Very Interesting…

Earn interest while keeping your emergency fund fluid.

As you work your way towards financial freedom, it is imperative to have liquid assets. The most liquid of all assets of course is always cash. Having stocks in a brokerage account is dandy, but the turnaround time to sell them can be days until the funds are transferred into your bank account.  This is no good if you have a situation arise which requires immediate funds.

Because life happens, having an emergency cash supply is essential.  The ideal emergency fund is to have two years worth  of living expenses stashed away. It sounds like an excessive amount, but believe me it is achievable. It just takes time to reach that level.

Two years worth of living expenses for most people is measured in tens of thousands of dollars. So for argument’s sake, let’s assume the amount we are discussing is between $25,000 and $50,000. Keeping that amount of money liquid can be a tricky matter, but you should not sacrifice the chance to earn interest on as much of your emergency fund as possible. There are ways of earning varying amounts of interest while still keeping your assets accessible.    

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The first and most important thing I recommend is always having $1000 physically on hand in your home. Keep it hidden of course, but have it! You’ll never earn interest on this smallest part of your emergency fund, but it is worth the small sacrifice to be able to reach out and touch your money if you need it in seconds.  It is better to have a $1000 in cash on hand you don’t need, than to need $1000 you don’t have.  Again, this is EMERGENCY MONEY, not fun money.  If it’s not a matter of life and death, DON’T TOUCH IT! DON’T EVEN LOOK AT IT!

Next, keep between $2000 and $5000 in your savings account. There are still some banks that will offer a minimal amount of interest with no fees. Often times credit unions will offer better interest than banks. Usually keeping $5000 in either a saving or money market account will earn you a higher interest rate for your cash. You can shop for the best interest rates offered at www.bankrate.com

Laddering CDs

Certificates of Deposit or CDs offer better interest rates but they tie up your funds until the maturity date. The longer the term, the higher the interest rate. Typically the terms run from as little as 3 months to as long as 5 years. To take advantage of the best interest rates while still keeping the cash fluid, I would recommend using a CD laddering strategy. Distribute your next $5000 to $10000  into a varying number of CDs each having different terms and end dates. You can create a ladder of CDs as long as you like with each CD being a rung. As each rung matures you can access it without penalty, or roll it over and wait for the next rung in the ladder to mature.

EX: Using $10,000, divvy it up into:  

  • 5 year CD $5000
  • 2 year CD $2000
  • 1 year CD $1000
  • 6 month CD $1000
  • 3 month $1000

With the CD ladder in this example, you will have a minimum of $1000 available to you every 3 months, and a minimum of $2000 every 6 months which you can cash in without penalty should you need it. Or let it roll over and continue to accrue interest.

Brokerage Account

Any part of your remaining cash assets beyond the above suggested $16,000 of allocated funds should be kept in a brokerage account such as MerrillEdge or TD Ameritrade to be used for the purchase of dividend stocks.  By investing in a diversified portfolio of various dividend paying stocks, you will be able to hedge your bets while maintaining a return on your investments. You’ll have to do your own homework on which stocks to buy, as past performance does not guarantee future earnings.

Experimental Investing

When you have two years worth of living expenses under your belt, you can afford to use any additional ‘mad money’ you may have for more risky financial ventures.  Some suggestions could include:

  • Collectibles / art
  • Real estate
  • Starting a business
  • Financing peer-to-peer loans through Prosper.com

 

Again, these are just suggestions and not recommendations. Ultimately you have to decide your financial future, but if you fail to plan for your future, you won’t have one.  As always I wish you happiness and success.  

Other People’s Money

Making reward cards, introductory rates and points work for you.

