Money for the Rest of Us

This week we took the dog to the vet because we thought she was beginning to get arthritis (she’s 12) because of some trouble she’s had walking. To make a long story a little shorter—the vet found some swelling in a lymph node and wanted to run blood tests because leukemia can be the cause of the swelling and the weakness in her legs.

Well, they ran the blood work and it turns out that she doesn’t have leukemia, and the swelling was just a benign fatty tissue. But, they also did x-rays to find out why she’s been limping. They didn’t find anything there either.

My adorable dog got a clean bill of health after much worrying; but all of this cost us over $550. Thank goodness for that emergency fund!

If you don’t have an emergency fund, this post about thinking about emergency funds as insurance might help convince you (and there are some good links at the bottom.)

Update: The links below are no longer valid.  The page has been moved to Slice.ca (I fixed the first link) but the rest of the resources can’t be found.  I will fix the links as soon as I am able.  If you know where the pages have been redirected to, please let me know.
Gotta love our neighbors to the North. Who else would come up with such a great show? I was in Toronto about a month ago and became a little obsessed with ‘Til Debt Do Us Part. I think we may have watched 3 or 4 episodes in the two days we were there… The show is a reality TV show that takes couples deeply in debt and helps them create a budget. It’s that simple. Yet it was highly entertaining. Hopefully a similar show will start in the US one of these days.

Besides just being an entertaining show, they also have some great articles on the network’s website including

Top 10 Ways to Avoid Arguing About Money

File or Fling? (About what records to trash and when to trash them.)

12 Steps to Getting Organized on a Budget (the Initial set-up presented here is crucial)

and

Ways to Live it Up on A Budget

My favorite tip from the final article is about how to see shows (concerts, sporting events, film festivals) for free– consider volunteering! I may look into this for future events here in DC.

I just got an email announcing a rate increase for the ING Electric Orange “checking” account to 4%. (There are actually no checks with this account. Just a debit/ATM/Mastercard.) The checking account rate is now up to 4% for accounts with less than $50,000. This is nearly the same rate as their savings account! Wow. You still have to have an ING Orange Savings account to be eligible to get the Electric Orange Checking. But who knows, they may soon change that. (Note: if you’re interested in getting a $25 referral bonus for the Orange Savings Account send me an email and I’ll send you a link.)
Here’s the text of the email:

Great news! The rate on Electric Orange balances up to $50,000 has increased to 4.00% Annual Percentage Yield.

MAKE THE MOST OF YOUR ELECTRIC ORANGE

Here are some great ways to use your account:

• Earn more by setting up Direct Deposit - access the User Guide on the Account Maintenance page for easy instructions
• Access your cash worldwide and at over 32,000 free Allpoint™ ATMs in all 50 states. Use the Free ATM locator to find an ATM near you.
• Go to the ‘Electric Orange’ tab for convenient and innovative ways to pay bills or send money to anyone for free
• Use your MasterCard® Debit Card to make secure purchases anywhere MasterCard is accepted
• Earn 5.05% APY on balances between $50,000 and $100,000 and 5.30% APY on balances over $100,000

(Annual percentage yields apply to your entire balance. Rates are variable and effective as of 2/17/06.)

When it comes to saving money, I find that it’s the little things that make all the difference. The first rule of advice for savings has always been “pay yourself first.” I do this. Chunks of money get taken out of my bank account the day after payday for retirement, other investments, and shorter term (cash) savings. But when should I increase the amount of each of these recurring deposits?
I always increase it after a raise or a cost-of-living adjustment. But that’s only happened twice since I’m so young. So how else can I find money to increase these recurring deposits?

This week I just found another good time to increase the amount: when fixed costs of living go down; namely insurance.

My car insurance premium went down for this 6-month cycle by just about 10%. This is only $10 a month, and so I almost didn’t notice it when the automatic payment took it from my account. But $10 a month is $10. I immediately went into the automatic deduction setup for my online savings account and increased the monthly deduction by $10.

Take a look at your fixed monthly expenses and see if they have decreased at all lately. If they have then increase your automatic savings deductions. $10 at a 9% interest rate over 40 years (with taxes taken out) will add $34,218 to your nest-egg. Not bad for savings from an insurance rate change.

