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In The New Year, Find Your Financial Angel!

December 10th, 2010 No comments

I got this email message from a co-worker about doing a simple thing and the result will be ‘financial abundance’. I’ve copied the message plus the angel below.

You have just been sent a Financial Abundance angel!
Pass her to two people, and be rich in four days.
Pass her to six then be rich in two days.
You ARE already rich!!!
I am not joking; you will find an unexpected windfall. If you delete her, you will never know how she works?..

I’ve never been the type to fall for this method of improving your finances, though attitude can play a factor in your personal finances. Also, great things do happen to people all the time (winning the lottery, inheriting money, etc) that can dramatically improve your finances in a short time.

What is interesting about the fellow who sent this is that he does have real financial problems but he has the means and the capability to create ‘abundance’ if he chose to take steps to improve it. Here is a summary of his finances:

  1. Six figure income.
  2. He owns multiple investment properties.
  3. He owns his primary home.
  4. He has stocks investments both taxable and deferred (retirement accounts).
  5. He has a spouse of similar earnings potential (once school is over).
  6. But, he is out of cash, living paycheck to paycheck.

Even if his angel comes through, he is still going to need to manage his money better. There isn’t any angel that can help him that, he needs to do this on his own.

What are you doing in the new year to improve your finances?

Categories: Personal Finance Tags:

Your Saving Money…What To Do Next With The Cash?

July 14th, 2010 No comments

People go through different stages in their financial lives, hopefully improving as time goes on. At some point you will likely reach a stage that can be called Accumulation Phase, or Phase 3 in this good article from Moolanomy about financial health. In summary, you are no longer spending more each month; that is, you have enough money to pay your bills with some money leftover for savings and investment.

I think that this is the most difficult step to tackle. You might not know what to do next with the money you are saving. From my own experience, I’ve never had problems with debt but I have stumbled investing, it took a while to learn enough about it to make intelligent decisions. I’m still learning.

This post is not about what you should do specifically with your savings, but I talk about 4 concepts that are important to understand about how to manage your stash. Even if you do invest your cash later on, you very likely will still maintain some level of cash reserves. Here’s some things you need to know.

1) Maintain Liquidity

If you read personal finance articles a lot, very common advice given is to keep 3-6 months in emergency savings to handle unexpected bills, unemployment, etc. This advice is good, it’s an example of liquidity. This simply means the ability to get access to cash quickly with limited or no loss of principal. A savings account at a bank is very liquid, you can withdraw cash in minutes at an ATM or a cashier. Your home is not liquid, it takes weeks or months to convert to cash; though, it could happen quicker if you are willing to sacrifice principal (sell it at below market value). Another example – cashing in a 6 month Certificate of Deposit (CD) early will usually result in a loss of earned interest.

So, cash is good because it enables you to plan for future expenses as well as handle any unexpected ones (new water heater, e.g.). After all you want to be able to pay for expenses without credit card or other debt if possible. Here are some examples of places to put your money that have high liquidity:

  • Savings/Checking Accounts
  • Money Market Accounts
  • Short Term U.S. Treasury Notes

2) Inflation Effects

In this article I talk about what cash is and why it’s not a good investment. Cash is good for the short term, but over the long term it loses value due to inflation. Inflation is caused by the general increase in money supply as well as the rising prices of goods and services over time.

Here’s an example of inflation:

As an avid coffee drinker over the years, I can recall how much coffee has increased in price over the years. In 1998, I could buy a large cup of coffee for about $1.25, today the same cup costs $2.20. That’s an increase of over 75%. If you saved money in a cash savings or money market account over the 12 years, you very likely would be able to buy the same cup of coffee today, and no more. You didn’t gain an additional return by saving, however, this is still way better than saving nothing.

3) Risk

Short of putting cash under your mattress, there is some level of risk of loss wherever you choose to put your cash.  But, typical places that people put their money can be virtually risk free, while others can be just a bit more risky. During the 2008 Credit Crisis, it became very clear about what things are safe and what are not. Here’s an example of a product marketed as ‘safe and liquid, equivalent to cash’, but during the crisis was neither: auction rate securities.

When viewing risk, also add in liquidity into the equation. On paper, the FDIC/NCUA (the federal agencies that insures bank/credit union deposits) guarantees your deposits, and I don’t question it. However, if your bank fails, what is the process and how long will it take to get your money back? After all, if you need the money quickly and can’t get it, that’s almost equivalent to losing it.

Here are some places to put your cash and their risk level:

  • U.S Treasury Notes – virtually risk free, very high liquidity. Backed by the U.S Government.
  • Savings/Checking Deposits – very low risk, high liquidity. Risk of liquidity loss due to bank failure. FDIC/NCUA insured.
  • Money Market Accounts – very low risk, good liquidity. FDIC/NCUA insured. Risk of liquidity loss due to bank failure.
  • Money Market Funds – low risk, good liquidity. NOT FDIC/NCUA insured. Principal loss is unlikely but possible.
  • Certificate of Deposit (CD) – very low risk, low liquidity. FDIC/NCUA insured.

