyday for at least $9 to $10.  On top of that, I found it much harder to eat in a disciplined and healthy way when I bought lunch.  Noon would roll around and as I walked around looking for food I would get cravings for burgers and fries or grilled cheese sandwiches and usually fall for these urges.  I'm a very disciplined person, but it can be really hard to be good to your wallet and your cholesterol levels when your primal instincts are kicking in.

When I reached my first year working, I checked over my credit card statement for the previous 12 months (an activity I highly recommend you do at least annually) and I found that I was spending way too much on these lunches, despite my efforts to eat cheaply.  I found that the best solution is really quite simple.  I decided I would pack my own lunch.  At first this felt daunting, having to put in the extra work to cook more meals on top of my dinners, but I figured out the solution that worked best for me.  I prepare lunches in batches of two or three at a time the night prior, so Sunday night I will cook two meals and Tuesday night I will cook three.  Usually this means making some complex carbohydrate with healthy lean protein.  For example, brown rice, whole wheat pasta, or red quinoa for the carbohydrates and maybe chicken, turkey, or veggie burgers for the protein.  Then throw in some veggies with it and you are good to go.  I have been doing this for years now and I could not be happier.

Not only is this much healthier, it also makes lunch time so much easier.  Instead of wondering what to get and fighting urges, you simply get hungry and eat what is prepared.  You feel super satisfied afterwards knowing you saved your health and your money.  I've calculated that on average I save between $6-8 per lunch, which is roughly $1,645 per year!  Plus, if you enjoy going for walks on your lunch break, I think you will find the walks much more enjoyable when your stomach isn't constantly interrupting your moments of relaxation and fresh air.

So take the Hard Saver challenge and try this out for a week, then two weeks, then a month and before you know it you will never want to go back.  You will look at people paying for lunch and think about how much they are abusing their bodies and wallets.

Post some ideas too for healthy quick lunches you can make so others can get inspired!

[workhardsaveharder]

When to use credit card points or rewards

So, you've amassed a lot of points, miles, or cash back just waiting to be redeemed at the click of a button?  Congratulations!  However, if you're like most people I know, you probably won't click that button anytime soon - but you should!

Except for miles which can obviously only be used when you are going to travel, all other rewards should generally be redeemed as soon as the credit card company allows it.

Getting cash back is probably the easiest to understand.  These types of credit cards give credit towards your statement, effectively lowering your bill.  That's basically the same as receiving cash.  But if I were to say to you I will give you $100 today, tomorrow, or one year from now, you would have to be crazy not to take the money today.  The reason is two fold:

The value of a dollar today is worth more than a dollar tomorrow.

There is no guarantee the credit card company (or I, in this example) will be in existence one year from now.

  Starting with the first point, due to inflation, a dollar today is worth more than a dollar tomorrow.  This means that today's dollar bill will get you more on the McDonald's Dollar Menu, for example, than tomorrow's (or technically next year's) dollar bill.  Simply speaking, the cash you have earned and are due to receive is not going to earn interest and will only be worth less with each passing day.

The second point is self-explanatory, I think.  Not every credit card company will be around forever.

The same can generally be said for points, but sometimes the way points can be used can be confusing depending on the credit card company.  Usually 1 point equates to 1 penny in value, but that may not be true with your specific credit card.  Regardless of how they convert, their worth is still going to decay overt time, just like cash back rewards.  Therefore, you should use these points as soon as you are eligible - and use them in the way that gets you the most bang for your point.

Sometimes credit card companies add incentives to make you want to wait.  For example, have you ever seen something like, "Redeem 7,500 points for a $100 value towards your next purchase?"  Similar incentives exist for cash back rewards.  Instead of getting the usual 1% (which is simply the standard for most cards, but many will offer higher percentages for certain types of spending) which would equate to $75 today, they are offering you $100.  That's fantastic!  But wait, you only have 1,000 points and at your current rate it will take you many months to earn enough points to qualify.  That's discouraging, but in almost all cases, that's actually worth the wait.  The reason is because generally the boost you get for waiting is far greater than the decay in the value of points due to inflation.  Unless it will take you a very long time (think two years) to get to the qualifying level, you should wait to accrue more points.*  But the offers do stop.  They never go up and up to, say 100,000 points will get you $1,250!  Once you reach your highest offer, cash out immediately!!

And if you're skeptical of why your credit card company seems to be encouraging you to use your points after first encouraging you to save them, the reason is simple.  If you use your points you will have a smaller statement to pay and feel richer.  Almost always this will result in spending or consuming more, and most likely with that same credit card that made you feel richer.  That's great for the card company because they get to make more from your transactions on a cost basis model that is already accounted for and planned out.  As long as you don't spend more than you normally would, this is good for you too.

