Mastering Money

How Do I Save Money?

So many people ask me, "Max, how do I save money?"  As a coach, I look at where my clients spend their money and some of the things I see absolutely amaze me.  I realize habits are difficult to break, and luxuries and conveniences are hard to curtail when we are used to having them, but we need to ask ourselves if the purchase is worth sacrificing our retirement.

In Kim Snider's blog entitled You Can't Invest What You Don't Save under her Saving Money category, Kim states she believes financial success includes "prodigious saving" and she further believes that $5 here and there really add up.  I agree.

In my business I see many people spending money right and left and have nothing to show for it, even just a few hours later.  It's called food, and it doesn't stop there.  Now, I'm not one for NOT eating out; I think eating out is great.  As a matter of fact, I love to tell a relevant story about my grandfather who was a philanthropist.  His favorite charity was an orphanage here in Dallas.  He gave to this orphanage throughout the year; however, at the holiday season, when he made his donation he stipulated that it had to go to a party.  The money was not to be used for shoes.  Why?  Everyone needs some luxury in their lives.

That being said, I see clients eating out all the time.  What makes that so special?  Absolutely nothing!!!  If it is a matter of everyday living, then there is nothing special about it at all.  Going to the grocery store can save about 80%.  Yes, that's 80%!  Take chicken.  Okay, I know some of you don't like it, but this is an example.  If you ordered chicken at your favorite "casual" restaurant, the dish would be about $5.99 plus tax and tip.  Oh yes, there'll be some steamed veggies on the side...yuck...(I prefer Oreo's), but by the time you're done, that's about $9 - $10 with tax and tip.  For about $7 you can buy enough chicken breasts for four meals, or about $1.75 per meal.  I know, you gotta clean up afterwards, but also consider the fact you don't have to deal with a wait person who may not be all that pleasant.  Think of the time you'll save as well, not having to wait to be seated, not having to wait on the meal to come, not having to wait on the check to come.  Not to mention the gas you'll save driving to and from the restaurant.  Furthermore, I find eating breakfast out is the worst value.  You can buy a dozen eggs at the grocery store for $1.29; however, the restaurant wants around $7 for that omelet.

Now let's take the electricity bill.  I know many people who are flabbergasted at their bill each month, yet in the summer they insist on keeping the thermostat at 72 degrees.  Try 80...okay, so you may have to drink more water,but that's healthy for you anyway.  In the winter months, try turning the thermostat to a lower temperature and wear a sweater.  You'll survive.  I wouldn't suggest doing this dramatically.  If you keep the temperature at 72 in the summer, try raising it a degree or two for a few days.  Once you've acclimated, then raise it again.  My clients have thanked me profusely for showing them the way to a lower electricity bill.  Sometimes we must adjust in order to make the difference.

Ever try washing your car yourself?  I HATE spending $15 to get my car washed.  Also, believe it or not, I find washing it myself a little therapeutic.  There's a sense of accomplishment, and it is done correctly, because it is done my way.  Although I don't own an SUV, I realize this may be an enormous undertaking.  Perhaps that's another area where you can save money...gasoline.  Do you really need to haul around all that extra cargo space? 

I look forward to your comments.

How to Save on Gasoline

Wow...even 15 gallons of gas costs over 40 bucks!  If you drive an SUV, filling up is equivalent to a night on the town!  It also seems the suburbs are getting farther and farther from town.  It is a fact that one can buy more home for the money the farther away it is from the central business district.  This means that people are living a lot farther from their place of employment, and they're driving gas-guzzling vehicles to go to and from, which forces demand higher.  In absence of moving, or finding another job, here are some tips on how to save money on gasoline:

1)   Consolidate trips by drawing imaginary lines in your city.  Say you're running errands; pick a major thoroughfare north of your home or starting point.  Once you go north of that street, stay on the north side of it and do everything you have to on that side before coming south.

