It’s Costing You $5,000 Per Month to NOT Save

Posted on March 20, 2012 Written by Leave a Comment

I have many female friends who don’t save money.  I’m not sure why, but I have some ideas.  Perhaps they’re waiting for their sugar daddy to save them.  Who knows?  I don’t mean to pick on the ladies at all…

…if anything, I mean to stress the importance of saving, not just for women, but for men too.  It just seems that more women than men don’t invest their money.

When it all boils down, there’s just you and God and nobody else.  How you live out the end of your days financially is not determined towards the end of your life.  It’s determined now, and only you are responsible for how you behave with money.

Let’s do some simple math in terms of a Roth IRA retirement account.  Currently you are permitted to contribute $5,000 annually to a Roth IRA, if you actually have one.  Why is there a limit?  Because as your Roth IRA grows, it grows tax free, so you’re limited to how much you can contribute to it.  Did I mention it grows tax free?

“Big whoopie.  $5,000 isn’t going to make me rich!”

 You’re wrong.  Let’s take a look at a simple calculation…but first, lets break that $5,000 into a monthly number of $5,000/12 = $416.66 (sounds suspiciously like the average car payment in this country.)  Now, automatically deposit $417.00 into your Roth IRA every month, understanding that it’s out of sight, out of mind, until you retire.

Once you have your Roth IRA, you can direct where the funds in that account are invested, or you can pay someone to do it for you, but that’s the second part.  Let’s go back to the hardest part…getting started.  Let’s just get focused on saving that $5,000 every year.  Once you have that going, you can think about where it goes.

Now, on to the growth of that money.  To simplify the calculation, let’s say that you get an average rate of return over the next 20 years at 10% (very realistic.)

In 20 years, your total investment will be 20 X 12 X $417.00 = $100,080.00 but your account value will be $319,295.44!!!  That’s $219,215.44 of FREE MONEY.  Here’s an interesting way of looking at this.  Let’s divide the free money by 240 (number of months in 20 years.)  You get $913.40.

In other words, by NOT saving $417.00 every month, you’re throwing away $913.00 every month.  Make sense?

But what if you have more time, which many of you do.  Let’s bump that up to 40 years, assuming you start at age 30.  40 X 12 X $417.00 = $200160.00.  Would you agree?  In the previous example, your account balance was over $300K.  In this example, you’ve supercharged your account over time and it will now be worth $2.66 MILLION DOLLARS.  Your first million won’t happen until year 31, but only 9 years later you’ll exceed an additional 1.5 million.  This is the power of compound interest.  Once it’s in place, you can draw income from it.  I don’t know about you, but when I multiple 2.6 Million X a modest 6% I get $156,000.  That’s money working for you.  Imagine being 59 1/2 (when you can start taking money out penalty free) with tax-free distributions of $156,000 annually for doing nothing.  Not bad, assuming you started this when you were 20, which is a clear argument for starting immediately if you haven’t already.

On a 40 year timeline, what is it costing you per month to NOT save $417.00?  This will blow your mind…

$5,122.88 PER MONTH.

So go ahead.  Keep drinking your Starbucks, paying your car payments, going on 4 or 5 vacations every year, and spending all of your money on things that go down in value.  Like Dave Ramsey always says, “I hope you like the car.”

OR

Restructure your financial behavior and re-write your monthly expense budget to cut out the excessive spending, because it’s costing you more than $5,000 per month NOT to save.

Filed Under: Financial Basics, Personal Finances Tagged: , , ,

Tax Refunds Are Bad For The Economy

Posted on February 4, 2012 Written by Leave a Comment

So you say you’re getting a tax refund this year?  Isn’t that delightful.  Now you’ll have “extra” money with which you can do whatever you like.  Most likely you’ll consider it a bonus of sorts and it will be spent on some sort of vacation, gambling binge, or electronic upgrade.  Am I close?  That’s what most people do, right?  So why should you be any different?

If you’re like millions of Americans who over-pay their taxes, you might be getting some of that money back!  Wheeeee!  So what should you do with that “extra” money?

First things first.  Recognize that it’s not extra money.  This is money that you loaned to the government interest free.  It’s hard-earned income that should be in your hands, not the government’s hands.  You do work hard don’t you?  You do want your money to be in your pocket right?  Then stop giving it to the government in advance.

Getting money back at the end of the year is not an indication that you’re winning with money.  It’s not a barometer that measures success.  It’s a tell tale sign that you aren’t doing the right thing with your money and that something needs to change.

If you’re getting a refund, you’re doing something wrong.  And, some companies are helping you continue this trend.

Some tax preparation companies build their entire business models on the fact that you might be entitled to a refund from the government.  They sell you on the fact that they can help you get more, and then they help you think about ways you can spend that money.  Then, you buy into their marketing with some of your refund as a fee to make sure you’re getting as much of a refund as possible.

For the average family living paycheck to paycheck, a $3000.00 refund, for example, might seem like an annual treat.  But if you divide that number by 12, you get $250.00 per month in additional income with which to budget.  When given large refunds, people tend to spend that money in their heads on big, extravagant purchases to satiate their desire for some sort of relief from the monthly grind without realizing that they could have had more wiggle room every month.

