How Saving Money Can Cost You

Credit: iosphere at FreeDigitalPhotos.net

I bet you thought I’d lost my marbles when you read this post’s title, but the title is as I intended. Saving money is wonderful, and I often preach the value of saving until I am blue in the face, but not always. Sometimes (hard swallow) saving money may not be so good for you. Saving money can be bad if…

• You buy something with a coupon that you would have otherwise not purchased. You didn’t save money; you got a good deal on an unnecessary expense.
• You buy something that is incrementally or insignificantly cheaper than a higher quality or longer lasting product. I’m talking canned soup, car batteries, air filters, toilet paper, Oreo’s, and other products like these.
• You already have an adequate rainy day fund yet you keep adding to your cash account that is earning you little interest while you have credit card debt, student loans, car loans, and home loans that are costing you lots of interest.
• You already have an adequate rainy day fund, and you are not contributing to your employer’s 401(k) or retirement plan (or you are not contributing enough to get your employer’s match if they offer one).
• You already have an adequate rainy day fund, and you are not investing anything in the stock market. Whether through annual IRA contributions or deposits to a taxable brokerage account, you need to be investing sooner rather than later so you will have a longer time frame to reap the rewards of long-term growth.
• You already have an adequate rainy day fund, but you do not have or adequately have life, disability, property and casualty, and/or excess liability insurance. Having no premiums or low premiums is nice until you need your insurance!

 

Finally, there are two currencies in life: money and time. Saving money is really important, but so is utilizing time. I once had a meeting with an elderly client whose health was beginning to fail, and he asked me what he was supposed to do now that he had all this money and no time to enjoy it. His degree of saving and holding onto his money was self-imposed, so I didn’t feel guilty, but I did feel sad for him. I’ll probably never recommend that you risk your financial security to make a memory, but it is important to be careful how many times you say, “No” or “Next time.”

 

Anything in enough excess can be bad for you. This includes fanaticism for a sports team, chocolate, and saving money. Keep saving, but not too much.

 

-Tom

The Top Ten Things I Learned from Buying a House

Credit: smarnad at FreeDigitalPhotos.net

Has it really been three weeks since my last post? What can I say? Time flies when you’re buying a house! Well now that you know what I’ve been up to, I’m back, and I’d like to share some tips with you based on what I learned from my recent experience.

