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Evil Interest

Everybody with a savings account or almost any form of debt has at least a passing familiarity with interest. How many of you actually know what it is, or even how much you are actually paying?

First, some definitions.

Principal is the term used for the amount of money you have borrowed.

Interest is the rent you pay to have that money. Interest is money-rent, expressed as a percentage of the principal. If you borrow $100 at 10%, you pay approximately $10 in interest. I say “approximately” because it’s just not that simple.

There are two kinds of interest: simple and compound.

Simple interest is called that because it is just that: simple. It’s easy to understand and it’s what most people mistakenly assume they are paying. With simple interest, the interest rate is only applied to the principal, never to the accumulated, or accrued, interest.

For example, if you have borrowed $100 at 10% annual interest, this is what your balance will look like:

At the time of borrowing the money, you owe $100.
After 1 year, you owe 10% of the $100, in addition to the original $100: $110.
After 2 years, you owe 10% of the $100, in addition to the original $100 and year one’s interest: $120.
After 10 years, you will owe a total of $200.

That’s simple.

On the other hand, in addition to five more fingers, you have compound interest. Compound interest complicates things considerably. With compound interest, interest is applied to the entire balance of what you owe; both the principal and the accrued interest are included in the calculation.

For example, with $100 at 10% compounded annually:

Year 1: You will owe $100 + 10% of the original $100, or $110
Year 2: You will owe $110 + 10% of the $110, or $121
Year 3: You will owe $121 + 10% of the $110, or $133.10
Year 4: You will owe $131.10 + 10% of the $110, or $144.41
Year 5: You will owe $144.41 + 10% of the $110, or $158.85
Year 6: You will owe $158.85+ 10% of the $110, or $174.74
Year 7: You will owe $174.74 + 10% of the $110, or $192.21
Year 8: You will owe $192.21 + 10% of the $110, or $211.43
Year 9: You will owe $211.43 + 10% of the $110, or $232.57
Year 10: You will owe $232.57 + 10% of the $110, or $255.83

That is a total of $155.83 in interest paid over 10 years, or $15.58 per year, for an effective interest rate of 15.583%.

To throw another twist into the mix, interest is rarely compounded annually. Monthly, or even daily, is much more common. With monthly compounded interest, the annual rate, or APR, is divided by 12 and recalculated every month.

For example, using the same $100 at 10% APR, compounded monthly:

Since the interest rate is compounded monthly, we will be using the monthly periodic rate, which is 10% / 12, or .83%

Month 1: $100 + .83% of $100 = $100.83
Month 2: $100.83 + .83% = $101.67
Month 3: $101.67 + .83% = $102.51
Month 4: $102.51 + .83% = $103.36
Month 5: $103.36 + .83% = $104.22
Month 6: $104.22 + .83% = $105.08
Month 7: $105.08 + .83% = $105.95
Month 8: $105.95 + .83% = $106.83
Month 9: $106.83 + .83% = $107.72
Month 10: $107.72 + .83% = $108.61
Month 11: $108.61 + .83% = $109.51
Month 12: $109.51 + .83% = $110.42

That’s $0.42 more interest paid the first year, and that number will continue to climb each year the interest is compounded.

It gets worse if interest is compounded daily, like most credit cards. If you see “Daily Periodic Rate” anywhere in your agreement, you are getting compounded daily. This same loan, compounded daily instead of monthly will yield $110.51 owed the first year. That $0.51 might not seem like much, but imagine it on a $10,000 credit card, or a $100,000 house! And that’s just the first year. Every year after, the disparity gets bigger.

Edit: The formula for calculating compounding interest is Principal x (1 + rate as a decimal / compounding term)^{compounding term}. So, for $100 at 10% compounded monthly, the formula is 100 x (1 + 0.1 / 12)¹²

That’s the downside to compounding interest. There is an upside, if you have investments or interest-bearing accounts. If that’s the case, compounding interest is working in your favor.

If you save $100 per week, and manage to get a 10% return on your investment, you will have $331,911 after 20 years(with $104,000 contributed) and $2,784,424 after 40(with $208,000 contributed). That mean you will have tripled your money in 20 years, or vingtupled* it in 40 years.

That’s how you get rich. $100 per week for the rest of your life will leave you with a comfortable retirement, without missing out on life now.

—

* Yes, it’s a real word**. It means a twenty-fold increase.