“A penny saved is a penny earned.” – attributed to Benjamin Franklin

I walk a lot outside during the day. It’s rare that a day goes by where I don’t find at least a penny on the ground. On average, I find about a dollar in coins a week, and I still stop to pick them up.  When I was younger, there used to be a joke circulating about Bill Gates, (who is still one of the three richest men in the world). It ran along the lines of this: “If you average out all the money Bill Gates makes in a single year, he  earns over $500 a second. If he was walking down the street and found a $100 bill lying on the ground, it would cost him money to stop and pick it up.”  The most amount of money I’ve ever found lying on the ground at one time was a loose $50 bill half-buried in the snow on Liberty Ave. That was a long time ago, and I was amazed and shocked at my good fortune, but also I felt a little bad for whomever had carelessly lost that much money.  

At a certain point, picking up discarded coins in the street becomes more trouble than it’s worth to some people, but I’m still of the mind-set that every penny saved adds up. To that end, I still use coupons and reward cards when I shop. These are great ways to save a few cents or even a few dollars each time you used them, and over the course of a year that can add up to hundreds of dollars.

The Store Loyalty Reward Card

Using a store loyalty reward card is easy enough, you just have to swipe or scan the card each time you shop. My local grocery store also sells gasoline (petro). At least 3 to 4 times a year, I accumulate enough points to earn a 100% discount on fuel. Gas in the USA isn’t as expensive as it is in other countries, but it’s still a fantastic savings in my book.  Just always make sure when collecting point to check if and when they expire, or you may lose them with noting to show.

card savings

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Reward Credit Cards

Some credit cards have a point reward system as well. These can be as simple as 1% cash back on all purchases, to a range of categories which each  have a special point rating. Reward credit cards ONLY work for people with perfect credit and who pay their entire balance in full each month.  The reason for this is twofold.

  • You usually only receive these special offers if you have good credit. The better your FICO score, the better the offers you receive from credit card companies.
  • Failing to pay the balance in full each month will cost you interest fees which will negate any savings earned by rewards.

I once read a post online where a woman was complaining about how her reward credit card was worthless because she was being charged all these fees each month for interest, exceeding her limit, and late fees. Usually the problem is not with the card, it’s user error indicative of a much greater personal problem. Never give a loaded gun to a baby, or a credit card to a fool.

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Special Rates or Introductory Offers

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Another offer reserved for those with stellar credit are cards that offer 0% interest, fees, and balance transfers. There are great during the introductory period, BUT you must exercise extreme caution with these cards. In essence, you are playing with other people’s money. The issuing bank is allowing you to ‘play with their money’ with no fees, in the hopes that you will ring up a huge balance and not be able to pay the balance in full at the end of the promotional offer. People who lack self-control fall victim to this all the time. Interest is calculated from the time of the purchase. If at the end of the promotional period, a balance is remaining, you will incur the full interest charge of the purchase, even if you have a relatively small portion remaining. For instance: Every October, I take my car in for its annual  maintenance inspection. I get all the little issues resolved, buy new tires, replace worn parts etc. Till it’s all said and done, the bill for keeping my car running another year can range from $500 to $2000. I usually pay with my Firestone Store Credit Card. It has a six months same-as-cash special promotion rate for all purchases over $299. Although the minimum monthly payment is about $20, you’ll never be able to pay the balance off in time if you only pay the minimum. The key to these cards is to divide the balance into five equal amounts, and pay that amount each month for 5 months. This allows you ONE extra month in case you need it.  In the image shown below, the six-month promotion ends April 5th. Even though I’ve paid almost the full balance except for a measly $200, if I fail to send the full balance in by the due date, I will incur $54.46 in retro-active interest fees! No thanks! I (almost) never pay interest.

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If you are able to take advantage of special offers like the ones I covered, enjoy yourself but always remember:

  • Pay your balances in full each month.
  • Pay your bill early.
  • Never skip a payment, or pay the bill late.
  • Never spend more money than you can afford to pay back.

As always, I wish you happiness and success!

A Snowball’s Chance!

Eliminating debt is just that simple!