1. Try to live a “normal” financial life 2-3 months before you start the lending process. With all of the issues, regulations, and legislation in the mortgage industry, getting a loan is like birthing a porcupine! If grandma wrote you a "big" check for Christmas, you opened a new credit card, or you made all of your charitable donations in one month, you may have some explaining to do. Save yourself the forms and the back and forth, and try to minimize irregular deposits/withdrawals/credit inquiries a few months before you start looking at houses.
2. Narrow the field. If you hop on one of the real estate search engines and check a few boxes narrowing down the number of bedrooms and set a not-so-narrow price range, I wish you well. There may be a shortage of houses in some areas, but believe me when I say there will not be a shortage of search results! Figure out your target school system, target zip code, price range, and must-have property features (basically check as many boxes as you can), and go at it. Fewer results are less overwhelming.
3. Decide on a price limit and don’t budge (at least upward). I kid you not, when you’re looking at houses and you see a nice and shiny new one that is $15,000 more than you are willing to spend, the thought “What’s another $15,000?” may creep into your mind. Dump ice water on your head, and move on. You set a price limit for a reason, and well, see number four.
4. Buy less house than you think you can. My checkbook is smoking, literally smoking. I’ve written checks to inspectors, appraisers, surveyors, plumbers, electricians, locksmiths, landscapers, utility companies, and my insurance company. It’s ridiculous! Any homeowner will tell you that homes cost more than their sticker price, so if you are having indigestion with the sticker price, step away while you still can!
5. A picture may be worth a thousand words, but a visit is worth more. When we first started looking, one of my favorite houses online failed to mention it had a giant, six-foot-tall manhole cover in the center of its backyard. Another house we looked at failed to mention it had a self-made bomb shelter in the basement. Neither of those elements were pictured online, but this tip also cuts both ways. Two of the four houses that were finalists for my wife and I were in the bottom half of our "pre-visit" rankings based on pictures alone. In one case, a do-it-yourself photographer did not do justice to the property. The moral of the story: don’t fall in love with or completely dismiss a house solely based on the pictures online.
6. Move rugs and pictures. Holy faded hardwood floors and nasty wall scratches, Batman! Hey, let he who hasn’t tried to hide an unfortunate wall scratch cast the first stone, but we saw some real cover-ups in our home visits. My father-in-law even tells a story where they moved a couch in a house they were looking at, and they found a gaping hole looking down to the floor below!
7. Talk to neighbors. One of the things our realtor really pushed us to do was to talk to neighbors. We had a few awkward conversations, but we also found some “goldmines.” Look for the nosey neighbors, the “Chatty Cathy’s,” and the dog walkers. They observe all, and they are more than happy to tell all. Take everything with a grain of salt, but it turned out to be valuable intel (or at least amusing gossip) to us on several occasions.
8. Discuss until you reach a stalemate or a decision. I love my wife dearly, but would you believe me if I told you we didn’t always like/dislike the same houses? There were some serious discussions through this life-altering and financially impactful process, but we were saved by the fact that we agreed before we looked at the first house that we would not buy a house unless we both genuinely liked it independently. If you are looking at real estate with someone else, there are going to be differences of opinion, but with a decision this big, you can’t just settle (neither of you). We joked with our friends that we had several potential houses that ended with “amicable irreconcilable differences.” Remember, in time, you will find a house that both of you like, and that sure beats one of you being secretly unhappy about your house for the next three decades!
9. Be ready to take on a second job before you pull the trigger. There were days at work that I literally worked on our home purchase for a couple of hours. Don’t worry, I still took care of all of my clients, but it did mean I was at work for longer periods of time than normal to make up for my “inefficient” labor. Dealing with needy lenders is unbelievable, coordinating appointments with all parties involved is surprisingly challenging, and responding to the seller’s pushy real estate agent in a timely fashion is an extra-special, little joy. After you’ve made an offer and it’s been accepted, the due diligence period is not pleasant, but it's crucial that you can make the time to dot all of the i's and cross all of the t's. Be warned and learn to like coffee!
10. Realize an inspector is a generalist. Our inspector did a pretty good job in my eyes, but he was not an electrician, a plumber, an architect, and a forester. As most homeowner’s do, we’ve discovered a few itches that need scratching since we shook hands with the sellers, and, unfortunately, that’s the joy of being a homeowner. This is another reason why you always need to have a rainy day fund – even immediately after you buy a house.

 

Those of you who have recently purchased a home can probably relate to some of what I just shared, but for those of you who are currently searching for a home or one day plan on buying a home, it is my hope that you will benefit from the top ten things I learned from going through the process. If you know someone who is looking at real estate, please pass this on to them because I wish I had known then what I know now.

 

-Tom

Compounding – The Good, The Bad, and The Ugly

Credit: jscreationzs at FreeDigitalPhotos.net

• If you were to invest $5,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $332,000.
• If you were to invest $5,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $395,000. 
• If you were to invest $6,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $399,000. 
• If you were to invest $6,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $474,000. 

That’s the “miracle” of compounding. Sure, investment returns matter a lot, but as you can see from the examples above, how much you save can matter even more! The good part about compounding savings and investment returns is that slow and steady really can win the asset accumulation race in a big way. You might not think you could ever save up $474,000, but do you think you could save $6,000 this year?

 

Recently my wife and I have been looking at houses, and nothing gives me more indigestion than looking at how much a house costs. I’m not talking about the sticker price; I’m talking about how much a house costs over the life of a mortgage. For those of you who have bought a house, this is usually the number that shows up in the top, right-hand corner of one of your loan documents indicating the total amount expected to be paid over the life of the loan. Once interest is baked in on a thirty-year loan, it’s horrifying to see the difference between the initial sales price and what you will actually end up paying. Interest payments alone could be in the hundreds of thousands of dollars! The bad part about compounding interest on a home loan, car loan, student loan, and certainly credit cards is that you keep trying to pay off principal, but you keep getting charged interest. It’s like you have a hole in your bucket. I’ve tried Pepcid, Pepto, and Tums, and the only thing that seems to work is paying off more debt at a faster pace.

