- Dora the Explorer is singing about cocaine. Is that why my kids have so much energy? #
- RT @prosperousfool: Be the Friendly Financial “Stop” Sign http://bit.ly/67NZFH #
- RT @tferriss: Aldous Huxley’s ‘Brave New World’ in a one-page cartoon: http://su.pr/2PAuup #
- RT @BSimple: Shallow men believe in Luck, Strong men believe in cause and effect. Ralph Waldo Emerson #
- 5am finally pays off. 800 word post finished. Reading to the kids has been more consistent,too. Not req’ing bedtime, just reading daily. #
- Titty Mouse and Tatty Mouse: morbid story from my childhood. Still enthralling. #
- RT @MoneyCrashers: Money Crashers 2010 New Year Giveaway Bash – $7,400 in Cash and Amazing Prizes http://bt.io/DDPy #
- [Read more…] about Twitter Weekly Updates for 2010-01-16
How to Save
Saving is hard. For years, we would either not save at all, or we’d save a bit, then rush to spend it. That didn’t get us very far. Years of pretending to save like this left us with nothing in reserve. Finally, we’ve figured out the strategy to save money.
First and foremost, make more than you spend. This holds true at any level of income. If you don’t make much money, then you need to not spend much, either. Sometimes, this isn’t possible under current circumstances. In those cases, you need to either increase your income or decrease your expenses. Cut the luxuries and pick up a side hustle. The wider the gap between your bottom line and your top line, the easier it is to save.
Next, make a budget and stick to it. There is no better way to track both your income and your expenses. I’ve discussed budgets before, so I won’t address that in detail today. Short version: Make a budget. Use any software you like. Use paper if you want. Make it and use it.
Pay yourself first. The first expense listed on your budget should be you. Save first. If you can’t afford to save, you can’t afford some of the other items in your budget. Cut the cable or take the bus, but save your money. Without an emergency fund, your budget is just a empty dream when something unexpected comes up. And something unexpected always comes up.
Automate that payment to yourself. Don’t leave yourself any excuse not to make that payment. Set up an automated transfer to another bank and forget about it. Schedule the transfer to happen on payday, every payday.
Now comes the hard part: Forget about the money. Don’t check your balance. Don’t think about it in any way. Just ignore it. For the first month or two, this will be difficult. After that, you’ll forget it exists for a few months and come back amazed at how much you’ve saved.
If you don’t forget about it, and you decide to dip into the account, you are undoing everything you’ve worked so hard to save. Do yourself a favor and leave the money alone.
New Debt
For the first time in 2 years(almost to the day), I am acquiring new debt that I can’t afford to pay off immediately. On a credit card.
Last Thursday, my son entered vision therapy. He has what is commonly known as a “lazy eye”, but is more properly called a “wandering eye”. His eyes don’t always lock on to whatever he is looking at. Instead, one of his eyes will (occasionally, but not always) drift to the side and shut off. His brain doesn’t interpret the signals from that eye.
We had two sessions of tests to diagnose the specific problems: $350.
We will have 28 weekly sessions of therapy @ $140 per session: $3920
There is an equipment fee: $85
That’s a total of $4355 over the next 7 months.
Insurance covers some of it, but the therapist is out-of-network, so it’s “pay first, get reimbursed later from the insurance company”. If we pay up front, we get 1 session free, bringing the price to $4215, minus insurance.
I have a health savings account that I have been trying to max out to cover this, to make my payments all pre-tax. I haven’t been able to get enough in there, yet. In fact, since I don’t have my kids on my insurance, my maximum HSA contribution is $3050.
Since finding out that vision therapy was going to be necessary, I have managed to save $1000 in cash, and about $1500 in my HSA. That’s $2500 of a $4215 bill, leaving $1715 that I still need to be able to cover.
Here is my plan:
We’re charging the entire $4215 at 11.9% interest on a card with a 2% travel rewards program. This will give me $84.30 worth of travel rewards good for reimbursing any travel expenses.
I will immediately pay off $1000 from cash savings.
I will also immediately file for an insurance reimbursement, which will cover 80% – $500, or $2972 minus a bit. Our insurance got a waiver on the pseudo-wonderful healthcare fraud act on the grounds that the plan sucks so bad that it would cost too much to comply with the law. No joke. I’m expecting about a $2500 reimbursement, and I have no idea how long that takes.
In 6 weeks, when I have maxed out my HSA contributions for the year, I will file for an HSA reimbursement for about $2500, leaving about $500 to cover some medical costs for the rest of the year. Vision therapy doesn’t count against my deductible, since my kids are on my wife’s insurance plan.
Starting in June, my debt snowball will no longer be going to max out my HSA and will instead go straight to this card, to finish paying it off as quickly as possible. That’s $750 per month.
Any money from any side work will also go towards this bill, but I don’t budget for that, because it isn’t reliable money.
The projected results:
$3215 on the credit card for 6 weeks @ 11.9% = $50 in interest payments.
After the HSA reimbursement, there will be $715 left to pay, which will be paid off in June for another $10 in interest.
When we get the insurance reimbursement, we’ll replenish the medical bill account, to start getting ready for the kid’s braces next year. We’ll drop $1500 into that account and use the remaining $1000 as a debt snowball payment.
We’ll end up paying $60 in interest to save $140 in therapy costs, so it’s good math, but I hate the idea of racking up another credit card bill. I could drop the interest costs a bit by raiding my emergency fund, but that still wouldn’t cover it all, and it would leave me with very little left for an actual emergency. I could raid the emergency fund for half of its value($700), and reduce the initial interest paid to $25 and the total interest paid to about $40, then use the $1000 leftover from the insurance reimbursement to replace my emergency fund.