2)   If you have more than one store to visit in a strip center, park in the middle; don't move your car to each location.  I don't care if you drive a Toyota or a Rolls-Royce, starting a car takes lots of fuel!

3)   Gas mileage drops dramatically at speeds over 60 miles per hour.  The EPA says that for every 5 miles per hour you drive above 60, you should add $.20 on the price of a gallon of gas.  Besides, it's safer to drive at slower speeds.

4)   Instead of accelerating uphill, I try and drive at the same speed as on level ground, or ever a little slower.

5)   I know a lot of people who use their car as a spare closet.  For every 100 pounds of stuff in your trunk, you can decrease your fuel economy by 1% to 2%, which adds up in the long run.

6)  For all you Sierra Club members and tri-athletes, this one's for you:  get rid of all that unsightly gear, like roof racks, until you are going to use it.  I know it's a pain to dismantle, but the drag from these appendages can reduce fuel economy by as much as 5%, which really adds up.

7)   Anticipate stops.  When you brake, you're wasting all that great acceleration you've already used.

8)   Accelerate slowly when the light turns green.  You don't impress anyone by being number one at the other side of the intersection.  If you're first in line when the light turns green, make sure you look both ways, as running red lights is quickly becoming an Olympic sport.

How Much Should I Invest?

Yesterday I was giving a presentation at  The Community Enrichment Center in Fort Worth, Texas.  A participant asked a great question:  "What's the minimum amount one can invest?"

I told her, my father always said, "You eat the elephant one bite at a time."  Many mutual funds will open an account with as little as $250.  Once one starts to save, then puts that money towards an investment, then watches that investment grow aided by the magic of compound interest, one begins to realize this can be rather fun.  That leads to finding more ways to make better use of our money, which results in saving more money as a handy bi-product.  This increased savings can then be invested, and before long, one has built a nice nest egg.

One should never delay the act of saving and investing for the future, no matter how small one might think that amount is.  If you don't start on the journey at some point, you never will.  The later you start, the more difficult it is to catch up.  Consider this:  if one invested $2,000 each year from the ages of 22 and 30, inclusive, which would be nine times $2,000, or $18,000, and stopped investing at age 30, and that money was earning 9% interest from the beginning, (the Dow Jones Industrial average has returned over 11% since 1929), you would have almost $600,000 by the time you reached age 65.  However, if you invested $2,000 each year beginning at age 31 and invested $2,000 each year thereafter until you reached age 65, and it earned 9% as in the first example, you still wouldn't have caught up, even though you invested $70,000 (35 times $2,000), as you would have accumulated only $470,000.  So here's a case where $18,000 is indeed greater than $70,000!!!

Credit Card Interest Rates

When interest rates are decreasing, credit card companies prefer to charge fixed rates on their cards because the lower rates can be passed along to the consumer (you) more slowly.  However, in June, 2004, the Federal Reserve began increasing short-term interest rates, specifically, the Federal Funds Rate, which is the rate banks charge one another for overnight funds. In June of 2004 the Federal Funds Rate was 1%; on January 31, 2006 it was increased to 4.50%.  This increases the rate that credit card issuers charge you.

The increase in interest rates has caused credit card issuers to switch from fixed to variable rates because they can pass that increase on to the consumer much more quickly.  According to The Wall Street Journal, today 66% of all credit cards carry a variable rate, whereas only one year ago only 55% had variable rates.  In February, 2006 the average interest rate on variable-rate cards jumped to 15.75% from 12.84% a year earlier.  On the other hand, the average increase in fixed-rate cards over the same period was only to 14.11% from 13.25%.

Indeed, issuers can increase the rate on a fixed-rate card at any time, or change the fixed rate to a variable rate, with only 15 days notice.  The rate change on a variable-rate card is more "automatic" and is based on a formula that is often tied to the issuing bank's prime rate.  The prime rate typically increases when the Federal Reserve raises the Federal Funds Rate mentioned above.  Issuers don't generally send out notices when the rate increases on variable-rate cards.  Make sure you pay close attention to your statement when it arrives for those rate changes.