4) Return On Investment

Cash investments don’t typically earn as much money or interest as other fancier options out there (particularly over the long term), such as stocks, bonds, and other investments. But, this doesn’t mean that you should ignore returns because doing a little bit of moving around can significantly increase the interest you earn on your cash. Here’s what affects your return on cash:

  • Liquidity – lower liquidity (6 month CD versus checking account) will increase your return.
  • FDIC/NCUA insurance – Accounts with these government insurance policies will earn lower returns than accounts that do not offer insurance – e.g., money market funds, municipal bonds.
  • Service Level – Accounts that offer fewer services/limited access have higher interest rates. For example, money market accounts have a Federal restriction which prevents more than 6 transactions per month.

The easiest way to earn more money with your cash is to go to your bank/credit union and ask about opening accounts that earn more interest. These accounts are typically money market accounts or Certificates of Deposit (CD).

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13 Ways to Save $5000 or More at Work

June 22nd, 2010 No comments

There’s money to be found at work and it’s not too far from your desk or place of employment. The key to finding money at your work is to do a little bit of investigation and then taking advantage of the savings if you are able. There are many different types of savings that can be found at work, but they generally fall into these categories:

  • Defined Payroll Benefits – the employer offers benefits at reduced or no cost to help attract/retain employees.
  • Product Service Discounts – reduced prices for products or services that your company offers.
  • Payroll Deductions for Products – buying products through your employer to get tax savings offered by federal or state tax law.
  • Marketing Programs – the employer using its employees as an audience to negotiate special deals with third parties.
  • In Kind Products/Services – the employer provides items to you that you probably would otherwise buy elsewhere.

If you are not sure where to start, go to your HR department. They will have all of this information available, very likely it will be online where you can enroll or find out more information. Here’s the list!

  1. Health Care Insurance – This is likely the largest benefit in dollar terms that an employer offers (I know it is for me). When you buy health insurance through your employer you will save money on taxes because the premiums are exempt from Federal/State income taxes. If you have a spouse, try to ‘opt out’ of one of your plans and use one or the other medical plan (if your spouse works). By declining one plan you will save some money.
  2. Commuter Expense Reimbursement – As I write this in 2010, you can currently spend $230/month on commuting expenses and $230/month on car parking expenses, which are both exempt from Federal income taxes. This covers public transit systems, the only reimbursement for cars is the parking. I recommend that you try to obtain a commuter reimbursement credit card that offers the ability to charge your expenses at will (instead of buying specific transit services through the account directly).
  3. Health Care Expense Reimbursement – Deduct up to $3,500 per year exempt from Federal taxes to pay for medical/dental/vision expenses. You can pay the deductibles/co-pays for services that were covered by insurance and you can pay for these services fully even if your payroll deductions don’t yet cover the expenses. The downside is that you must determine once per year how much you want to spend – if you don’t spend the money that year you lose it.
  4. Daycare Reimbursement – Deduct up to $5,000 per year exempt from Federal taxes to pay for child care services for your dependents.
  5. Retirement Saving Account – Deduct up to $22,000 per year from Federal/State taxes when you put away retirement money in a 401(k), 403(b) account. These are a great way to save for retirement and you get immediate tax benefits in your paycheck, whereas with regular IRAs you get the benefit when you file your tax return at the end of the year.
  6. Personal Cell Phone Discounts – The major cell phone operators will offer discounts of 20% or more to many employers, right now I get a 22% discount from Verizon Wireless. You don’t need to buy a new phone or sign a new contract, you can get a discount for the plan you have right now. This may be offered as part of your corporate perks program (see below).
  7. Auto Insurance Discounts – I currently buy my car insurance through a mutual insurance company that is non-profit and owned by it’s policyholders. In order to buy the policy, your employer needs to be a member company. When I compare the policy to other competitors on the open market, the policy is much less expensive.
  8. Dental/Eye Care Insurance – For many people, these policies are optional. You will get the same deal as with health insurance policies (deduct your premiums from Federal tax bill). Note that if you also enroll in the Health Care Reimbursement program, you can pay for these out of pocket instead of the buying the insurance policy. Consider your expenses and policy costs before deciding. I personally do buy the Dental Insurance, but I decline the Eye Care policy.
  9. Free Drinks – Most employers will offer filtered water and various drinks to use at work. It’s a good deal for the employer because they know that if you leave the premises for drinks, productivity will likely be lower.
  10. Company Freebies – Employers can offer all sorts of freebies, usually the same products and services that they offer as a business. Personally, I’ve gotten weekend use of cars (corvettes as well as the more pedestrian vehicles), free doctors (paid by the company – not by your health insurance). I know some colleagues who were offered unlimited M&Ms (Mars company), and another company even provided free lunches!
  11. Company Product Discounts – Some employers offer their own products as a discount to their employees. When I worked for a pharmaceutical company, they offered reduced cost health/wellness products. When I worked for an automobile manufacturer, they offered their own vehicles are reduced cost.
  12. Corporate Perks Program –  Using the power of their employee base, the company gets discounts for its employees to hundreds of stores through a corporate perks program. The company I work for now provides these discounts using corporateperks.com. I’ve personally used this program to get discounts at BlueNile.com , BrooksBrothers.com and Target.com.
  13. Employer Sponsorships – A company may sponsor events or third party charitable or non-profit entities such as museums, sports/entertainment events, and trade shows. All you would need to take advantage of these programs is your employee badge. I have found that these benefits require some research to find at your company; e.g., I had to contact my HR department to find out which museums in NYC they support.