There is been much talk in the blogsphere lately about HSBC’s “new money” offer. The deal is that any new money you put in an existing account, or all money you put in a new account will earn 6.00% interest now through April 30, 2007. Many people seem to be debating whether or not it is worth it to transfer their money over. The general consensus is that if you already have your money in a high interest bank account (like at ING or Emigrant) then it’s not worth it to transfer the money over. I would probably agree with this. Unless you are considering transferring accounts anyway, then 1% for three months isn’t going to make much difference. But that’s not the point.

The HSBC 6.00% offer is a great deal and anyone interested in personal finance should be taking advantage of the offer. How?

Use the HSBC offer to educate people. Tell your family, friends, co-workers, anyone. Even if you have previously told these people about high-interest bank accounts, tell them again. A 6.00% interest rate is enough to get even the laziest people off of their feet and to actually do something. So, while the HSBC offer may not be worth it to you, it is worth it to many other people. Use your power of persuasion to convince others to put away their money in a high-interest account.

I personally bank with HSBC for two reasons: 1) They give you an ATM card. If I ever need to dip into my savings for emergency cash quickly I can. 2) There is a branch office near me. This means I can deposit money and not have to wait 2-3 days for an online transfer. Also, if needed, I can get cash from their ATM without fees. 3) I travel internationally a lot. HSBC has branch offices in a number of different countries and I can take cash out of their international ATMs without a conversion fee.

As a final note: If you are one of those people who keeps thinking about or talking about getting a high-interest bank account and has yet to do it—NOW IS THE TIME. Spend the 20 minutes applying for an account. Don’t pass up on a 6% rate.

How does what we put in our mouth reflect our spending habits? As the old saying goes “you are what you eat.” Eating frugally reflects frugal spending habits. Eating lavishly reflects extravagant spending habits.

At a former workplace, a co-worker of mine would only go out to get her lunch before 11:15am or after 1:30pm. Why? Because the lunch lines were too long right around the lunch hour. These long lunch lines were for your average lunch restaurants: Subway, Potbelly, Cosi etc. Lunching at any of these places will cost you anywhere from $5-$10 per day. Think of all the money these people are spending for what they could essentially be making at home for half the price. I admit, I am one of these people a few times a month. And when I go out for lunch in DC it usually ends up costing me about $7.50.

Compare that with the (roughly estimated) cost of my lunch today:

• Peanut Butter and Jelly Sandwich on two pieces of wheat bread: about $0.60
• Banana: $0.30
• Orange: $0.50
• Yogurt: $0.80
• Water: Free

Total Lunch Cost: $2.20

That’s a difference of $5.30/day. Not much you say? Spend a few minutes playing around with the lunch calculator. I ran it for the cost of my meal today against what I would pay for a usual fast-food lunch out in DC. At an 8% interest rate over four years I would save nearly $6,000 by bringing my lunch rather than dining out. In twenty years I would save over $60,000 by taking my lunch to work. In forty years (approximately retirement): $344,000!

Don’t get me wrong, I’m not saying that you should never go out to lunch. But do it minimally and gradually. If you currently eat out everyday, try cutting it back to 4 days next week, 3 days the week after that, 2 days the week after that, and then just eat out 1 a week. Plug 16 days/month into the calculator and see how much you could save by eating out only 1 day a week.

So, eat like a rich person: take your lunch to work.

Two days ago Your Credit Advisor posted a list of 25 Personal Finance Myths. This was a great list and I highly recommend that you take a look at it. My favorites include:

5. Money makes you happy. Money makes you unhappy.
7. Becoming rich is hard work.
14. Saving is hard, and I don’t make enough.

But, what I found more interesting about this post was the following statement:

“Someone once said that if you were to make a list of your 10 closest friends and acquaintances and order your earnings and theirs from smallest to greatest, you’d probably find yourself somewhere near the middle. All that this means is that we are subtly influenced by our friends, even when we’re not aware of it, especially in matters of money. Being somewhere in the middle is probably more comfortable for the average person.”

I don’t know if My Credit Advisor meant “earnings” or net worth. I did this exercise and found myself to be roughly in the middle in terms of earnings, but much closer to the top in terms of perceived net worth. (I know for a fact that the majority of my friends have little or no savings and no investments.)

