After my friend Brian's post about trimming expenses, I've been thinking about my own complete lack of doing so. It's a bit of a problem, potentially.
I've been eating out a lot more than usual, lately. I've been driving more than usual, too, partially as a result of eating out more. I'll need to make repairs to my car pretty soon, and I'm not sure how much those will be yet. Speaking of repairs, I also repaired my file server, to an extent. I bought a couple 2TB hard drives for $99.99 each. I was able to save most of my files, and all of my important files, so that was good. Still, $200.
I'm also thinking of buying things that I really don't need at all. For example, I want to buy another digital camera. Why? Because I keep one in the car to take pictures of personalized license plates. Why does that mean I need two? Because I never have one with me when the cats are doing cute things, and taking videos of cute cats is the quickest way to youtube stardom! I fully recognize that this is not the best investment, but I'll probably end up doing it before too long.
Then there's utilities. The hot weather of late has skyrocketed my power bill along with everyone else's. I've also tried watering my lawn to get some grass seed to grow. That didn't really work, but I'm sure my next water bill will be higher than I've ever seen it. I also bought that new grass seed, some starter fertilizer, and a small spreader at The Home Depot using gift cards. And for the little remaining grass I have combined with the small amount of new grass that came up, I'll need a new lawnmower soon. I'd like a nice quiet electric one, which apparently means $300 or so. I'd also like to avoid the battery problems people have reported, which means $200 or so instead, but having to use an extension cord. So far, I'm leaning toward this cordless 36V mower. We'll see.
Finally, I've been donating (or pledging to donate) more to charity. If that isn't a stupid use of money, I don't know what is! Seriously, though, I'm going to try eating at home more often again. When I do, it tends to be really cheap. Hopefully the fall brings more reasonableness to my power bill, and whatever lawn mower I buy is reliable and durable. You all can hope that I don't buy that extra camera so that you're not flooded with videos of my cats. And you can also thank me for keeping the economy going these past few months!
Showing posts with label spending. Show all posts
Showing posts with label spending. Show all posts
Monday, September 27, 2010
Thursday, March 27, 2008
Multiple E*TRADE accounts
A couple posts ago, I commented on my spending discipline. I just took a step to help me maintain that discipline. I opened up a separate bank account just for emergency funds.
I used to have a E*TRADE Bank Complete Savings account. It has solid features and a high yield - beating Bank of America CDs, for example. The interest rate applies to every dollar in the account - it's not tiered. Now I have two! E*TRADE is kind enough to allow people to open as many as they want, it would seem. The interesting thing is that this basically eliminates the limit of 6 withdrawals a month because you can always transfer money over to another savings account and withdraw from that.
I have never hit the withdrawal limit, so that didn't enter into my thinking when I set up the account. I was just thankful to have the option to create a separate bank account with just as high of an interest rate. I can rename it to "Do not touch" or "Emergency Funds" or whatever else will make sure I'm not tempted to spend it. I then set up an automatic transfer from my old savings account (which gets my direct deposits) to my new one. Now I'll always have enough cash on hand in case I otherwise forget to set aside cash (say, for property taxes or insurance). Thanks, E*TRADE!
I used to have a E*TRADE Bank Complete Savings account. It has solid features and a high yield - beating Bank of America CDs, for example. The interest rate applies to every dollar in the account - it's not tiered. Now I have two! E*TRADE is kind enough to allow people to open as many as they want, it would seem. The interesting thing is that this basically eliminates the limit of 6 withdrawals a month because you can always transfer money over to another savings account and withdraw from that.
I have never hit the withdrawal limit, so that didn't enter into my thinking when I set up the account. I was just thankful to have the option to create a separate bank account with just as high of an interest rate. I can rename it to "Do not touch" or "Emergency Funds" or whatever else will make sure I'm not tempted to spend it. I then set up an automatic transfer from my old savings account (which gets my direct deposits) to my new one. Now I'll always have enough cash on hand in case I otherwise forget to set aside cash (say, for property taxes or insurance). Thanks, E*TRADE!
Thursday, March 6, 2008
Managing debt
I grew up thinking that debt was a bad thing. Why buy a car when you can't afford it outright? I understood that houses required mortgages, but why put things on credit cards when you can pay cash? Managed properly, debt, even in credit card form, can be a good thing.
Spending
A lot of proper debt management depends on a realistic assessment of your spending habits. I, for example, don't tend to buy things. Or, I didn't until I bought a house and needed to put things in it. I have no expensive hobbies (compared to my brother who buys guitars and related equipment quite often) and I keep my monthly spending constant within a couple hundred dollars, in general.
In short, my spending habits are well defined and I track them informally. I also have a pretty stable job. IBM is a $160B company and people seem to like what I do there. Thus, I have a demonstrated discipline when it comes to spending and a pretty solid income. The risk of me not being able to pay my monthly bills is fairly low, so debt shouldn't be an undue emotional burden.
