The last few days I’ve been going over my finances like a man obsessed. I guess I just like to know that I’m being as efficient as possible in the handling of my finances. I actually chastised my co-worker today for wanting to pay off his 3.7% car loan early in one lump sum with his savings that’s earning 5%. I ran some numbers and told him that he’d be giving up about $1500 over the next few years by doing that. He told me that it’s worth it not having this car payment over his head. That’s when I realized that my world and his were completely different. He just didn’t want to deal with it… to spend the time and energy keeping track of things.
So it got me thinking. What are some ways for guys like him to make (or save) money… and for that matter – what about people with mild OCD like me? Here’s what I came up with.
Paying Bills:
Disciplined:
Wait until the very last possible moment to pay your bills. The longer your money stays in interest bearing accounts, the more you will make in the long run. 30 days of interest on $1000 is about $4.16 at 5% APR. That adds up over time.
Undisciplined:
Pay your bills the very first day you get the bill. Better yet, set up an automatic payment plan with your bank account to be both billed and to pay the bill electronically. Late fees and the interest payments (if you don’t pay the amount in full every month) can add up substantially.
Tax Withholding:
Disciplined:
Make sure that you adjust your W-4 to not get ANY amount of tax refund the following year. In fact, make it that you will owe a little bit. This way you have the money up to a year ahead of time to make investments and earn interest.
Undisciplined:
I can never understand why people like getting big tax refunds. I understand how people who spend a bit too freely might benefit from it, but it’s a big waste.
When you get your huge refund check, send it directly to a savings account or CD. No exceptions. As a matter of fact, at the end of your tax return, fill out the portion where you can deposit your refund electronically directly to a savings account. This way you never see the check and can’t spend it in your mind in the weeks leading up to getting it.
If you tend to get a big refund but are also having trouble making payments on things like credit cards and such, it would behoove you to adjust your withholdings so that you can pay a little more every month.
Saving Money:
Disciplined:
Make a budget. Stick to it.
Undisciplined:
Many financial experts like to point out that by giving up your $5 latte at Starbucks everyday, you’ll save a ton of money, but let’s get real. If you want it, you’ll eventually get it. Forget about not having your latte. You won’t do it. In order to stick to this plan you have to deny yourself everyday, which is just setting yourself up for failure. Instead, concentrate on not making impulse big purchases, like that 50” plasma or the new car.
Have your paycheck automatically deposited into your checking account. Then have the bank do an automatic transfer of a portion of that money into a savings account every month. If you think that you will raid the savings account, then every time you save $1k in the savings account, buy a CD (certificate of deposit) so that you can’t touch it until it matures. When you get the CD, make sure you get one that automatically renews unless you specifically ask them to cash it out at the end of the term.
Investing:
Disciplined:
Do your homework. Analyze trends. Buy undervalued stocks and investments that will diversify your portfolio but not sacrifice potential gains – especially if you’re relatively young.
Undisciplined:
Index Funds are your friends. Instant diversification, one-stop shopping, and minimal fees. Don’t bother buying other mutual funds for the sake of diversification because chances are those other mutual funds are buying almost the same things that the index funds are.
Credit Cards:
Disciplined:
If you will never, ever carry a balance, get a rewards card with no annual fee. Pay off the entire balance every month, or better yet, have the credit card company automatically withdraw the entire balance from your checking account every month. I’ve earned around $250 so far this year in cash back doing this. Another bonus (unlike with interest paid on savings accounts) is that it is not considered taxable income.
Undisciplined:
Find the lowest FIXED rate credit card you can find. Don’t look for rewards of any kind because what you’d get in rewards would be completely eclipsed by the interest rate you’re paying on the balance you’re carrying. Don’t look for something that has a 0% interest for a few months if you know your balance is going to be in there for longer than that because the rate will most likely skyrocket after that… if not immediately – eventually.
While we’re on the subject of credit cards… trying to invest your money doesn’t make much sense at all if you have credit card debt. The best way to make money is not to have to pay interest on debt that you have. Any investment or savings vehicle (besides a 401k with matching contributions) most likely will not do well enough for you to “make up the difference” in gains. You’re fooling yourself if you think you’re good or lucky enough to do so. Bigwig financial people are LUCKY if they make 10% annually on their investments. If your credit card interest rate is more than that, don’t bother making investments until you’ve paid off your credit cards. It would be like using a bucket to bail out the Titanic… pointless.