** No, I did not know that yesterday.

Budget Lesson, Part 3

Finance

I keep calling these lessons, but they are examples and explanations, more than lessons. Names aside, please see Part 1 and Part 2 to catch up. The Google Doc of this example is here.

This time, I’m going to review my non-monthly bills. These are the bills that have to be paid, but not on a monthly basis. Some are annual, others are quarterly, or even weekly. Every month, the amount–adjusted to the monthly equivalent–is set aside in Quicken.

School Lunch – We don’t qualify for any of the reduced lunch plan, and I don’t know that it is possible to send a brown-bag lunch that is both cheaper and healthier than the school’s menu. This is automatically replenished whenever it gets below $15. This actually gets paid about every other month.
Property Taxes – Semi-annual and increasing every year. I know the valuations around me, so I don’t think an appeal would win.
Life insurance – We pay this quarterly. If I die, my family will be completely covered for several years, without adjusting a single expense. If the expenses are adjusted to account for the fact that I won’t be eating, driving, or using electricity, it will last much longer. This is a separate policy from the one discussed in Part 2. GET INSURANCE! Take care of your family.
AAA – Since we got reliable cars, this hasn’t been a money-saver, but it’s priceless in terms of peace of mind.
Vehicle Registration – We have two cars and a motorcycle that need registration every year. I’m planning to sell the bike in the spring, but I was planning that for last spring, too. It’s easy to put that off, since I enjoy riding.
Daycare – Daycare is a weekly expense. As a two-income family, this isn’t an expense we can do away with…yet. As time goes on, the bill will be getting lower. In June, my youngest reaches a cheaper pricing table and my oldest is almost ready to be done with daycare completely.
City Bill – Our garbage and sewer are paid through the city on a quarterly basis.
Web host – I’ve got this blog, plus a few other side projects hosted here. I have been simplifying and reducing the projects that aren’t fun or profitable, but I’m not sure this expense will ever go away.

There aren’t too many items here that can be legitimately and responsibly trimmed.

Budget Lesson, Part 7

Finance

It’s been a month(again!) since I’ve written a post for the budget series, so I’ll be continuing that today. See these posts for the history of this series.

This time, I’m looking at how to reduce my “set aside” funds. These are the categories that don’t have specific payout amounts and happen at irregular intervals. One of the convenient features of our set-aside funds–also a feature of our non-monthly bills–is that the money sits in our checking account, providing a buffer against overdrafts. The buffer is big enough that I can withdraw our entire month’s discretionary budget on the first of the month.

Parties – Twice a year, we have large parties. We have a barbecue(not necessarily low and slow, I’m in the midwest) and a Halloween party. We also have three kids with birthdays. Each year, we try to do something exotic at the barbecue. One year, it was a turducken. This year, we’ll be skipping the show-off portion of the show. The Halloween party is never expensive. I don’t drink much, so the bar stays well-stocked without frequent expensive shopping trips. We throw two large parties for less than $300 combined, and our guests start RSVPing a year in advance. We’re fun. The kids are getting gypped this year. I am over my addiction to expensive birthday parties for my kids. There will be a small party for one, a sleepover for another, and a party combined with some cousins’ birthday parties for the third. It sound horrible but all of them will have fun.
Gifts – We set aside money for presents, but we don’t feel we need to spend all of the money we have set aside. Anything left over stays here. Eventually, it will be something nice for all of us.
Pet Care – We have 4 cats and a dog. Cat litter and food are expenses that we can’t make disappear. We don’t buy the fancy food, but we also don’t buy the stuff that uses cardboard as filler. We have set a new limit at 3 pets, but that limit will only be reached through attrition. There’s nothing to cut here for a few years.
Car Repair – This is another category with nothing to cut. If we don’t spend it, and something catastrophic happens to a car, we’ll be covered. If it doesn’t, we’ll have a bit more cushion in our checking account.
Furnace Warranty – When we bought a new furnace and air conditioner, we got the extended warranty. This is an unlimited renewal warranty, so, in 5 years, we’ll have to buy it again to keep it. If we keep it forever, they will eventually replace our furnace when it dies.
Medicine/Medical – It’s a sad fact that people get sick. We set aside a small amount to cover our costs. The costs rise and fall, but over any given quarter, I don’t think I’ve been off by more than $5.

I’ve taken a hard look at most of the bills over time, so there isn’t always a lot to cut. Next time, I’ll be addressing our discretionary spending.