I completely agree with the statement that “being somewhere in the middle is probably more comfortable.” However, I also think there is more to this. I think that most of us are in the middle because we really like appearing average. We like not standing out. Personally, very few of my friends have any idea of how much I have saved or invested. I don’t want to share this information with them because I don’t want to appear exceptional. I like being in the middle.

But what would happen if I told them how much money I have saved? I don’t know. I think I don’t tell them because I fear that they would reject me because I’m no longer “like them.” A main sociological theory is that we are friends with people who are similar to us. By telling my friends that I am essentially “rich” (in their eyes) I would fundamentally alter our friendships because one of their perceived notion that I too live paycheck to paycheck with no emergency fund. They would no longer understand that I also struggle to make ends meet, but that’s only because I don’t see the money I save.

But what would be the positives of telling my friends that I save and invest? For starters, they would probably see that it’s entirely possible to live on a small salary and still invest. I could teach them about saving and investing and spending more wisely. I know this would help them, but I still hesitate to tell them. Why is our culture so afraid of money that we don’t even talk about it with our closest friends?

I pay for renter’s insurance so that if some unexpected tragedy were to happen and all of my belongings were ruined/destroyed/stolen my life would not be turned completely on end. Every month I pay for car insurance so that if some unfortunate accident were to occur, my life and the life/lives of others involved wouldn’t be financially ruined. Almost everyone pays a good deal of money each month to keep themselves safe from an unexpected event- a fire, flood, earthquake, or car accident. So, why don’t we pay money each month for “unemployment insurance.” Well, we do. In our taxes. But, would government unemployment benefits actually allow you to continue your lifestyle as it currently is? I am almost certain that the answer is no. And the government won’t come to your aid in other crises.

So how to you get “unemployment/emergency insurance”? You create it yourself. And you certainly should. It will be one of the best investments you will ever make. If you don’t already have an emergency fund, start one. First, open up a high-interest savings account such as one at ING, HSBC, or Emigrant. (It really doesn’t matter which one. I chose HSBC because they have a branch office in my city so that if I actually ever needed the money I could withdraw from an ATM that day and not have to wait 3 days for on online transfer.) After you have your high-interest back account, arrange automatic withdrawals for your new “insurance.”

Finally, the most important step in starting your emergency fund is understanding that this is a monthly payment you have to make, just like any of your other bills. By thinking about your emergency fund as insurance you will soon forget that you ever had that money to spend. It is scary, but incredibly likely that someday you will have an event which will require you to dip into this fund. You could lose your job, but a more likely scenario is that your car needs a repair or you have a large medical bill or you accidentally broke your friend’s camera. By having this emergency insurance you will be able to fix your car, pay the medical bill, or buy a new camera without having to go into debt.

Some common questions about emergency funds:

1. How much should I save?

This is something you should decide for yourself. A few things to take into consider: How much is your rent/mortgage each month? What are your minimum total expenses for each month? What is the deductible on your car/house/renter’s insurance? Some recommend that you have anywhere from 3 to 12 months worth of savings available. For unmarried twenty-somethings I think savings that will cover two to three months of your expenses is enough.

2. How do I calculate that?

If you are currently living paycheck to paycheck the easiest thing to do is multiple your monthly take home pay by 2-3. For example, if after taxes you earn $2000 each month and you spend it all on things that are absolutely necessary, you should have $6,000 saved. (Chances are you don’t spend all of it on things that are absolutely necessary. Maybe 70% of your take home pay is a better number). In this example seventy-percent of your current take home pay would mean you would need an emergency fund of $2800-$4200. At the very minimum I would recommend doubling your highest deductible. If your car insurance deductible is $500 have $1000 in your emergency fund.

3. OMG, that’s a lot of money! I can’t afford that!
Yes you can. Remember, this is an insurance bill. You have to pay it. Set up automatic deductions for $89 each month. (Why $89? It doesn’t sound like that much money).

4. Where can I learn more about emergency funds?

Here are some good posts on the subject:

Building an Emergency Fund (Bankrate)

How and Why to Start an Emergency Fund (Get Rich Slowly)

Four Steps to an Emergency Fund, and Peace of Mind (The Automatic Millionaire)