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It never ceases to amaze me how people seem to just amass mountains of debt, and the ‘creative reasons’ they list for having done so. From the instant gratification of “gotta have it now!”, to keeping up with the Joneses,  or just the insidious swipe of the credit card to pay for our morning coffee on the way to work. Americans seem to have every excuse in the book for why they are in debt, and it’s always ‘not their fault’.  Now don’t get me wrong, emergencies do happen, and tragedies do occur, always at the worst possible time and in the most expensive manner.   Grabbing breakfast and a coffee on the way to work is NOT an emergency. A new bigger HDTV is NOT an emergency. A new outfit when you have a wardrobe bursting with unworn clothes is NOT an emergency. These are bad habits that you’ve fallen into and the credit card which has allowed you to charge up this mountain of debt was your responsibility.

NO NEW DEBT!  

When I found myself in $50,000 worth of debt in 2001, I thought I’d never crawl out of the hole I had dug myself into. It took years of hard work and discipline to become debt free, and I was ridiculed by several know-it-alls who could not comprehend why I just didn’t file for bankruptcy and make it ‘easy’ on myself. Often times, the ‘easy way’ is the wrong way. Bankruptcy is FOREVER.  And if you refuse to change your behavior, you’ll find yourself back in the same situation as before. I’ve witnessed friends making the same mistakes after filing bankruptcy. Because THEY refused to alter their behavior, their chances of ever becoming debt free are the same as a snowball’s chance in a blast furnace. The first step towards recovery is NO NEW DEBT!  You can’t spend one cent on ANYTHING that isn’t essential. Don’t even charge a stick of gum. NOTHING! If you lack the willpower to stop using your credit cards, you MUST cut them up. I remember as a boy watching an old TV show from the late 70’s called WHAT’S HAPPENING!! A character named ReRun (played by Fred Berry) gets his first credit card, and quickly gets into trouble. One credit card quickly turns to a dozen, and soon he needs to finance his credit cards with a loan. In quick order, everything he owns including the Monopoly game and even his red beret  gets repossessed.  In the penultimate scene of the episode, ReRun and friends sell EVERYTHING in the apartment except his food processor, which he fills with his credit cards to make ‘credit card coleslaw’.  

 

The Debt Snowball

The level of intelligence which created a problem is never sufficient to solve the problem, and that’s why there are walls of self-help books in bookstores. It’s so that you have the ability to consult someone wiser than yourself and find a solution to your problem.  For me, that wise counsel came from reading books by Dave Ramsey.  While in a discount remainder store, I found a thin book titled Pricele$$ marked down to $2.99. What drew me to the book was the cover depicting credit cards in a blender which reminded me of the What’s Happening!! episode.

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While reading his book Pricele$$, I first learned about his debt-destroying weapon, The Debt Snowball. It is the opposite of the more convention debt stacking, or debt avalanche payment method.   In the traditional debt stacking method, you pay the bill with the highest interest rate off first. You dump all your extra cash into this bill while maintaining the minimum payments on all other bills. Like an avalanche of money just wiping that debt off the face of the Earth. Dave Ramsey instead advocates the opposite approach, which he dubs ‘The Debt Snowball’. Picture a small snowball rolling downhill increasing in size and speed as it gains momentum.  With this method, you list all of your debts in order from smallest to largest regardless of interest rate, and their minimum monthly payment.  You then use every extra penny you have to pay off that smallest of your bills first. As soon as you wipe it out, you apply its minimum payment and add it to the minimum payment of the next bill on the list. You repeat this process until all debts are paid. This method worked for me, and it will work for anyone as long as you follow three simple rules.

  • No new debt. You can’t charge anything.
  • All ‘extra’ money from cutting non-essentials must be used for paying down the smallest debt.
  • You MUST keep making the minimum payments on all your bills.

The last one is a real no-brainer. You can’t stop paying one existing bill to finance another. I tell myself that no one could be this stupid, but just this week, a friend-of-a-friend had her car repossessed for non-payment because she needed the car money to save for a down payment on a new apartment. I can’t fathom how she convinced herself that this was a great idea.  Like I wrote last week, few (if any) of my friends take my financial advice seriously, often choosing their own disastrous schemes over wise council. Like the old saying goes, “a fool and his money are soon parted.” As always, I wish you happiness and success!