SOPA Is Evil

Business

Piracy So the record companies, the movie studios, the obsolete media, and some large software companies want the ability to nuke a website from orbit if they find any of their intellectual property there.

Or a hint of their intellectual property.

Or, “Oops, I guess that wasn’t ours. How much business did you lose during the 6 month appeal of a non-judicial takedown?”

Pure crap.

I’m not saying that from the perspective of some junior high pirate watching free porn in his parents’ basement. Intellectual property is the basis of my livelihood. I am a Microsoft Certified Professional; a software engineer. I am a blogger; a writer. I am a web developer; again, pure IP.

Giving private companies the right to arbitrarily take down sites for what may or may not be an actual violation is absurd.

Over the last few years, a law firm called Righthaven(spit!) has been teaming up with news agencies around the country to extort fees out of websites–generally small sites–for violating their copyright. Most of those cases involved individual users–not owners–posting fair-use snippets of articles. Since the cases were filed in Nevada, it would have cost more to fight the suits than to simply pay the blackmail, typically $5,000-$10,000.

Now, add the ability to threaten to administratively shut down the site if settlement isn’t made in 24 hours. That eliminates the ability to consult with an attorney, undermining the legal system completely.

All because once-successful companies can’t cope with the current world.

I’m not a fan of piracy. I enjoy buying movies because that encourages the people who made them to continue to make movies. The delivery system sucks.

Netflix has developed a successful business model out of making it easier to watch movies legally than to pirate them. For $8/month, you can watch as many movies as you’d like. If you have a $50 Roku, or any number of other devices, you can watch right on your TV. Add another $8/month to that, and you can get new DVDs delivered right to your door. For less than $20/month, they are delivering licensed, legitimate content and making a profit doing so.

How did the movie companies respond?

Did they increase the availability of their libraries, to get more wanting-to-be-honest customers paying a small fee to watch their content?

Of course not. They reduced the instant library and extended the amount of time before they would license new movies for rental. They made it harder to get their content legitimately, which increased the amount of piracy.

Now, since Plan A is biting them in the ass, they are pushing for yet more legislation to salvage their failed business models.

Here are three options for watching movies I don’t own:

Option 1: Instant

Through the magic of Amazon Instant, Netflix Instant, or any of the magical Roku channels, I can…

Open an account. Once.
Find a movie I want to watch.
Watch it immediately. This could be included in a membership fee, or as an individual rental.

Option 2: Piracy

I am not recommending illegal activity. This is for the sake of example, only.

Download torrent software, like uTorrent. Once.
Go to a site like Torrentz.com and find a movie I want to watch.
Click the torrent link, let the torrent software open it and download the movie.
Watch the movie in a couple of hours. For free.

Option 3: Buy it.

Drive to the store each time I want to watch a movie.
Spend $15-$20 on the movie.
Drive home.
Fight the bank vault of plastic and tape they wrap the movies in.
Put the DVD in the player.
Watch 5 minutes of “Don’t Be a Pirate” garbage. Hey jerkface, if I’m watching the DVD, I didn’t pirate it. Bad market-targeting here.
Watch 15 minutes of commercials that I can’t skip through.
Watch 15 minutes of ~~commercials~~ previews that I can’t skip through.
Watch the movie. This process takes longer than the piracy and costs more than option 1.

On top of that, I’m told I’m a pirate if I back up my movies for archival purposes. Or if I rip my movies to my network to allow me to watch them conveniently. I’m told that I’m merely licensing the content of the disc, but if the disc fails, I have to buy a new one. I can’t just download the content again.

This is a failure, and it isn’t a legislative failure.

The companies that are embracing modern options are succeeding, and will continue to do so. The companies that refuse, at the expense of their potential customers, will sink.

Budget Lesson, Part 6

Finance

It’s been a month since I’ve written a post for the budget series, so I’ll be continuing that today. See these posts for the history of this series.

This time, I’ll be reviewing my non-monthly bills. These are the bills that have to be paid, but aren’t due on a monthly basis. Some are annual, some are quarterly.

