Your Wallet’s 3 Biggest Enemies

We’re in a heap of trouble.

We’ve bought too many nice things and borrowed up to our eyeballs to pay for them. We watch commercials for the latest overpriced creations from chain restaurants, and all of a sudden we find ourselves at one trying it out. We look at our neighbor’s driveway and notice the shiny new car sitting there, and all of a sudden our car is old and needs to be replaced. And just when you’re starting to make progress paying off all this debt, your kid gets sick and you can’t afford to pay the hospital bills.

One

There are so many little things in life that try to pull us off track, it’s no wonder our best-laid plans and intentions so often don’t work out. Your car needs an expensive repair to pass inspection. The air conditioner in your house breaks and has to be replaced. I could go on and on. These things happen, almost always unexpectedly, to all of us. And they cost money. Money that we’ve already allocated elsewhere in our budgets.

That’s why the lack of an emergency fund is the first of your wallet’s three biggest enemies.

If things are going well right now, great. You’ve probably worked hard to get to this point. When it comes to your wallet though, you have to consider the what-ifs. What if you lost your job next week? Would you have enough savings to carry you until you found work again?

An emergency fund is your best friend because it provides a safety net when the unexpected happens. The idea is to sacrifice the surplus today so that when the chips are down tomorrow you’ll have something to fall back on. Start with $1,000. Save just $20 a week and you’ll be there in a year.

Two

Bad habits are the second of your wallet’s three biggest enemies. Daily coffee stops are singled out most often by financial people. Let me throw my voice in with theirs: If you have a habit of stopping for coffee every morning before work, you need to find a different route. Smoking is an another obvious habit that kills your wallet and your health.

But other habits are just as detrimental. Look at cell phone contracts. Yes, renewing that stinking contract every two years with one of the overpriced Big 4 providers is a bad habit. I’ve been guilty of this one too. Since I’m part of a family plan, I’ve assumed that it’s cheaper to stay with them. After looking at the numbers, it would actually be cheaper to go with a non-contract provider that offers month to month service.  Do you still have cable? Eliminate it, stop watching all those commercials, get outside for some fresh air and save over a grand a year.

Wanting everything to be convenient is a bad habit that costs you potentially thousands a year. If you think the dealership is a one-stop shop for buying a new car, you need to realize a few things. First, car salespeople are very good at what they do. They’ll dangle a low monthly price in front of you while loading all kinds of fees on the back end. They’ll upsell you every way you can imagine. Second, many dealers engage in disgusting tactics like car spotting, and prey on the feeble or those with bad credit. And last, you need to do some research. Look at reliability, features, crash test scores, and prices of the models you are considering. Being informed helps you fight back against slimy car salesmen. Lesson: Inconvenience yourself a little by arranging the financing at a credit union, negotiating through email, and researching before even setting foot on the lot for a test drive.

Three

The third and final of your wallet’s three biggest enemies is your insistence on keeping up with the Joneses. Free Money Finance says that out of his 52 best ways to save money, this is the #1 way, and I have to agree.

I would go further and say that avoiding competitive consumption is the #1 predictor of financial success. You don’t need to keep up with friends, neighbors or anyone else. The truth is, there will always be someone out there with a newer car, whiter teeth, or a bigger paycheck.

Of the three, this is probably the most difficult to master. Our world is driven by an affinity for stuff. Not only do we need things, we need them yesterday and we need them to be nicer than the neighbor’s. So often we’re driven by envy that we’ll settle at nothing to show off our wealth (or in most cases our lack of it) to others.

Your challenge: Think about everything you already own. You probably have more than you realized. More than most people on this planet actually. You have access to a computer as you read this, which most don’t have. Be content with what you have and spend time enjoying it.

Do you disagree with any of these three? What would you add?

The Secret to (Financial) Success

To lose weight, you eat less, eat well and exercise regularly. To become a better basketball player, you watch videos of pros and practice a lot.

But how do you achieve financial success?

Improvement in any area of life requires focused attention and a definition of success. If the goal is weight loss, you must be conscious of what’s going in your mouth and how much you’re exercising. You must also define how much weight you want to lose. In basketball or any other sport, you must practice (some experts say 10,000 hours is how long it takes to become an expert). You must also watch and play against those who are better than you.