Debt and Savings

During a workshop I was conducting yesterday, a bright woman who was asking great questions, asked me something I had never considered:  if you are supposed to save six months of expenses for the unfortunate event that you might lose your job, does that six months worth of expenses include paying off your debt?

I told her that I believe the six months of expenses saved in case of a job loss should include the servicing of the debt.  In other words, the amount you put back should not only cover your day-to-day living expenses, but should also include the minimum payments on your unsecured debt.  The worst thing that can happen is that your credit card debt increases while you have no income.  It makes it very difficult to pay off your debt if you don't at least cover your minimum payments each month.

Credit card companies are usually fairly lenient when it comes to hardships.  If you call them, and in a firm, non threatening tone, explain your unfortunate situation of temporary income loss, they will be glad to make alternative arrangements.  They would rather be paid something than nothing at all.  Remember to stay cool and calm; they will react more favorably to you.

That's One For Savings

Hooray for Danielle DiMartino, columnist for The Dallas Morning News!!!  In the paper on Monday, March 20th she wrote that she receives lots of emails from folks who wish to increase their investment returns by a percentage point or two.  But, she said, they're missing the point.  She says, "it isn't the percentage return of your investment that matters; it's the percentage of your income that you save and invest." 

Last year, in 2005, for the first time since the Great Depression, the savings rate in America was negative.  What does that mean?  That means we spent more than our disposable income, disposable income being that which is left over after taxes.  One of two things happen (or both happen) when we spend more than we make:  either we cash in our investments in order to pay for our purchases, or we go into debt.  Neither one are a good thing.

I must agree with what Dick Cheney said on March 2nd at the National Summit on Retirement Savings:  "The American dream begins with saving money, and that should begin on the very first day of work."

More and more we must rely on ourselves for our retirement.  Our employers and our government are not going to fund our retirement, so we must save for ourselves.  Otherwise, we better get used to eating Little Friskies and sleeping under a bridge.

A New Retirement Saving Vehicle?

I've always said it is far wiser to pay off your debt before you begin to invest, unless, of course, Hillary Clinton is your investment adviser and you can earn an after-tax return higher than the rate your credit cards are charging you.  It's that simple. 

Some credit cards are charging 29.9% interest.  Unless you can find an investment that yields an after-tax return above the rate your credit cards are charging, it is best to invest in yourself and pay off your debt before you invest for retirement.

That said, let's talk about 401(k) retirement plans.  Folks, gone are the days where retirement is funded by our employers.  It used to be we worked for a company for 700 years, then we retired, at which point we would receive a gold watch and a monthly stipend.  Today, it's different.  The burden of saving for retirement has been shifted from employers to employees.  The good news is that many employers will match what the employee puts in their 401(k) plan, at least up to a certain percent.  (Sometimes the employer will match 50% of what the employee contributes up to a certain amount or percentage of the employee's salary.)  That's free money!!!!  That's just like getting a raise.  Your employer is giving you money on top of your salary and you don't have to pay taxes on it until you withdraw it at retirement.

Again, the caveat is:  while it's beneficial to put money in your 401(k), and really good if it is indeed matched, if you are heavily in debt, you're simply digging your hole deeper.  Since this is pre-tax money, you are saving on your taxes; therefore, if your tax rate is greater than the interest on your debt, you'll come out ahead.  According to Hewitt Associates, a management consulting firm, about 30% of eligible employees don't participate in their 401(k)'s.

