Milking the Dollar$

Here is an article by Jeffrey Strain about 6 simple ways to save yourself thousands of dollars! It is just one part of a larger series; however, I found it to be the most important segment.

Overall, I found it to be excellent and all 6 “moves” to be great ways to save money. Even though they are all pretty simple ideas, don’t discount their effectiveness.

6 Moves

1. Get organized: I have been doing this myself the last few years. It has been an ongoing process, but I finally feel like I am getting to where I want to be.

You might wonder how this will save you money? The answer is simple: the less “crap” you have the less house you can live in. Small housing is cheaper in rent and utilities which equals to hundreds in saving.

Just a few years ago, I could have never fit all of my stuff in my 395 square foot apartment. However, lately I have really worked on divesting myself of stuff I didn’t need. Now, not only do can I fit in a sub-compact space, but I have room to spare!

2. Start a part-time business: For many, home businesses often lead to full-time careers. The author himself started writing as a side gig, and now that is how he makes his living.

Opportunities are everywhere. I suggest you assess your personal skills (as well as your passions), if you are interested in starting a side business. Once you have an idea where your heart is, you can start focusing on how to monetize your hobbies.

As you know, I blog as one of my pseudo side-businesses. I knew I liked personal finance and making money, but for years I just read what others had say instead of posting my own ideas. Eventually, however, I decided it was time to turn my interest into an income generator. Whether or not I sink or swim in this venture, I know I’ll feel good about it, since at least I tried. Nothing feels worse than wondering what might have been?

3. Anticipate big purchases: This cannot be repeated enough! Simply put, time allows you to search out the best bargain, whereas waiting for something to finally die usually doesn’t leave you with that luxury.

For example, if I were to replace a major appliance. I would personally try to wait till Black Friday to find the best deal. Alternatively, I might just wait till I find a “going-out-of-business” or other clearance sale. Even just waiting for Bing.com cashback to hit its high point would likely result in significant saving.

4. Take a tax class: I have never done this; however, I have always reread the tax rules when doing my own taxes. Having knowledge of all the available credits and deductions for which you qualify can easily save you thousands!

Don’t think you already know what credits are available to you. Tax rules change, as well as life situations. If you get comfortable in a tax routine and fail to keep yourself educated, you will likely miss out on huge saving as your circumstances evolve.

5. Drop a habit: I know what you’re thinking: “but I don’t drink or smoke?” “How can possibly save from this tip?”

The author makes a good point that it’s not only the deadly habits that cost us money. He was able to wean himself of a soda/sports drink habit that cost him $1,000/year. That’s right; he put an extra $1,000 in his pocket by just switching to tap water!

6. Trash your TV: The article notes that the average American watches 30 hours of TV every week! Not only is that spending money on cable, energy, and equipment, but more importantly, it is wasting time that could be spent on developing skills or working a side gig. Over the years, I have noticed that most of the broke/indebted people I know watch an excessive amount of television.

Final thoughts:

Without a doubt, I think this is one of the most important articles I have come across in awhile. The author has done a wonderful job of finding easy ways to really turn around a personal financial situation.

Everyone is probably guilty of a few of these, including myself. The goal here is not to be perfect. We are only human remember.

In place of seeking immediate perfection, set a plan to meet your own goals and work towards them one step at a time. For example, instead of drinking 10 sodas/week, cut back to 6 at first. Instead of watching TV 5 hours every night, settle for 2. Not only will your wallet become fatter, but you also likely start living a more fulfilling life.

On July 20, 2009, investors in pharmaceutical company Humane Genome Science (HGSI) woke up to a shock when the price of their shares opened about 400% higher than the previous close.  The boost came from the unlikely success for of the experimental drug  Benlysta, which met its goals in a late-stage study in treating Lupus. 

The sudden and unexpected breakout of HGSI generated  a lot of unanticipated wealth for its shareholders.  I heard one story of a guy making $2.5 million that day and another hitting the $1.8 million mark.  Handfuls of individuals proclaimed to have made thousands of dollars from the surge.  Even, I got a piece of the action.