To achieve success, you first need a definition of success. What does financial success mean to you? It’s different for every person. Does it mean being debt free? Financial independence? Retiring at 55? As long as it’s specific and attainable, there’s no wrong answer.

With success defined, you’re ready to make a plan. In it you’ll lay out your vision for the future, how you’ll get there and how long it will take. Your values should drive the plan. Do you tithe? Do you like having new things? Do you have other financial commitments to meet before you start the plan? Just like the old saying, “If you fail to plan, you plan to fail.”

A key piece of the plan should be creating separate savings accounts for your goals. Mint and SmartyPig are two excellent resources that help you visualize progress. I have a different method though. I use simple savings accounts with an online bank. Right now I have five accounts, one for each of my goals. My accounts are all together on the same page, so I can see at a glance how I’m doing. I’ve found that if it all sits in my checking account I’ll spend it quicker than Speedy Gonzales.

Control Your Cash

When you’re deep in debt creditors demand your money each month. When you don’t have values, anybody can come along and tell you what to do with your money because you shift with the tides. When you don’t have a vision and a plan, your money is at the mercy of spontaneous whims, spur of the moment decisions and unbridled emotion.

Do you want these to be controlling factors in your life? Not if you’re living with purpose! The secret to financial success is to define success and then direct your money there. 

Don’t let whims, flavors of the week or financial salespeople dictate what you do with your money. Define success and have a vision of what you want the future to look like. Then you’ll be in control of your cash and on the way to financial success.

Photo by garmaonhealth.com

Beware of Investments Offering Oversized Returns

The Ripoff Alert is a new series appearing once each week on Fridays. It alerts you to the latest scams and ripoffs trying to get between you and your money, and gives you information you need to stay safe. This is #17 in the series. 

Trick question: What’s an easy way to guarantee a 10% return on your investments? Well, if I were a smooth criminal trying to make off with your money, I’d tell you I knew of a business that was about to make it to the big leagues. I’d convince you to “invest” your money before that happens. You’ll double or triple your money in just weeks! And with almost no risk!

Many of us are looking for that path to easy wealth. We badly want it to exist, and in some cases are willing to risk everything we’ve worked hard for to make a quick buck.

The truth about investing is that if you want a large return, you’re going to have to accept some level of risk. The larger the return you want, the larger the potential risk you have to take on. Anybody who tells you otherwise is trying to clean out your wallet.

The opposite is also true. If you’re unwilling to accept much risk, you have to settle with a lower return. Don’t be fooled into thinking you can have only upside with little or no potential downside.

“But I Need to Catch Up!”

Unless your time horizon is 10 years or longer, there’s no place you can put your money right now and have it grow more than about 1%. I know it’s pathetic. We all realize that won’t even beat inflation. But one nice side effect of these times we’re in is that if somebody comes along and tells you they can earn you 15% a year guaranteed, or 2% per day, or any other number that seems too good to be true, you know they’re lying. Such rates just don’t exist, today or ever.

I know it’s tempting to take the bait. You lost 30% of your nest egg in the recession and you need to get back on track. But the criminals will make off with your money, leaving you without the 15% return or your original investment.

Think about this: In an era where banks offer 1% per year on savings accounts, how can anybody legitimately offer 2% per day? Not gonna happen.

They’re Just So Sly

Fraudsters use online bulletin boards, newsletters and emails to alert you to these “can’t lose” deals. The internet allows them a curtain of anonymity that emboldens them to make audacious promises. But if this investment were such a great deal, why would they be telling us? Wouldn’t they just invest all of their own money if they truly believed it was a good deal?

You have to be careful with affinity fraud as well. This happens when someone you know and trust, such as a church leader or family member, tries to get money out of you for illegitimate purposes. It’s easy to let our guard down around those we trust. But when someone starts asking for your money you need to start asking questions.

So back to our trick question. The answer is there’s no way to guarantee a return of any percent on investments. By its very nature, investing is about taking on risk. It’s about taking chances. There are no guarantees with investing. 

The Case for Buying a New Car

Most money-saving experts support buying a used car instead of a new one as a way to save. Since buying a car is the second-biggest purchase we make, the potential savings are huge.

I’ve been thinking a lot about cars lately because of some personal circumstances. One of our until-now reliable cars decided it wasn’t going to start up, so we had it towed to the mechanic where it sits today, more than a week later. As luck would have it, our other car was involved in an accident the very next day. There were no injuries and the car is still driveable, but it leaves us in a tough spot. How much should we spend repairing these cars, considering they are 11 and 8 years old, respectively? Should we instead look at buying a new car?