 

The ugly part of compounding has to do with the relationship between money and purchasing power. If you have $100,000 in cash and you bury it in the backyard, when you dig it back up, what do you have? That’s right, $100,000. The problem is that while your money was safely hiding underground, there’s a pretty good chance that the cost of goods and services went up (inflation). Think groceries, health care, and education expenses. You might still have the same amount of money, but you are actually poorer than you were because you can no longer buy as many goods and services as you used to since they are now at a higher price. Said another way, your purchasing power has gone down. I don’t see a lot of people burying money in their backyards, but I do see people hold on to exorbitant amounts of cash or an alarming amount of low-interest CDs and bonds. I don’t ever want to take away someone’s “cash blanket,” and I firmly believe that bonds have a place in most people’s investment portfolios to help provide for short-term liquidity needs, reduce overall volatility, and act as an income-producing alternative to stocks. However, just like chocolate cake, too much can be a bad thing. If you have too much invested in cash, CDs, or bonds, your minimal investment returns can lag the rate of inflation, and, compounded over time, you can lose purchasing power even if your assets are slightly growing or staying about the same.

 

That’s the good, the bad, and the ugly truths about compounding.

 

-Tom

 

What If It’s Not Working?

Credit: jesadaphorn at FreeDigitalPhotos.net

Money comes, money goes. You get paid. Wahoo! Then the cable bill comes... Then the phone bill... Then the water bill, power bill, car payment, and house payment all come on one, lovely day. @#$%! This is the month when homeowner’s insurance premiums come in? Did you forget about that? (I know I did!) Wow. There’s just not that much more left than before you and I got paid! And we’re supposed to go to that new, pricey restaurant this weekend with our friends… Do you ever feel like this? I think most people do.

So what should you do when it’s not working? You’re certainly working hard, and you’re reading all of those helpful financial blogs every time your friend pumps one out (hopefully), but your financial situation is just not improving that much. What should you do? In three words:

Try something different.

If you’re having trouble saving money, open a second cash account and direct deposit a portion from each pay check into it. Pretend it’s another one of those deductions on your check no one really understands, and I bet your cash will finally build!

If you’re having trouble paying down your credit card debt or you keep “overusing” your debit card, play rock, paper, scissors with your plastic cards and go with scissors! Cut them up into a lot of pieces (to help reduce the chance of identity theft), and try using cash. When you see how many pictures of Andrew Jackson or Benjamin Franklin something takes, it may feel different and help your self-restraint.

If you’re having trouble actually increasing your contributions to your retirement plan at work, think Nike - just do it! As long as your increased contribution isn’t horribly unreasonable, you’ll probably naturally figure out how to make your reduced income work once you have less income actually coming in.

The one I’ve actually seen a lot of lately is someone trying to do too many good things at once. I admire people who do this, but let’s be realistic; you can’t boost cash, pay down debt, save for a new car, save for a new house, save for your kid’s college, save for your kid’s wedding, and save for that long overdue dream vacation all at the same time. I mean you could, but unless you’re making really big money, that “shotgun approach” isn’t going to work. Based on my experience, most people taking the “shotgun approach” end up feeling like they aren’t making any progress, get frustrated, and then return to spending what they make. Instead, I’d suggest that you go with a “surgical strike approach,” and go after one or only a few items at a time. Boost cash, then pay down debt while keeping your cash up. Save for a car, buy a car, and then save for the new house. This way you will feel like you are making financial progress because you are accomplishing something that is tangible and observable. Things will get checked off your list, and you may find that your rate of financial progress seems to pick up momentum.

If what you are trying to do financially isn’t working, don’t feel bad. When talking about his many attempts to invent the lightbulb, Thomas Edison said that he had not failed, he’d just found 10,000 ways that didn’t work! Edison also said, “Our greatest weakness lies in giving up. The most certain way to succeed is always just to try one more time.”