Back in February I purchased 100 shares of HGSI for $2.34/share.  On July 21, 2009, I sold those same shares for $14.23 each, netting $1,164.00 in profits after brokerage fees.  Although the $1,164.00 was not a “life-changing” amount, in my situation, it was definitely a windfall.  Thus, I was inspired to write about how to deal with a windfall.

Below are some of my thoughts on windfalls and how they should be dealt with.  Given that I am a firm believer in building wealth slowly through saving, it may come as no surprise that I don’t advocate going a shopping spree.  However, I do believe in living a little every now and then, so don’t go putting all your winnings in the sock drawer just yet!

Windfall sources

You don’t have to take the risk of buying and selling stocks to receive a windfall.  Accumulated wealth is all around you.  You just have to be lucky enough (or smart enough) to be its recipient.   Just look at these examples:

• Inheritance
• Sale of a home, property, or business
• Settlement of a lawsuit
• Collection of a life insurance policy (heaven forbid!)
• Work bonus
• Winning the lotto!

What constitutes a windfall?

The question above is a bit of a personal one.  One man’s windfall may be another man’s pocket change.  I’m sure many consider my earnings to be meager, but to me, they were very substantial.

I personally place windfalls fall into four different categories: small, medium, large and retirement!

• Small – $100-$1,000
• Medium – $1,000-$10,000
• Large – $10,000-$100,000
• Retirement – >$100,0000

Although I admit they may appear a bit arbitrary, there is a little reasoning behind the values I used.  A windfall under $1,000 is nice, but somewhat commonplace.  Between $1,000-$10,000, there is a bit of excitement, as the cash influx starts to open up opportunities.  Receiving over $10,000 at once, will definitely change your fortunes, allowing you to pay off debt or make a down payment on a house.  Greater than $100,000, you have a life-changing event.  You may not be able to retire as my label implies, but you can definitely think about major career and/or lifestyle changes at that point.

Why you should have a windfall plan

Biggie Smalls once said, “mo’ money, mo’ problems.”  Now, I don’t think this is entirely true.  In fact, unlike popular belief, it is my opinion that money actually solves a lot of problems.  However, Biggie has point.

Even the smallest of windfalls can be emotional events.  Being unprepared for one leads many to seek immediate professional help.  Well at least the smart people do, as the media is full of tales about individuals acquiring a large chunk of change only to be unprepared and uneducated about financial matters.  Purchasing cars and homes, most of them are back to where they were in only a couple of years - their money spent (unwisely) on depreciating assets.

Thus, its crucial to plan ahead now before your ship finally comes sailing in.  Consider the following suggestions:

• Pay taxes:  I will have to pay capital gains taxes on my $1,164.00.  It won’t be too bad given the small amount I made; however, if you receive over $100,000, the IRS is going to be looking for their cut.  Thus, pay the taxes first to avoid major headaches down the road. 
• Pay down debt:  If you have debt, it makes the most financial sense to pay it off after you have paid taxes.  Think of it might as a once in a lifetime opportunity to get yourself out of the hole
• Treat yourself:  You gotta have a little fun in life.  Given the joy and stress new-found wealth will likely give you, I would suggest using a small percentage of it to relax.  However, I would stick to <3% and not to exceed a few thousand total. 
• Take a cooling off period:  After getting over the initial shock, the next thought to go through our minds would likely be what we would spend it all on!   However, resist the temptation and revel in the moment, rather than new toys. 
• Get professional help:  One thing every fat wallet needs is a good accountant.  Do not visit a broker!

Final thoughts

In the end, I left my $1,164.00 in my brokerage account.  I figure another opportunity to reinvest it is always around the corner.  However, if it would have a life-changing amount, things would have been different.

My plan for any windfall over $100,000 starts with paying taxes.  After taxes I plan on treating myself first and then immediately putting 85% into long-term savings.  The remaining 12-13% will go into a liquid account waiting for me to “cool off.”  After I have settled down, who knows?  All I really know for sure is that I won’t go and blow it!

