Interest – the discussion begins…

Yes, I know it has been more than a week since my last post.  I warned you upfront that I am a lazy girl, and random gaps in posts are, regrettably, a symptom.  Anyway, here it is – the overdue net post!

The concept of interest fascinates me, from the mathematical perspective and also from the implications.  Interest is powerful, and like any power it can be used for either good or evil.  It can help you build wealth or it can take debt from bad to worse.  

I hate debt.  Debt is the anti-savings. It unbalances the balanced money formula (wealth = income - expenses).  It weights the expenses rather than increasing the income.  The whole debt business is negative – negative net worth, negative interest.   To make matters worse, debt has quietly infiltrated many aspects of modern life until it has become acceptable, even expected.   For many people, it feels unavoidable.  Unfortunately, I am no exception.  

Hello!  I have debt.  And that debt is not free; it earns interest against me.  

Every dollar I pay in interest on debt is a dollar completely wasted.  I might as well have taken a dollar out of my wallet, torn it up into little, tiny pieces, and then thrown it in the air like confetti.  At least that would be more fun than handing that same dollar over to a big evil bank where it will be used to line the jacket of the CEO’s $5,000 suit.  While I’m sure not banks are evil and CEO’s need clothes just like the rest of us, it is still very poor judgment on my part to just go around throwing away my hard-earned money. 

I like to think of debt and savings the same way – in terms of interest rates.  Debt is a negative interest rate; it is always a loss.  Saving in cash has no interest; I’m not losing anything, but I’m not gaining anything either.  Saving in an interest earning asset is ideal.  Money is the perfect little worker – it doesn’t need sleep, and it never gets tired.  

Interest can either work for me or work against me.  I can either use it to build wealth or use it as an excuse to throw money away.  It's a simple decision - debt or asset. I want my money to work for me, not against me.  So, I need to make sure all of the negative is good and gone before building the positive.  

So what am I actually saying?  I've been looping around these concepts at a high level, but haven't really said anything particularly practical.  So here it is.  

First, don't go into debt if at all possible.  Never put more on a credit card than you can pay back in less than a month.  Pay cash for major purchases: cars, houses, etcetera.  Second, if you already have debt, pay it back as soon as possible.  Pay more than the minimum.  Attack that debt with everything you have.  Third, put any leftover money to work.  Small interest rates are good, but big ones are better.  Get the most bang you can find for those hard earned bucks.  

The bottom line is that we need to shift the balance of power from compiling debt to increasing income.  It's as simple as that.  

Credit Cards Are Not Bad

Cake does not make you fat.  Eating too much cake makes you fat.  It's not the indulgence; it's the over-indulgence.  Similarly, eating too many carrots will also make you fat (though, admittedly it will take an awful lot of carrots).  It's not the cake or the carrots that are bad or unhealthy.  It's going too far, over eating, and overspending your calorie budget that leaves you with those love handles.  

It's the same concept with credit cards. 

Credit cards, like cake, are not innately evil.  However, like cake, credit cards have a bad reputation because they tend to be overused and abused.  This is not the credit card's fault.  The credit card doesn't make decisions.  The credit card doesn't jump out of your wallet and into the hands of the sales associate at your favorite store.  You gave it to her of your own free will.  And there's nothing wrong with that as long as that card is handled thoughtfully. 

Credit cards have their fair share of bad qualities.  They are designed to exploit you to make money off of your poor decisions and bad spending habits.  They come with tempting starting offers, such as interest free trial periods and bonuses for transferring the balance from another card.  And then once you've built up a balance - wham!  You get charged with a diabolically high interest charge.  Where did that come from?  Oh yeah, they call it fine print for a reason.  

But there are some really great benefits that you can get from credit cards too.  They offer flexibility in spending so that you don't have to use cash for every purchase.  They provide a nice cushion in case of an emergency (eg. flat tire and tow truck).  Many credit cards also come with rewards.  These can come in the for of airline miles, hotel vouchers, and cash back - my personal favorite.  

I currently have a credit card that pays me 1% cash back for all purchases with 5% bonus cash back in special categories.  Since this is money that I was planning on spending anyway and did not have stashed away in a higher yielding account or investment, I might as well put it to good use and make a little money on it.  

So if you follow the rules, you can beat the credit card at its own game.  And the best part is that the rules are pretty simple.

1. Don't carry a balance. 

This means that the card needs to be paid off every month.  Completely paid off.  Any money that rolls over could be charged interest.  This is no good.  Compound interest is a powerful ally but and even more powerful enemy.  Don't let anything roll over.  Make sure the balance gets zeroed out at least once a month.