If you don’t want to listen to this Thomas, that’s fine, but please listen to Thomas Edison. Try one more time!

-Tom

Scams Not to Fall For

Credit: Stuart Miles

A couple of weeks ago I got a call from a blocked phone number. I was curious (despite knowing what curiosity does to felines), so I decided to answer. There were lots of voices in the background and even a few phones ringing, but my caller gruffly asked if he had reached my residence. When I confirmed he had, things got real.

Muffled Voice: “This is the United States Treasury Department, and we are calling to notify you that you have several years of back taxes coming due.”
Me: “Really? I’m surprised to hear that. What tax years are in question?”
Muffled Voice: “You have several years of back taxes coming due, and you need to make a payment or face a lien on your property. You can pay now by credit card or wire transfer.”
Me: “That’s not going to happen. To which IRS Center should I make my payment (yep, that was a CPA joke)?”
[Click]


That call was a pathetic fraud, but I can see how it could scare someone who did not have their wits about them into divulging personal information and maybe even giving out a credit card number. Luckily, I didn’t fall for that farce (that is evidently still going on), but too many people have fallen victim to many similar scams. Today, I thought I’d give you a heads up on some of the latest scams that are out there.

• Scam #1: Congratulations! You’ve won a sweepstakes or random drawing, but there’s just one thing, you’re pretty sure you didn’t enter. Once they ask you for banking information so they can withhold the proper taxes and send you your winnings, go ahead and wish them an unpleasant day.
• Scam #2: You’ve won a free cruise or a vacation? I doubt it. Once they ask you for personal information so you can claim your prize and await further instructions, go ahead and hang up. Cruise on to whatever else you had planned for the day.
• Scam #3: You get a call from a “friend” telling you one of your family members is in jail. This is evidently a favorite to use on grandmas whose grandsons are in jail and are “too embarrassed” to call their parents. Please don’t wire any bail money and promise to keep it a secret…
• Scam #4: If you frequently sell things online personally or as part of your business, and someone sends you a check that is larger than your agreed upon price and they ask you to just send them the difference back, I hope you hear the alarm bells. They’re probably trying to get the difference from you in real money and leave you with a not-so-real check!
• Scam #5: Would you like to buy this widget at a discounted price that’s only available for a limited period of time? I hope you don’t, but if you do, I hope you wouldn’t be so easily pressured into quickly handing over your personal and financial information.
• Scam #6: Would you like to make a donation to the United Thieves of the Southeastern United States to benefit those who suffer from Antarctican Measleitis (asked in a super sweet voice)? With apologies to those who suffer from Antarctican Measleitis, no! Stick to the charities and causes you know. Your support is very much appreciated.
• Scam #7: You get an email from one of your friends (whose email address has been hacked) telling you they randomly took an international trip, are in trouble, and need money. First, how many people take random international trips? Second, if your friend took a random trip to Mozambique without telling you they were going, aren’t you a little peeved? Why would you send them money? Third, call your friend, and see if they are okay. I’d be willing to bet they are, and whatever you do, don’t click the link!
• Scam #8: You’re staying in a nice hotel, it’s kind of late in the evening, and you get a call from “the front desk” letting you know there was a glitch with the computer system and they lost your credit card information on file. They either need you to come down with your card or go over your information with them over the phone. You’re tired and tying your shoes again seems like a more significant inconvenience than it probably should, so you might be tempted to give your name as it is written on the card, your credit card number, expiration date, and the 3- or 4-digit security code. Don’t do it! It’s probably not the front desk of the hotel. Much more likely, it’s the guy two people behind you when you checked in who heard your last name and room number when the clerk wished you a nice stay!

I believe there really are a lot of good people out there in today’s world, but unfortunately, there are some real stinkers, too. There are some very sick and evil people who prey on the naïve, the lonely, and the elderly. Sadly, they are somewhat successful at it. Please be smart. Don’t give anyone anything unless you’re sure they are who they claim. Ask them questions they should be able to answer. Call them back on phone numbers you look up and email them back at email addresses you search for to test them.

Don’t fall for these scams. Don’t let your friends fall for them either.

-Tom