Granted, for most of these things you need at least a modicum of motivation to even initiate them, but you’ll be surprised at how even a minimum of effort can return over the long haul. Everyone wants to know how to get rich quick, but with that mindset it’s almost guaranteed that you won’t.
Okay, sorry for the long, boring post about money. I only do this once in a while, so humor me.
That’s a great deal of good advice. If most people just took the small about of time to think about they spend and save the economy would be doing much better.
Geez, where are you finding 5% interest on savings? I just asked another bank how much their savings rate is and they told me that they were embarassed to disclose it. I think it got up to 1% with a minimum balance of $50,000! Who in the world is going to put $50,000 into a savings account with such a low interest rate?
droupsof- i suggest you try hsbc or emigrant direct. these banks operate online and can afford to pay out higher interest rates.
these are all good advice and a important ones as well. what irritates me most are when my friends tell me they don’t take advantage of the 401k program at work! not only can you contribute pre-tax dollars but in most cases your employers will match your contributions up to a certain percentage! it’s like leaving free money on the table!
i pay my bills manually electronically, usually as soon as i get the bill. i’d wait til the last minute if my checking account accrues interest. but at the same time, i only keep the minimum in my checking, just enough to pay the bills.
i don’t understand how waiting until the last minute to pay your bills saves money. which is what i do, but it’s more so that i can keep the money in my bank account for as long as possible before parting with it. you’ll have to explain that to me sometime.
and when you don’t have a lot of money, not drinking starbucks everyday makes a big difference. i used to drink a grande americano every morning (the temptation of having a starbucks every block in d.c.), which i stopped and usually limit to just on mondays during the work week. that saves me $10 a week! it does add up…
joannkim: The reason that waiting until the last minute (so long as you actually pay in time) saves you money is that the funds you would use to pay your bills are collecting interest the whole time that you are not paying your bills. It is a very small amount of money, but it adds up.
Fairly interesting and useful advice, but only if you actually make some money!
hmm.. ‘mild’ OCD? lol j/k didn’t really understand all the jargon up there. head swimming lol
this makes me wonder how many millions you have saved up by now
great advice, but even better that you are so eager to share the knowledge.
Good tips! I adjust my W-2 so that I do make more in every paycheck, but I have been paying SO much for school (which I get to write off, woo!) that I end up getting it all back anyway. I think this year I get back about $1600. Though I of course do not invest that or use it to pay down my credit card, insead I but camera equipment so that I can make more money. For example, I used my $700 tax return to buy my digital camera for $650, which in turn neted me a profit of $2500 in work, which has all then been re-invested in camera equipment. Now, once I get the new camera with my tax return, I will be able to work even more and then big bucks can start rolling in. I invest in myself!
Though that $11,000 credit card balance is killer, though I do have a low interest rate (fixed 7.9%). All in all, that credit card balance is the next thing to go, though it will be a while..
I don’t think this was a long and boring post at all. I do think that people need to gauge how much the extra stress of having another bill to pay each month is worth to them against the loss of potential savings, as in your example of the coworker who paid off his car note in one go.
I have a savings account that also accrues around 5%, into which 10% of my biweekly paycheck is deposited, I dump 6% of my salary into my 401k with a dollar for dollar match, no credit card debt, and I admit to being one of those people who gets a small tax refund every year, not because I want to have money to burn in the spring but because I have this paralyzing fear that I’ll owe the IRS a huge sum that I won’t be able to pay back, especially not on my paltry wages. I would be paying them back for the rest of my life.
I think we have to be realistic about our spending habits and factor them into our budgets (I have one of those too). In my case, I recognize that Starbucks is like a crack den to me. I cannot walk past one without fighting the overwhelming urge to enter its holy crackdom. Because I know that I’m not going to give up coffee, I’ve taken to getting my fix at a less expensive cafe near my work. It’s a small compromise for not buying my usual frou-frou espresso beverage on a daily basis.
I’ve started thinking of each purchase in terms of which bill I could pay if I didn’t buy it.
New lamp: $40Cell phone bill: $46
I’d rather keep my cell phone. I can use it to see in the dark, so I don’t even need the lamp!
Good advice. Once I get out of graduate school I will definitely be investing more. Thank goodness for my Roth IRA.
just passing by…great advice you have here!
to each his own.