Interest Rates
The rest of debt management is interest rates. Most debt is pretty simple, actually. The interest rate is advertised directly. Some interest is tax deductible, though, in which case you need to multiply the advertised interest rate by (1 - your tax rate). For example, if you're in the 25% tax bracket and have a 6% mortgage, you're effectively only paying 4.5%.
If you can beat the interest rate determined above through investing, you can actually make money by going into debt. Even with the recent downturn, The S&P500 index has seen annualized growth of 9.516% over the last 5 years. That pesky tax rate works against us a bit, here, though. Interest income and short term capital gains are taxed as regular income, while long term capital gains are taxed at a 15% flat rate. For a worst case scenario, we can assume everything will be taxed as regular income. We need to now divide our effective interest rate from above by (1 - your tax rate) to get an rate of return goal. That 4.5% becomes 6% again. An 18% credit card interest rate becomes a 24% goal. Whatever we invest in, we need to beat this final rate in order for the debt to be profitable.
Over the long term, an 8% annualized return is fairly achievable. If you can invest money borrowed at 6% (effective) or lower, it is likely that you will be able to make money on money you don't actually have. This whole argument only applies if you have the money available to invest, though. If you borrow money to buy things, then that money isn't working for you.
Credit Cards
When there is something you need to buy, credit card debt can still be a good thing (even a card with an 18% interest rate!). The key is to not keep an interest-bearing balance. Pay the credit card off completely each month and you've basically borrowed money for 30-50 days interest free. You can keep that money in a high interest savings account and earn an extra few dollars by using a credit card instead of cash. Even better, you can get a credit card with additional cash back like the Chase Freedom card and/or Citi Dividends card.
Keep in mind that interest-free financing isn't a free pass to go on a spending spree. You still have to pay the purchase price. However, a store's 0% financing credit line can actually be better than cash back credit cards. I'll leave it as an exercise for the reader to determine a formula based on bank account savings rate, b, financing period, t, and cash back bonus, c, that calculates the break-even surface.
Spending
A lot of proper debt management depends on a realistic assessment of your spending habits. I, for example, don't tend to buy things. Or, I didn't until I bought a house and needed to put things in it. I have no expensive hobbies (compared to my brother who buys guitars and related equipment quite often) and I keep my monthly spending constant within a couple hundred dollars, in general.
In short, my spending habits are well defined and I track them informally. I also have a pretty stable job. IBM is a $160B company and people seem to like what I do there. Thus, I have a demonstrated discipline when it comes to spending and a pretty solid income. The risk of me not being able to pay my monthly bills is fairly low, so debt shouldn't be an undue emotional burden.
Interest Rates
The rest of debt management is interest rates. Most debt is pretty simple, actually. The interest rate is advertised directly. Some interest is tax deductible, though, in which case you need to multiply the advertised interest rate by (1 - your tax rate). For example, if you're in the 25% tax bracket and have a 6% mortgage, you're effectively only paying 4.5%.
If you can beat the interest rate determined above through investing, you can actually make money by going into debt. Even with the recent downturn, The S&P500 index has seen annualized growth of 9.516% over the last 5 years. That pesky tax rate works against us a bit, here, though. Interest income and short term capital gains are taxed as regular income, while long term capital gains are taxed at a 15% flat rate. For a worst case scenario, we can assume everything will be taxed as regular income. We need to now divide our effective interest rate from above by (1 - your tax rate) to get an rate of return goal. That 4.5% becomes 6% again. An 18% credit card interest rate becomes a 24% goal. Whatever we invest in, we need to beat this final rate in order for the debt to be profitable.
Over the long term, an 8% annualized return is fairly achievable. If you can invest money borrowed at 6% (effective) or lower, it is likely that you will be able to make money on money you don't actually have. This whole argument only applies if you have the money available to invest, though. If you borrow money to buy things, then that money isn't working for you.
Credit Cards
When there is something you need to buy, credit card debt can still be a good thing (even a card with an 18% interest rate!). The key is to not keep an interest-bearing balance. Pay the credit card off completely each month and you've basically borrowed money for 30-50 days interest free. You can keep that money in a high interest savings account and earn an extra few dollars by using a credit card instead of cash. Even better, you can get a credit card with additional cash back like the Chase Freedom card and/or Citi Dividends card.
Keep in mind that interest-free financing isn't a free pass to go on a spending spree. You still have to pay the purchase price. However, a store's 0% financing credit line can actually be better than cash back credit cards. I'll leave it as an exercise for the reader to determine a formula based on bank account savings rate, b, financing period, t, and cash back bonus, c, that calculates the break-even surface.
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