There seems to be a common misconception that only those with high-paying jobs can get rich.  It may be true that a  high income can get you to where you want to be financially much quicker.  However, that’s only because when you make more money, you have more potential to save.  The thing to remember (as I have stated before) is that income does not equal wealth, and even those of us with the most meager of means can retire comfortably.

The Millionaire Next Door (an essential read for those interested in personal finance) blew the whole notion of the rich “living large” clear out of the water.  In their research, the authors found that most millionaires did not live in McMansions and drive fancy cars.  In fact, they found that most were hard to recognize, as they usually lived in modest homes, held average jobs, and drove their vehicles till they died.  On the other hand, those in the high-income brackets with corresponding lifestyles had far less accumulated wealth as a factor of their incomes.  As one profiled rancher from the book put it, these people are “all hat, no cattle.”

However, all this talk about the poor getting rich probably doesn’t mean much to you without real-life examples.  Thus, I introduce you to Mr. Earl Crawley. 

Mr. Crawley’s story

Earl Crawley is a perfect example of a person who “gets it.”  Working as a parking attendant, he was able to accumulate a significant amount of wealth over his working life.

Crawley’s rags-to-riches story first began when he was young.  As a child, he was given the financial lessons that most of us where never fortunate enough to have received:

My mother taught me how to budget, which made me appreciate how a little money can grow.

Over the course of his career as a parking attendant, Mr. Crawley utilized many of the strategies commonly used by the poor to get rich.  His multifaceted approach, allowed for him close the income gap with his “better off” peers.  So how did he do it?

• He took advantage of what he was taught:  As I noted above, Crawley’s mother had the foresight to teach her son about money at an early age.  Quality financial education is often overlooked, but could possibly be the most important thing you teach your children.  Thus, teach them how to succeed financially now, and  they will thank you later. 
• He lived frugally:  You can cut back on almost everyone without too much pain.  Crawley, himself, lists simple living as his main overall strategy:

 I did it with good old-fashioned nickels and dimes.

• He generated multiple income streams and saved his earnings:  Crawley states that he maintained odd jobs from which he saved as much as he could.  I cannot recommend enough having a second income source dedicated to long-term savings.  In fact, 100% of the profits I generate from my various “side hustles” go straight to saving. 
• He invested wisely:  Although he didn’t have much formal education, Crawley was smart enough to ask experts about financial advice.  He remarks that he was never afraid to ask questions to the brokers, financial advisers, or even customers he came into contact with everyday.  The information he gleaned allowed him to make informative stock picks which paid off well.

By following these steps Earl Crawley’s hard work paid off in the tune of a $500,000 portfolio.  That’s right, a parking attendant earning minimum wage increased his net worth to a half million dollars!

Like any financially savvy individual, however, he hasn’t stopped yet.  In fact, he has started his own investment club and continues to research stocks. 

Overall,  it appears the sky is the limit for this saver!  Hopefully, his story made you realize that you too can become wealthy, no matter which career path you have chosen.

In this day and age, it’s hard for us to image anyone turning a blind eye to society and its financial system.  When we can conjure up this individual, the image is usually of some mentally-ill transient or survivalist/militia type.  No one “normal” could possible live this way, right?

Odd or not, Daniel Suelo is doing  just that.  That’s right, this white, middle-aged college graduate decided that one autumn day in 2000 he had had enough.  Fed up with money’s control of his life, Suelo headed for the outskirts out Moab, Utah 9 years ago and hasn’t turned back.  Instead of living in a house full of manufactured goods, he now calls a cave his home and dines on whatever he can scavenge.

Below I have included some excerpts from Suelo’s story.  Please take the time to read the full article about his life, because this guy’s existence is pretty amazing.  He kinda reminds me of a modern-day Chris McCandless.  Enjoy!

On why he left:

“When I lived with money, I was always lacking.”  “Money represents lack. Money represents things in the past (debt) and things in the future (credit), but money never represents what is present.”