School Lunch – This could be cut by sending a bag lunch. We pay about $1.25 per day for school lunch. At that price, I don’t think I can beat the nutrition, let alone the convenience of the meal. We pay this whenever the account gets below $10.
Property Taxes – We pay this semi-annually. This bill goes up every year due to the ****** ***-******* ******-******* who don’t care about their constituents making ends meet. ******* ***** ******* *******. Huh. Who knew WordPress came with a censor? I could move, but I’d have to get out of commuting distance to get this down much.
Life insurance – I’ve got two quarterly life insurance policies. I can’t get these much cheaper, but I should be able to next year. The questions asked if I’ve smoked in the last three years, and that will be up on Halloween.
AAA – It’s only been recently that I’ve owned vehicles reliable enough to avoid paying my AAA dues for me. I could cancel this, but for $80 per year, the hotel discounts make it a wash. One vacation per year comes close to making the difference.
Vehicle Registration – The only way to cut this would be to get rid of a vehicle. I don’t think that’s possible for us. We work in opposite directions and, for at least one quarter per year, spend too much time chasing around for activities.
Daycare – We’ve been using our current daycare provider since my oldest(10) was one. When my youngest turns 2 in June, our costs will go down. Without one of us quitting our job, this bill can only go down as the kids grow up.
City Bill – This bill combines our garbage, water, and sewer. With three adults, three kids, and 5 animals in the house, reducing our garbage level is difficult. We do try to manage our water usage in the summer, to keep that down.
Web host – I have a few domain names and a hosting package to handle my side hustles and miscellaneous projects. This is a deductible expense. I have been allowing my domain names to expire if the project isn’t being actively pursued.
Memberships – I have annual dues to two organizations. I’m making payments on lifetime memberships, so these will be going away in about 18 months.

Reviewing this list, there doesn’t seem to be too much I can cut and accomplish any meaningful savings. Am I missing something?

Budgeting tips – sticking to your budget

Finance

If you are looking to get out of debt, or you are currently debt-free and want to stay that way, then it is important that you get a grip of your financial situation and live within your means.

A good way to do this is to create a budget as this gives you a clear indication of how much money is coming in, how much is going out and also highlights any areas where you may need to make cut backs should you be falling short each month.

Once you have sorted out the figures and made necessary amendments, for example paying bills by direct debit in order to make savings or cutting existing debts by carrying out a balance transfer to a lower rate credit card, it is time to start focussing on the lifestyle changes.

As you will find, it is one thing to create a budget and quite another to stick to it, but by adhering to the following steps and exercising a certain amount of will power, you should be able to ensure that you live within your means and resist the urge to reach for that credit card.

Keep focussed

Before you start to look at how you can stick to your budget you need to clarify why you need to stick to your budget!

A budget can initially seem like something that has been devised with the sole intention of stopping you having fun and buying or doing the things that you want. So it is important to remember that, though some cutbacks may be necessary in the short term, a budget is a long-term strategy that will allow you to take control of your finances and, all being well, live a happy life that is free from the worry of excessive debt.

Change your habits

Unfortunately, a successful budget can require a change in lifestyle and this can be one of the most difficult things to adhere to.

For example, if you have previously enjoyed eating out regularly then you may have to make cut backs in this area to ensure that you are living within your means. But, instead of seeing this as a negative, try to focus on the positives and remember the reasons why you are budgeting.

And a change in habits doesn’t necessarily mean that you have to cut back on your enjoyment of life and it may actually open your eyes to other pursuits you may not have previously considered.

For example, instead of eating out try preparing a meal at home and turn your dining room into a restaurant. This means that you can still have the fine dining experience but at a fraction of the price and without the worry of making a reservation!

Shop smarter

Lists figure heavily when creating a personal budget and list-making is a habit that you should get used to when trying to stick to your budget.

When budgeting it is vitally important to avoid impulse buying and a great way to do this is to always make a list of things you need before you go shopping.

This means that you will have a clear idea of what you need and you will be less inclined to make random purchases that may just turn out to be an unnecessary drain on your finances. It’s also worth mentioning at this point that you should always differentiate and prioritise the things you need over the things you simply want.

If you are unsure how to make the distinction then put off making the purchase for a couple of days and then reconsider if you actually need it. This cooling off period will often convince you that you can do without it and save you money.

In addition, savings can be made on your shopping by simply swapping big name brands for supermarket own varieties, using discount coupons and looking for any special offers.

Overall, it is important to be fully focussed and committed to your budget plan and to be aware that a change in finances may require a change in lifestyle. But a few short term changes may well add up to better finances in the long term.

Article written by Les Roberts, budget reporter at Moneysupermarket.com.

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Option 1: Instant

Option 2: Piracy

Option 3: Buy it.