*To figure out the wisest decision, simply estimate the number of months you have until you can qualify for an offer like this.  Assume inflation is 2% and for a rough approximation, multiply the inflation by the number of months divided by 12.  So, if it takes you 6 months, 6/12 = .5 multiplied by .02 = .01 or 1%.  Then multiply this percentage by the amount to qualify, in this case 7,500.  That number is 75 points, or $0.75 (in most cases), and is the conservative estimated cost of waiting to receive this offer.  The reason it "costs" you is because points you could spend today on goods bought today are instead being deferred, and you are paying for these goods with cash.  In six months time, these points will buy 1% less goods than they did at the beginning.  The reason it is conservative is because the points are assumed to be accrued evenly throughout the 6 months, so points accrued earlier will have decayed more than points accrued sooner.  But do not be fooled, in the same way a dollar today is worth more than a dollar tomorrow, so too is a point today worth more than a point tomorrow.

[workhardsaveharder]

Credit or debit?

The answer to this question is actually pretty simple:

Pay for everything with a credit card that you would normally buy with cash or a debit card.

The reason is because most credit cards have usage incentives, such as cash back, miles, reward points, etc.  Typically, every dollar you spend on a credit card equates to 1% of something back.  That something can be cash, like my personal favorite, or miles towards an airline ticket.  You are literally throwing away a penny every time you opt to use cash.

In addition, if you use your credit card all of your transaction history is stored for future use and analysis.  This can be very handy at the beginning of a calendar year when you can look back at transactions from last year and see if there are any unnecessary spending habits that you may have overlooked while doing them.

There are only two GOLDEN RULES which you absolutely must live by at all times:

Never spend more than you have.

Never spend more than you have.

Feel free to repeat the second one like they do in Fight Club.  The minute you start using your credit card to borrow money and pay interest for mini loans, you risk spiraling into deep and painful debt.  So treat that credit card like a debit card in terms of usage, and keep the cash in an interest bearing savings or checking account.

[workhardsaveharder]

Auto transfer some of your paycheck to a separate bank account ASAP!

My first year out of school I was lucky enough to land a high paying job in finance, an industry I still work in.  I immediately thought saving would be a piece of cake with my nice salary and fancy office job so I never formally saved money.  I watched the money come in, and rather naively, watched it go out.  Around six months into the working world I grew used to monthly credit card statements (not bills or debt, I always pay in full thank God) easily amounting to 66% of my take home pay and didn't really think anything of it.  I kept telling myself, "I don't need to set aside a few hundred dollars because any pay period I can easily just put a grand or two towards savings."  It was like I was addicted to spending and couldn't face the reality.  If I wanted to go out to dinner, I'd go out to dinner.  If I wanted to buy a new gadget or game, done.  Pack lunch to work (more to come on this in a separate post!)?  No way!  My time is worth more than the pennies it would save.

It wasn't until a full year of this behavior that I took a hard look at my finances.  I looked at all my credit card statements and realized that they averaged over 66% of my net take home pay for the year.  I looked at my net worth, or savings, and was shocked to see that after a full year of working very, very hard - in fact harder than I had ever worked throughout school - that I hadn't saved a dollar more.  Luckily, I didn't lose money because I was smart enough to at least rent a very cheap apartment and not live in the city like all of my friends.

It was that moment that I decided enough was enough.  I set up an auto transfer from the checking account that my paycheck was direct deposited into to a completely separate savings account at an online bank with a high interest rate (ING Direct, now https://home.capitalone360.com/ which I highly recommend).  The initial amount was small, and when I multiplied this small bi-weekly amount times the number of pay checks in a year, I felt depressed.  I realized that at this rate I wouldn't really have that much saved in a year.  So I bumped up the rate a bit and just got a bit more creative with other ways to save more so that I could increase that rate further.

I plan to share those ways throughout this blog.  Until then, if you haven't already, please for the love of money (or God, whichever you prefer), set up an auto transfer like I've described.  It's incredibly easy, just login to whatever bank you use, go to their payments or transfers section and look for auto transfers.  Follow the steps and set it initially to a figure you know you are comfortable with and that you can easily achieve.

Remember, it may seem like a small amount today, but in less time than you think, it will become a significant figure.

I will end with a favorite quote I like to tell myself when I feel overwhelmed with a task: "How do you eat an elephant?  One bite at a time."