About food:

He sautés the watercress, mustard leaves, and wild onions, mixing in fresh almonds he picked from a friend’s orchard and ghee made from Dumpster-dived butter, and we eat out of his soot-caked pans.

His former life:

HE WASN’T ALWAYS THIS WAY. SUELO graduated from the University of Colorado with a degree in anthropology, he thought about becoming a doctor, he held jobs, he had cash and a bank account. In 1987, after several years as an assistant lab technician in Colorado hospitals, he joined the Peace Corps and was posted to an Ecuadoran village high in the Andes.

What his future holds:

Suelo is 48, and he doesn’t exactly have a 401(k). “I’ll do what creatures have been doing for millions of years for retirement,” he says. “Why is it sad that I die in the canyon and not in the geriatric ward well-insured? I have great faith in the power of natural selection. And one day, I will be selected out.” Until then, think of him like the raven, cleaning up the carcasses the rest of us leave behind. 

I hope everyone had a great holiday weekend! Now that we are back, I thought I’d write about some of the basics of building wealth and getting out of debt.

Building wealth and paying down debt both follow a similar course.  To me, the main difference is what side of $0 net worth one finds him or herself on.  Also, in most instances, generating wealth involves more investing.  However, if you are in debt, you can continue on a similar path once you have paid it off.

Below, I have listed what I feel are some the “rules” of both building wealth and reducing debt.  You may have seen similar lists before, as most financial bloggers have compiled their own.  However, I feel that these are the ones you should learn now because they lay a good foundation for what I plan on teaching.  Notice, I said “foundation” because these are just some of the basics, and I will be later adding to this list, as well as introducing some more advanced topics.

So, without further delay, let’s take a look at these financial rules.  Note, I tried to highlight key words and phrases to make the learning process simpler:

The rules

1. Start ASAP!:  Just a couple of years of putting off saving and investing will have drastic effects on your accumulated wealth upon retirement.  That’s just how the rule of compounding interest works.  However, if in debt, you will have to take care of that first, so don’t put it off any longer!

Think of this example I found at Fortune.com:

“Employee A starts putting away $100 a month when she’s 22. Her money grows at 8 percent a year, and after ten years she stops contributing – and lets her stake grow. Employee B waits until he’s 32 to set aside $100 a month, also growing at 8 percent a year, and he keeps it up until he hits 64. When they both retire at 64, she will have $234,600, and he’ll have only $177,400.”

2. Identify all of your recurring expenses:  Having a list of all your weekly, monthly, and annual bills gives you an idea of where your money is going.  Once you can visualize your expenses, finding areas to “trim the fat” becomes an easier process.

Categorizing may also help in this process, and I recommend it to help stay organized.  Just make sure you get everything – monthly rent, water bill, electric bill, phone bill, internet, cable, credit cards, personal loans, gym membership, private school tuition, etc….

3. Cut back on all of your bills:  This goes hand and hand with the previous step. Don’t start telling yourself there’s no place to cut costs.  I’m the Michael Jordan of saving money, and I still find places where I can save on a regular basis.  For example, you could switch to a cheaper phone plan, start packing your own lunches, and/or move to a cheaper apartment.

In some instances, you should slash expenses from your budget entirely. For example, if you are deeply in debt, you don’t have time to be watching cable television.  Also, things like magazine subscriptions and gym memberships should be first to go, since you can exercise for free and use the library

Remember, every dollar counts!  Just cutting your phone bill down $10/mth will give you an extra $120/year from which you can start accruing interest.  The possibilities here are truly endless!

4. Make a budget:  I will be the first to admit that I don’t have a budget. (However, I’m a pro, so don’t try this at home!) After you have slashed your recurring expenses, adjust your budget accordingly and stick to it.  Don’t forget to include food, clothing, rent, entertainment, etc…

Giving yourself a tight budget for everything will force you to shop around and become inventive.  This, in turn, will cause you to research your expenditures, which will ultimately result in the discovery of cheaper sources and/or alternatives.