2. Don't spend more than you can pay.  

The credit card wants you to spend more than you can pay.  It gives you an alluringly high credit line begging to be used.  Then all the sudden you are between a rock and a hard place and can't follow rule 1.  

3. Don't forget to use your rewards.  

Forget rewards?  How could that ever happen?  Well you might be surprised.  The credit cards are in the business of taking your money.  Even if they offer it, they don't necessarily want you taking advantage of the freebies.  So, there might be strings or limitations tied to your rewards.  Learn what they are so that you came claim your rewards.  You earned them, after all.  

Saving the Lazy Way

Short post today, in honor of the holiday.  I promise later this week that I will post something a little more substantial.  For now, I'm just going to leave this here and enjoy the rest of my day off.  I hope you do too!

I can’t speak for everyone, but I know that at the end of a long work day, I am considerably more interested in collapsing on the couch than doing just about anything else.  Exercising, doing housework, and sometimes even cooking just feel like way too much work.  And the funny thing is that I enjoy doing all of those things!  Mustering the energy to do things I don’t enjoy is a whole different beast entirely.  If I let myself get as far as the couch, then the lazy has won.  It generally involves an act of congress to remind me that I’m supposed to be a responsible adult. 

To evade this sluggish, pitiful fate, I have two strategies:

1.       Avoid the couch until I have tackled my to-do list, and

2.       Automate what I can so that I have less to do. 

Many banks offer options to automatically transfer money from a checking account into a savings account at a set frequency.  As far as I am concerned, this is perfect.  Not only do I not have to do anything, I don’t even have to think about doing anything! 

Even better yet, the transfers can be set up so that I don’t even notice them.  I get paid bi-weekly on Thursdays.  So, I have my savings auto-transfers set up to go at the same time.  That way I know there will be money available (so I won’t accidentally overdraft).  Plus the money gets transferred as soon as I get it, so I never get a chance to spend it.  My savings account can sit quietly in the background, growing week by week, without weighing on my conscience or impacting my day to day behavior.  This is great because it frees up time and mental energy to focus on other things, like push-ups or vacuuming. 

2014 Year-In-Review

At the beginning of 2014, I made a list of financial goals for myself to be accomplished by the end of the year.  Now that new years has come and gone, it is a good time to do a review of the goal progress.

1.       Max out 2013 IRA – Goal met.  I only needed to add another $500 in order to reach the 2013 max, and the IRA was maxed-out for the allowable 2013 contribution before the April 15^th deadline.  This means the IRA has been maxed out two years in a row (2012 and 2013).  Huzzah!

2.       Max out 2014 IRA – Goal not met.  I have not put a penny toward the 2014 IRA yet.  I am torn between the security of saving the money in a liquid cash account for emergencies and stocking it away for retirement.  The emotional me that wants financial security now beat out the future me that wants security in retirement.  This goal will carry forward to 2015 as I do still intend to max it out for the 2014 tax year.  I want to continue the tradition of maxing the IRA as long as I can.

3.       Pay off car loan – Goal met.  I hate car loans with a fiery passion to end all fiery passions.  So, I finally paid off the car loan in March, over twenty months early against my sixty month loan.  It felt like the weight of the world lifted off of my shoulders when I saw the zero balance on that account.  Happy dances ensued.

4.       Pay back loan to Mom – Goal met.  Mom loaned me a couple thousand dollars for expenses during my senior year of college.  Since starting gainful employment following graduation, I had been slowly paying her back.  I sent the last check in June.

5.       Save $10,000 – Goal met.  This goal was met by stocking away money from every paycheck in addition to any extra found money during the year.  For the first time, I actually have a reasonably healthy emergency fund.

6.       Pay down mortgage principal – Goal met.  I have my mortgage payments set to deduct half of my payment every two weeks to align with my paychecks.  This results in an extra payment being made over the course of the year.  Also, I have the payments set to pay an extra $25 in principal every two weeks for a total of $50 extra toward the principal every month.  Overall, the mortgage principle went down by about $5000 over 2014.

7.       Pay cash for my MBA tuition – Goal met.  My company has a tuition reimbursement program, but I am still required to pay for the classes up front before I can be reimbursed.  In order to pay up front, I needed to have cash up front without taking away from other savings goals.  