So what's new? Roth 401(k)'s!  Yes, that's right.  A Roth 401(k) is a 401(k) to which an employee can make contributions; however, these contributions are made after taxes, as opposed to a traditional 401(k) where the contributions are made before taxes.  What's the advantage?  You are betting that your tax rate will be higher in retirement than today, that's why you're paying the taxes on those dollars today, so you won't pay them when you withdraw the money at retirement.  Sound rather counter-intuitive?  Shouldn't my tax rate be lower in retirement, not higher?  Perhaps not:  as Pamela Yip of the Dallas Morning News states, "Most financial planners assume your tax rate will be lower in retirement because your income will be lower.  But given the federal government's ballooning Medicare and Social Security obligations, and the inexorable upward trend ever since income taxes were instituted, the higher-tax bet may not be a bad one."

By contributing to your employer's 401(k) and Roth 401(k), if they offer one (one poll taken by the Profit Sharing / 401(k) Council of America found that only 17% of their members were going to implement a Roth 401(k)), will give you choices later so you can withdrawal from the traditional or the Roth depending on your tax situation at retirement.

Something New to Affect Your Credit Score

Due to budget crunches, there are some major U.S. cities that are hiring private collection agencies to collect on small claims that are usually ignored by the population.  Since a delinquent account handled by a private collection agency can potentially land in a credit file, many people in large cities have recently discovered that unpaid fees such as parking tickets, dog-catcher fines and library fees are lowering their credit scores.  It is actually up to the city to decide whether the information will end up in a person's credit file.

If it sounds trivial, consider this:  hundreds of cities around the country are owed millions of dollars in unpaid fines.  Since 1997 Chicago began using a collection agency to track down unpaid parking fines.  The revenue from tickets has doubled from $68 million to $154 million.  In Florida, some cities have used private agencies to find swimmers who haven't paid "beach rescue" fees after they were rescued by lifeguards.  I'd be grateful if someone saved my life.

One private company, Unique Management Services, works exclusively with libraries around the country and handles collections for 750 libraries.  This is BIG business.  Unique says it has annual revenue in the millions of dollars, and its business is growing 15% per year.  Unique uses "soft" tactics.  They let library patrons know the library isn't mad at them and wants them to return the books they borrowed.  About half of their call-center employees are students at a local Baptist seminary.

Interestingly, some cities are using collection agencies to collect on fines that are over a decade old.  The Philadelphia Parking Authority had tried this, but had to cease due to numerous complaints by debtors and  media coverage. 

In order to be reported to a credit bureau, a bill has to be more that 30 days delinquent.  It doesn't matter the size of the fine, as even small fines in any activity in a credit file can do major damage to a credit score.  Maxine Sweet, vice president of public education at Experian, one of the three credit bureaus, says no matter the amount, even small unpaid fines in your credit file can have a seriously negative impact on your credit report, "on par with a tax lien or a bankruptcy."

FICO scores range from 300 to 850; anything above 700 will get you the best rate on a loan.  However, a municipal fine such as an unpaid parking ticket reported to a credit bureau can reduce your credit score by 100 points, making it hard for someone with previously good credit to receive the best rate on a loan.  Collections activity can stay on your credit report for seven years.

It is important to note that consumers should try to come to an arrangement to have the fines wiped off their credit reports before they pay them.  Consumers should call the government agency or the collection agency and ascertain that if they pay the fine, the collection activity will be removed from their report.

Go to creditboards.com to see sample letters to send collection agencies and other advice to help consumers get items removed from credit files.

Calculating Your Savings

Americans spent more than they earned in 2005, which is the first time that has happened since the Great Depression.  According to The Wall Street Journal, U. S. consumers will have spent $39 billion more than they earned in 2005, yes that is billion, with a "b." 

In order to calculate your own personal savings rate, let's start with disposable income, which is defined as income after taxes.  You can't dispose of your gross income because you owe taxes on it.  Therefore, disposable income is calculated as such (you may wish to use monthly figures since they are easier to obtain):

Gross Income:  Salary, interest, dividends, royalties, rental income and government benefits.

Less Taxes =

Disposable Income.

Now, subtract from Disposable Income all the money you spend in a month, if you used monthly figures to calculate your Disposable Income.  It may be easiest to go through your check book or your credit card statements to see how much you are spending.  You may find this to be very depressing.  Do not include any amounts you spent on investment, as that is considered savings.