5. Start an emergency fund:  Before beginning to conquer your debt, establishing an emergency fund is critical. Most experts say that any emergency fund needs to contain enough cash to cover 6 months of your living expenses.  However, I believe that if you have borrowed extensively, you should stop contributing to it once it reaches about $1000-$2000 and then start paying down your debt.

No matter how much you have in your emergency fund, remember it is for emergencies only!  The idea is that you will go to it instead of your credit cards when disaster hits.

6. Attack your debt aggressively:  Debt is a destroyer of wealth and must be dealt with as soon as you have established an emergency fund. It makes no sense to put saving into an account earning 5% when you have thousands in credit card debt financed at 18.9%.

My recommendation is to make a list of all your outstanding debts including the name of the creditor, amount owed, and interest rate.  Once you have your list, pick one debt and throw everything you have at it.

There are 2 schools of thought as to which outstanding debt one should target first. One school says pick the highest interest rate.  The other, however, believes that small victories are crucial in the beginning, and thus recommends choosing the smallest amount instead.

To understand exactly how these differing philosophies work, consider the situation in this example:

Bob Smith’s outstanding debt:

Student Loans   $50,000   4%

Car Loan   $3,400   8%

Personal Loan   $700   5%

Credit Card 1   $9,800   12%

Credit Card 2   $11,100   21%

Credit Card 3   $2,000   18%

Credit Card 4   $6,000   16%

Total   $83,000

 As one can easily see, our friend Bob here is in a lot of trouble. However, the two above-mentioned schools of thought would approach his situation entirely differently. Both would agree that the Student Loans would be handled last, given high balance and relatively low interest rate. The rest, however, is up for argument.

The 1st group always argues attacking the highest interest rate first. Thus, someone following this line of reasoning would go after Credit Card 2 first, followed by Credit Card 3, then Credit Card 4, and so on. On paper, this is the most rational approach, since in the end, you save the most money.

Group 2, however, would likely first target the Personal Loan, then move on to Credit Card 3, and then finally start on the highest interest card, Credit Card 2.

This strategy might seem random, but there is actually a reasonable theory behind it. You see, small victories keep morale and motivation up, which in turn increases the likelihood of success. Since both the Personal Loan and Credit Card 2 are of relatively small amounts, they can be paid off quickly thus reinforcing to Bob that he can overcome this problem. I for one would probably actually choose this approach, if I were in Bob’s situation.

One thing to remember is that no matter which route you take, you have to keep making payments on the other debts besides the one you are attacking. Thus, you would pay the minimum payments on all but the one you have targeted for immediate termination.

7. Pay yourself first: Every time you are paid, you should immediately put a certain percentage of your earnings into an account reserved for long-term saving. Try to aim for a minimum of between 10%-20% of your gross pay. Treat it as just another monthly bill that must be paid and include it in your budget. After reducing all your expenses, you’ll likely never miss it, and soon transferring the cash will become second nature.

8. Live below your means: You have probably heard the phrase, “live within your means.”  Unfortunately, I think that’s bad financial advice. Sure, it’s better than living above and accumulating debt.  However, living within your means could be living paycheck to paycheck, since that sort of lifestyle is within your means.  Thus, the only way to build wealth is through saving and investing which requires you to live more modestly than your full potential would allow.

9. Invest in a Roth 401k or IRA:  I chose Roth for a reason.  That being, our government is spending money as fast as they can print it and racking up enormous amounts debt that will eventually have to be paid off.  All of this spending is a recipe for increased taxation in the future.  Thus, pay your retirement taxes now while the rates are lower.

However, don’t worry about switching to a Roth if you are close to retirement.  I don’t foresee any rapid increase that will affect the baby boomers, and this advice is strictly for us younger folks.

Final thoughts

In the end, I really hope this post inspires you think about your own financial situation.  Remember, getting out of debt and building wealth can both be long processes, so patience is key. 

No matter how grim the situation looks, there’s always a way to pull yourself out of it.  If you don’t know where to start, just look at rule number 1.  Taking the first plunge is always the hardest part of any life action.  Fortunately, I know you have it in you.  Now, take a deep breath, and just do it!