I also discovered this excellent article over at the NY Times. The author talks about why it sometimes makes sense to spend a little extra to get something we really want. He decided to save up and buy a bike that was more expensive than he could afford at the time. He’s seen others go through three or four bikes in the time he’s had his. He argues that in some cases it makes sense to buy good things and own them a long time.

Buying a good thing (new car) comes with several benefits, the most important of which is reliability. That’s at the top of everyone’s list when car shopping. After all, the point of owning a car is to get us from place to place reliably, right? (Unless you’re a rock star, in which case you also need to arrive fashionably.)

With used cars, you have no idea whether the previous owner followed the recommended maintenance schedule. By buying new, you know the maintenance history because you’ll be doing it yourself. The best way to make your car reliable is to follow the maintenance schedule to a T. Sure, you could take a used car to a mechanic and have it checked out. But even if it’s clean, you don’t know what kind of use and abuse it was subjected to.

New cars come with a warranty, while most used cars are sold as-is. Used car salesmen are allowed to tell you lies about the car’s condition and history. I assume most are honest, but this is a pretty big risk to take to save a few grand.

Another important consideration is safety. Safety standards continue to improve, and with new cars you’re likely to benefit from the latest developments. Some of my favorites are electronic stability control, knee airbags and the blind spot indicators on rear-view mirrors. These features are found on many cars costing less than $20,000, which would have been unthinkable five or ten years ago.

Then there’s that new car smell. Who doesn’t like that?

Lots of people like to buy new cars, drive them four or five years, then trade them in towards a new car. They constantly make car payments instead of holding on to the car for a few more years, payment-free. These people have no business buying new cars.

If you’re going to buy a new car, plan to keep it at least ten years. Why ten? Depreciation is the largest cost of driving a new car. Not gas, not insurance or maintenance. Depreciation is the loss in a car’s value over time. It’s a ticking clock that erodes the value of your car, and starts the minute you drive off the lot. The hit you’ll take from depreciation is greatest in the first three to four years you own the car. In order to recoup these costs, you need to spread them out over time by driving that car at least a decade.

Buy a reliable new car, follow the maintenance schedule and keep it a long time. Your wallet will thank you.

Do you buy new or used? Why?

Photo by thefinancialphysician.com

How Retailers Get You to Keep Spending

It’s summer – a time when many of us spend our money on cookouts, swimwear and gas for road trips. But this isn’t all we’re buying. Retailers in more industries are coming up with new ways to get you in the door and keep you coming back.

Take Amazon. Their Subscribe and Save program offers lower prices on a wide variety of goods, which show up at your door at scheduled intervals. They hope these low prices will entice you to sign up to receive products regularly. Then there’s Amazon Prime. For $79 a year you get unlimited free 2-day shipping on most items on their site. Studies have shown that people buy more if free shipping is offered. But for that $79 up front, you start to feel obligated to shop at Amazon more often than you normally would. Finally, their Kindle Fire tablet, which came out in late 2011, hooks you in by encouraging you to download e-books and songs from their online catalog.

Offering the original product at a discount or even free is another way retailers get you into their ecosystem. Printers and razors are two examples.

Manufacturers sell printers at rock bottom prices, often as low as $30, and force you to buy expensive ink refills that cost as much as the original printer. Since all printer cartridges are different, your only option is to buy that manufacturer’s refills. Thus, you’re forced to pay their inflated prices for years and years anytime you run out of ink.

Then there are razors. Companies like Gillette often give away razors for free on college campuses. Then they turn around and sell four-packs of razor heads for about $18. This works out to $4.50 for 3 weeks of shaving. What a ripoff! But I’ll let you in on a little secret. Razor blades are stainless steel. If you take care of them they’ll last for a year or more. In fact, I’ve been using the same razor for 30 months and counting!

Taking care of a razor blade means rinsing it out well, drying it completely and occasionally sharpening it. The best way to sharpen it is to use the inside of your forearm. After every 5 shaves or so, push the razor from your elbow area to your wrist. Your skin acts like leather, and is great for sharpening razor blades.

Retailers use all sorts of strategies to keep you coming back for more. Be aware of this next time you get that screaming deal!

Can you think of any other companies that use this strategy to keep you coming back?