The list above just covers stuff that I know about with my own employer. There may be others in your own experience, all you need to do is to keep an eye out.

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Self Insure To Save On Car Insurance

June 1st, 2010 No comments

No doubt you’ve seen those commercials/ads for countless companies claiming they can save you money on your automobile insurance. It makes me wonder which companies are still left charging too much? Anyway, those ads always make me think about what saving money really means. I don’t think that you can save money by buying something. Well, maybe once I saved money by buying something in a Macy’s store. When I got to the checkout counter, the clothing I purchased rang up lower than what I expected. I lowered my automobile insurance premium by eliminating coverage. This may work for you. First a summary of what is included in a typical automobile policy (this is not complete, but good enough for now).

  1. Liability Coverage – Insures damages you cause to other persons or property.
  2. Health Care Coverage – Insures your own injures when you are injured in an automobile related collision.
  3. Collision/Comprehensive – Insures your vehicle against damages you cause, or other damages unrelated to an automobile collision.

The first two types of coverage (1) and (2) are coverage you will want to carry. In a future post, I will discuss how I reduced the premium for these types of coverage. The third type of coverage (3) only affects your vehicle – the maximum payoff is the depreciated value of your vehicle. If you eliminate the coverage, you will be on the hook for any damages that occur – so that’s why it’s self insurance if you forgo the policy.

If you have a loan on the vehicle or are leasing the vehicle, the title holder (not you) will require you to have coverage to protect their financial interest. So the first check is to make sure you have clear title to the vehicle.

Chances are if you have owned vehicles before, you have self insured one without realizing it. If you kept a vehicle for a number of years and have paid off the car loan, you probably dropped Collision/Comprehensive coverage because the value of the vehicle had dropped low enough such that the insurance doesn’t make sense (the payoff for a ‘totaled’ vehicle was near the cost of the premium + policy deductible).

I took this idea one step further by self insuring my vehicle well before it had depreciated to this endpoint. About (3) years ago, I was offered a renewal Collision/Comprehensive policy for my then (3) year old car. The coverage cost almost $500, whereas I estimated the value of the vehicle was about $8,000-$8500. These numbers didn’t make sense to me, because the premium didn’t in my estimation reflect the actual risk of loss for the vehicle. The vehicle is used for errands and day trips only – no commuting. After doing the math, I decide to go for it.

But, it takes a certain amount of financial security to pull it off. Here’s why: The vehicle needs to be paid off. In my case, I had already paid off the $7K loan. Also, you need to be in a position to ‘pay the loss’ on your ‘policy’, either by having cash to buy another car or potentially take out another loan.On the benefit side, I gain the following as illustrated in this table (the car value is estimated using Kelley Blue Book [kbb.com], the policy premiums are estimates from my automobile insurance company):

Year

Car Value

Policy Premium

Deductible

Max Loss Payoff

1

8,000

500

500

7,000

2

7,000

450

500

6,050

3

5,000

350

500

4,150

4

4,500

350

500

3,650

5

4,000

300

500

3,200

Total Savings

1,950

Each year, I gain the savings from not paying the premium. Also, as the vehicle depreciates, the loss potential is reduced – this isn’t savings in your pocket but can be looked as reducing the cost of ownership and increasing the money available for your next vehicle.

How To Define Wealth

May 25th, 2010 No comments

What is wealth? It can be many things including non-financial stuff, such as having your health, your family and living in a safe place. From this point of view, many Americans and people around the world can consider themselves wealthy. Since this is a financial site, I will talk mainly about ‘financial’ wealth.

Here’s how I define wealth.

Wealth is the ownership of a valuable asset that can in the future (or already does) product income.

Why does this matter? Understanding what wealth is and using it to your advantage can help you to improve your quality of life. Here’s how:

  1. Increase your standard of living. Owning assets that produce income can add to, or replace income you earn at your job.
  2. Enhance your income security. If you can earn additional income consistently, it can help tide you over with your bills if job loss occurs.
  3. Enhance job flexibility. By not depending on your job for all of your income, you can consider other employment options which may fit your lifestyle better: take a lower paying but more fulfilling job, taking time off, becoming a consultant, going part time instead of full time.
  4. Help you to afford to fund your goals, such as retirement, college costs, or big purchases such as a home.

One of the goals of this site is to demonstrate that owning wealth is not just for people with a lot of money. Anyone can own assets no matter what you earn or what your job is. On this site, I will be talking mainly about general personal finance topics, with a primary focus on wealth building.

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