8.       Travel – Goal met, sort of?  This goal is super vague, so it’s hard to say whether it was met or not.  I definitely traveled in 2014, but since I didn’t give myself a specific travel budget as part of this goal, I can’t really say I met or didn’t meet anything. 

9.       Increase 401k contribution to 12% – Goal met. 

I also had two stretch goals for 2014 that I added about halfway through the year after having success paying off the loans for the car and to Mom.  The stretch goals were to save $25,000 (increased from the $10k goal) and to open an index fund.  However, it turns out that these goals were a little over-ambitious for me.  I still want to do them, so these goals will be carried forward to 2015.

Overall, 2014 was a great year for me financially.  I obliterated the last of my consumer and personal debt with the exception of my mortgage.  I made great progress on paying down the mortgage and was able to build up my emergency savings.  I’m really looking forward to continuing my progress toward wealth building into 2015.  Keep an eye out for the 2015 goal setting post in the next week or two.  I’m sure it’s going to be a great year. 

Lazy Spending Tracking Using Mint.com

You need to track your spending.  Every penny.  This piece of PF wisdom goes back ages and has been refreshed time and again by various finance gurus.  While I am certainly no finance guru, I do agree whole-heartedly with this little gem.  It sets a firm foundation for building good financial habits.

Why you should care:

It all ties neatly back to the Balanced Money Formula, particularly the “reducing expenses” piece.  How can you reduce expenses without understanding what your expenses are?  Sure, you know how much your rent or mortgage costs, but what about all of those variable expenses?  Gas, groceries, and utilities all change a little from month to month.  Do you really know how much the odd little purchases here and there are adding up and impacting your bottom line? Maybe, but probably not – unless you are tracking.   

Photo courtesy of amazon.com

My pitiful story:

I got started on spending tracking when I started my first job at 16 years old.  My mom took me to the bank and helped me open my first checking account for stashing my weekly paychecks.  She sat me down and explained all about debit cards and how I needed to track my spending so that I didn’t accidentally overdraft.   The checking account came with a little pocket book register, and I would dutifully save all of my receipts (gas, McDonald's, etc.) and enter them by hand, line-by-line making sure to update the column that tracked my balance. 

That is, until I didn’t.  It was sooo tedious entering all of those little four and five dollar entries by hand.  It was just four dollars, I told myself.  It couldn’t make that big of a difference, right?  Like many 16 year-olds, I was wrong.  I overdrafted, and got fined $35.  That was more than I made in an entire shift in my minimum wage job.  And I had just thrown it away because I was too lazy to write down my latte habit.  I would like to tell you that I learned my lesson right away and never overdrafted again.  However, in addition to being lazy, I am also stubborn, and it took me a few more $35 hits to truly learn my lesson. 

Overall, my laziness and inattention cost me well over $100.  That is just too much money to throw away.  Eventually, I got better about tracking my account balance.  But it was still tedious, and I still hated it. 

Better living through technology:

I spent years tracking every penny that passed through that checking account in a regular old composition notebook, and can attest that it was a very unpleasant chore.  However, now we have technology; there are so many better ways.  For the last several years, I have been using Mint.com to track all of my expenses.  If you aren’t familiar with it, Mint is a free online service that will automatically retrieve and organize transaction data from whichever of your bank accounts you fancy to track. 

You can use Mint to automatically categorize your spending so that you can see how much you spend in different areas.  You can set budgets for different categories and Mint will automatically alert you if you approach or exceed your limit.  It also has very simple graphical and tabular displays that send chills up my nerdy little spine.  I love Mint; it takes all of the tedious data logging out of spending tracking.  All I have to do is sit back and geek-out on my neatly organized finance data.  It’s every lazy girl’s dream. 

Time for action:

Once you see how you are spending, then you can start to take steps to reduce spending in targeted areas.  But more on that later.  For now, you need to go open a Mint account, and I need to figure out how I’ve already reached my fast food limit.

Are You Going to Get a Raise in 2015?

The short answer is maybe, if you play your cards right. 

In 2014, the unemployment rate dropped to its lowest level since 1999 according to statistics from the Department of Labor.  In addition, economists at CNN expect that the rate will drop to a normal level (about 5.2%) by the end of 2015.  This is great news for job seekers, both unemployed and underemployed. 

However, it doesn’t necessarily mean good news for the currently employed.  Despite all of this hiring, the average wage has only increased by 1.7% over the last year according to the government.  This is truly pitiful when you consider that inflation is also hovering around 2%.  This means that the average person staying in the same job actually has less buying power from year to year respective of inflation.  Employers appear to be more focused on bringing in new talent than rewarding existing employees.  But the good news is that you could be in a good position to negotiate for a raise.  