Next, divide what is left from Disposable Income into Disposable Income and this is your personal savings rate.

For example, if your total Gross Income is $4,500, and you pay $1,200 in taxes, your Disposable Income is $3,300 ($4,500 less $1,200.)  If your had credit card charges of $1,500 and your bank outlays were $1,000, totaling $2,500, then your savings was $800 (Disposable Income of $3,300 less credit card charges of $1,500, less bank outlays of $1,000.)  Your savings rate would be the $800 divided by disposable income of $3,300, or 24%.  That would be far above average, as last year the average was -.4% of disposable income.

We're saving less because our home values are increasing.  This is very dangerous.  According to Dean Baker, co-director of the Center for Economic Policy Research, every dollar of extra housing wealth translates into a savings reduction of 5 cents.  Many homeowners have borrowed against this increase in home value due to low interest rates on home equity loans, and have spent the funds.  Mr. Baker stated that we saw the same thing in the late 1990's with the stock market bubble.  There was a huge run-up in stock prices, and Americans' saving rate decreased.

To create a spending plan, please check out my web site:  http://www.spendingsolutions.com.  This is a secure site that will allow you to keep track of your spending.  The only way to save is to keep track of what you spend!!!!

Let's get back to saving as we did in the 1970's:  5-10% of our Disposable Income.

Improving Your FICO Score

You actually have three FICO scores, one for each of the three credit bureaus:  Experian, TransUnion and Equifax.  Each is based on information the credit bureau keeps in your file.  The score will change as the information in your file changes.  For a bureau to determine your FICO score, they must be aware of at least one account that has been open for at least six months with activity during the past six months.  These scores are called FICO scores because the credit bureaus use software developed by Fair Isaac Company.

Okay, so you don't think it's so important to improve your credit score?  You know your credit history isn't so hot, but so what?  Who cares? 

Lots of people care.

When you apply for a new credit card, or a car loan, or even a mortgage, lenders use your FICO score to assess the risk they are taking in loaning money to you.  Therefore, your FICO score will determine the rate you pay as well as how much a lender is willing to loan you.  It's rather like the rich get richer and the poor get poorer.  If you have bad credit, and your FICO score is low, you are considered a bad risk to those who are loaning you money.  If you loaned money to someone, wouldn't you check their payment history?  It's the old economic rule of risk / reward, which states the higher risk you take, the higher your reward should be, only the investor is not you; the investor is the mortgage company and they are investing in you.  They are making an investment in you by lending you money, and if you are a high risk, meaning there is a strong probability you will have problems paying the money back, they will charge you more to loan you the money.

It could be your FICO score is so low, they don't even want to take the risk at all.  You'll get rejected.  They figure, no matter what they charge you, it isn't worth the risk.  It isn't worth earning all that interest because they figure you'll never be able to pay the principal back.

Insurance companies also look at your FICO score.  If you have a low score, they'll charge you a higher premium.  Why?  Because they can.  Again, the rich get richer and...you know the rest.  They figure if your payment history is bad, then you are a higher risk, and that is what insurance companies know best; it is what they are in the business of doing:  estimating risk, whether that risk be if you home will burn down, if you will get into an accident, or if you will be able to pay your obligations.  They charge higher premiums to everyone who is a higher risk, no matter the risk.

Finally, suppose you are really fed up with your boss, hate your current job, start looking for a new job, find your dream job in the paper, and you apply for it.  Well guess what?  The Human Resources Department for that employer will probably check your FICO score, along with your criminal history and your drug use.  Why your FICO score?  Because they can.  Again, it gives the Human Resources Department and your prospective manager more insight into they type of person you are.  Do you pay your bills on time?  Sometimes they feel that's indicative of other behaviors in your life, such as, do you report to work on time?

Just some food for thought.  For ways to improve your FICO score, see my blog under Secret Sauce.