Credit Cards: How to Pick a Winner
We live in a decidedly credit-centric culture. Whip out cash to pay for $200 in groceries and watch the funny looks from the other customers and the disgust from the clerk. It’s almost like they are upset they have to know how to count to run a cash register.
If someone doesn’t have a credit card, everyone wonders what’s wrong, and assumes they have terrible credit. That’s a lousy assumption to make, but it happens. For most of the last two years, I shunned credit cards as much as possible, preferring cash for my daily spending. Spending two years changing my spending habits has made me comfortable enough to use my cards again, both for the convenience and the rewards.
Having a decent card brings some advantages.
Credit cards legally provide fraud protection to consumers. Under U.S. federal law, you are not responsible for more than $50 of fraudulent charges. many card issuers have extended this to $0 liability, meaning you don’t pay a cent if your card is stolen. Trying getting that protection with a wallet full of cash.
The fraud protection makes it easier to shop online, which more people are doing every day. At this point, there is no product you can buy in person that you can’t get online, often cheaper. How would you order something without a credit card? Even the prepaid cards you can buy and fill at a store will often fail during an online transaction because there is no actual person or account associated with the card. The “name as it appears on the card” is a protective feature for the credit card processors and they dislike accepting cards without it.
If you’re going to use a credit card, you need to make a good choice on which credit card to get. There are a few things to check before you apply for a card.
Annual fee. Generally, I am opposed to getting any card with an annual fee, but sometimes, it’s worth it. If, for example, a card provides travel discounts and roadside assistance with its $65 annual fee, you can cancel AAA and save $75 per year. A good rewards plan can balance out the fee, too. I’m using a travel rewards card that has a 2% rewards plan. That’s 2% on every dollar spent, plus discounts on some travel purchases. In a few months, I’ve accumulated $500 of travel rewards for the $65 fee that was waived for the first year. The math works. A card that charges an annual fee without providing services worth several times that fee isn’t worth getting.
Interest rate. This should be a non-issue. You should be paying off you card completely every month. In a perfect world. In the real world, sometimes things come up. In my case, I was surprised with a medical bill for my son that was 4 times larger than my emergency fund. It went on the card. So far, I’ve only had to pay one month’s interest, and I don’t see the balance surviving another month, but it’s nice that I’m not paying a 20% interest rate. Unfortunately, as a response the CARD Act, the days of fixed rate 9.9% cards seems to be over.
Grace period. This is the amount of time you have when the credit card company isn’t charging you interest. Most cards offer a 20-25 day grace period, but still bill monthly. That means that you’ll be paying interest, even if you pay your bill on time. To be safe, you’ll need to either find a card that has a 30 day grace period, or pay your balance off every 15-20 days. Some of the horrible cards don’t offer a grace period of any length. Avoid those.
Activation fees. Avoid these. Always. There’s no card that charges an activation fee that’s worth getting. An activation fee is an early warning sign that you’ll be paying a $200 annual fee and 30% interest in addition to the $150 activation fee.
Other fees. What else does the card charge for? International transactions? ATM fees? Know what you’ll be paying.
Service. Some cards provide some stellar services, include concierge service, roadside assistance, and free travel services. Some of that can more than balance out the fees they charge. My card adds a year to the warranty of any electronics I buy with it, which is great.
Credit cards aren’t always evil, if you use them responsibly. Just be sure you know what you’re paying and what you’re getting.
What’s in your wallet?
Handling a Windfall
What would you do if you were handed $10,000 tomorrow? $20,000?
The easy default answer–if you spend time in the personal finance world–is to pay off debt and save the rest.
But is that the right answer?
When my mother-in-law died, we inherited a little bit of money, a house that hasn’t been updated since the 60s, and a new-ish car that still has an active loan.
We also have about $16,000 in credit card debt and a small mortgage.
The Dave Ramsey answer would be to pay off the card at all costs and worry about the inherited house later, but that seems off. If we modernize the house and fix the things that are broken, we have a mortgage-free rental property. Our local rental market is strong; we should be able to clear $800 per month after expenses.
Is the right answer to pay off our card and scrape to get the house ready or should we fix up the house and use that new income to pay off the card?
My wife has also inherited an IRA that–due to its status as a Beneficiary IRA and the fact that there have been disbursements–has to be drained within 5 years. It’s not huge. After taxes, it’s about the size of the car loan. Should we make the $200/month payments, or cash out the temporary IRA and make the car loan go away immediately? Should we cash out the IRA and open one for my wife?
Although the cause was sad, these are good problems to have. If we manage this right, we’ll be more financially stable than we would have been for decades, otherwise.
I want your opinion, please.
2 questions:
1. House or credit card?
2. What would you do with a $10,000 IRA that has to be cashed out over the next 5 years?
Saturday Roundup – Welcome to Halloween
- Image via Wikipedia
This weekend marks the beginning of Halloween at Casa del Myhouse. We’ll start setting up our yard display tomorrow. If we’re lucky, we’ll be featured on TV again.
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The Best Posts of the Week:
Bill and Ted is coming back for another sequel! I don’t know how they can top Bad Robot Ted or the Grim Reaper playing Battleship, but I’m looking forward to it.
Here’s a summary of the first stage of the new, overpriced, under-understood health care plan.
I keep thinking about signing up for a CSA. Here’s some details on how they work.
Frugal Dad talks about “my money“.
Finally, a list of the carnivals I’ve participated in:
Cheap Vacations was included in the Festival of Frugality. Thanks!
If I missed anyone, please let me know.