Assuming that you are a reasonably good employee and have been in your position for a while, it would not be unreasonable to ask for a raise.  From the perspective of your employer, it is much less expensive to give you a small raise than to risk you leaving.  According to a survey by Glassdoor.com, more than 35% of workers surveyed say that they would look for a new job if they don’t get a pay bump.  In that case, your employer would be out the cost of seeking, hiring, and training your replacement, plus the lost productivity in the meantime.  Rewarding you for your hard work is not only reasonable, it makes good business sense.  Just make sure you have facts to justify why you deserve your raise; emotions have no place in a negotiation and could do more harm than good.

The company I work for has historically been very good about giving annual raises for cost of living and performance.  I expect that will be the case this year, as well, unless the senior team has decided that it wants to start a mutiny among the individual contributors.  Raises are usually announced in February, so I should be finding out fairly soon what the numbers will be.  The company has had a good year, and I'm having a lot of trouble not counting my chickens before they hatch.    

Over the four years that I have worked for this company, my raises have been between 2.4% and 3.5%.  These numbers are generated through some complex formula which takes into account the performance of the overall company, the local sites, and the individuals against some relative, predetermined performance metrics.  There is no room for negotiation, but the standard calculation for all employees makes it feel fair-ish.  

For the most part, I had no context for how this compared to the national average.  I just knew it felt good seeing my base salary go up  by any amount.  Having now seen the national numbers, I find myself feeling a little more grateful.  While I am not overwhelming satisfied by my job for reasons that I will not get into here, I do appreciate that I am compensated fairly and can support myself financially.   

http://money.cnn.com/2015/01/09/news/economy/december-jobs-report-unemployment/index.html?iid=HP_LN

http://money.cnn.com/2015/01/09/news/economy/wages-raise/index.html?iid=Lead

http://money.cnn.com/2015/01/09/pf/worker-raise/index.html?iid=HP_LN

Balanced Money Formula

I am a personal finance nerd.  I have a host of nerdy hobbies (outer space, chemistry, knitting), but personal finance holds a special fascination for me.  I love it; so much so, that I consider personal finance to be more of an enjoyable hobby than merely a necessity.  I love that personal finance is based on fundamentally simple concepts that can be applied at the most basic level or, if desired, can be extrapolated to become as complex as you want to make it.  And let’s face it – I like the complex.  So many options, so little time.

With every PF decision that I make, I always end up coming back to the balanced money formula:  Wealth = Income – Expenses.   My ultimate goal is to build wealth (and retire early, live on a beach, sip cocktails, etc.), and according to the Balance Money Formula, there are two simple factors under my control that can help me achieve my goal(s).  I can either increase my income or decrease my expenses.  Easy-peasy, on the surface.  Either of these things will result in an overall increase in wealth; doing both is better.  

I feel like I’m pretty good at keeping my expenses in check.  My fiancé and I both tend to err on the side of frugal.  We drive reliable, moderately priced cars that are completely paid off.  We only go out to eat a couple of times a week and only to inexpensive restaurants.  We shop with coupons and at discount retailers.  There are definitely many other things we could be doing to decrease expenses.  However, for now, I have little intention of changing our spending habits.  We spend less than we earn and are able to live comfortably without seeing much by way of lifestyle inflation.  I’m going to put a pin in this topic for now because I just don’t have much to say about it.  Steady goes the course for expenses.

I consider income to be a whole different ball game from expenses.  Expenses feel limiting to me, while income feels exciting.  The world is my oyster when it comes to prospects to increase income, if I can just get creative.  However, up until recently, I have really not been very creative with regards to income.  My fiancé and I both work demanding, yet lucrative, day jobs that keep us comfortable and let us build our savings.  Every spare penny after expenses gets stashed in a bank account where it slowly grows at a pitiful interest rate.  I still get a thrill when I see the numbers go up every month; compound interest is magical, after all.  But there’s nothing terribly exciting about my day job, and there’s nothing terribly exciting about a savings account.

Lately, I’ve been looking for new ways to boost my income, and subsequently boost my wealth.  I have historically subscribed to the conventional wisdom – work hard, get paid, save 10%, repeat.  However, as times change, so does the conventional wisdom.  I’m not starting at square one, but I definitely have a lot of exploring to do.  Adventure is out there!  And with a little luck, maybe some money too.