Can’t save up that emergency fund?  Need that deductible for unexpected insurance gotchas?  Need a bit extra every month to pay down debt?  You know where to find it.

“But if I don’t pay in, I might owe…”

Yep.  That’s true, you might, but if you plan for it, and save for it, it won’t be a problem, will it?  The optimal plan puts you at zero owed, zero paid back at the end of the year.  It’s hard to nail that right on the nose, but personally, I’d rather owe, have complete control over the money, and not give it to the government.  If it sits in my account, I earn the interest on it.

“It’s like a savings account…”

I hear this from people who don’t have the discipline to save and don’t understand the amazing power of compound interest, which Albert Einstein once declared to be “the most powerful force in the universe.”  Those same people struggle to make their monthly expenses and don’t even realize they could have more breathing room, pay off debt faster, or save for a specific goal.  I’ve heard out of the mouths of people who are getting refunds that they “aren’t able to save $1000.00,” that it’s “just not realistic.”  Oh really?  If you’re okay with your employer automatically sending your “savings” to the government, why not just adjust your W4 so you get more of your paycheck, then setup an automated transfer into a savings account.  Label that savings account “Tax Savings” and leave it alone.

Bottom line?  You are in control of how much money your employer withholds from your paycheck when it comes to Federal and State taxes.  Social Security?  Not so much.  (Man am I fired up about that one!)  If this year you get a big refund, adjust your W2 so that your employer reduces the amount they withhold by the amount of your previous year’s refund.  You should be in much better shape the following year.

 

 

Filed Under: Personal Finances Tagged: , , , ,

Will Banks Settle for Less Than I Owe?

Posted on November 8, 2011 Written by Leave a Comment

Yes.

Think about it.  Anyone who lends money does so understanding that there is a risk that the borrower will refuse, or will be unable to re-pay the loan.  Let’s do a quick example on $100,000 at 4% for 30 years.

Your payment would be $477.42, which you happen to faithfully pay for 5 years before you lose your job and fall behind.

During that 5 year period (60 payments) you paid out $28,645.00 of which $19,393.00 was pure interest to the bank.  The balance on your note at this point is $90,748.00.  The bank has already recovered nearly $20,000 of it’s initial risk in the first 5 years.  Subtract the total interest from the balance of your loan, and you’re left with a break-even settlement.

If you offered a settlement of $71,355.00 ($90,748 – $19,393) which would be 78.6% of the balance owed, the bank would break even on you.  Anyone who is persistent could make that deal happen.

So again, the answer is yes.

What if the settlement was less than the break even?  You could still do it, because the risk involved involves a possibility of loss, which the bank has a tolerance for if they see that they’re going to lose more money in the future.  Banks would rather cut their losses (loss mitigation) sooner than later.

So you offer $50,000 to pay off a $90,000 balance.  On the surface that looks like a 55% payout, but remember that you’ve already paid them $20K or so.  So a $50,000 settlement on $90,000 with an original loan of $100,000 is actually only a 30% loss.

If the bank had an insurance policy on the money, then there will be a claim that will close the gap even more, resulting in even more loss mitigation.

The bottom line is that any time someone owes someone else money, and the lender can see clearly that they are in a situation where they need to cut their losses, they will definitely cut their losses.  You’d do it to if someone owed you money and offered you a “take it or leave it” settlement.

Filed Under: Personal Finances Tagged: ,

Banks Love It When You’re Broke

Posted on August 16, 2011 Written by Leave a Comment

I was presented with an e-mail this evening by my “brick and mortar” bank.  About 5 years ago, I learned about online banks.  Not online banking, but online banks…in other words, banks that have no physical locations.  I learned that they offer higher rates of return on their basic products which were much higher than the local behemoth brick and mortar banks (Chase, Wells Fargo, Bank Of America, etc.)

One of these Banks (ING Direct) is the bank that I chose for my primary checking account.  They had only one stipulation…keep a brick and mortar bank account tied to the online bank account.  Okay.  No problem.  So, since then, I have been depositing my funds at Wells Fargo, then promptly moving them to ING Direct, just so I can have the account with the better return hold my money.  Online banks have better interest rates, and they operate just like a normal checking account…and they have a really cool debit card with no numbers indented on it.  :)  For those of you who had the previous card with two orange stripes, this will be a breath of fresh air, as the hourly employee will no longer be confused by the two separate stripes on the card.  However, now they’ll stare at the card, and say things like, “that’s cool,” or “neat, I’ve never seen one of these before.”

I’m getting off topic.

The e-mail that Wells Fargo sent me this evening notified me that I would soon be charged a $7.00 monthly service fee for my previously “Free” checking account if my balance fell below $1500.00.

“So what!” you say.  ”If you weren’t broke, you wouldn’t have to worry about it.  You’re saying you don’t have more than $1500.00?”  (Note:  Most Americans don’t have enough to survive more than one month without pay.)

NO.  That’s not what I am saying.  I AM saying that I don’t have more than $1500.00 in that account.  Remember, I only have the Wells Fargo bank account so I can have the online bank account, because I deposit my checks with Wells Fargo, but I transfer everything to ING Direct right away.

Aside from the fact that I’m using Wells Fargo as a proxy to warp my money to another bank, the truth remains that Wells Fargo has just put a premium on my account that can be calculated as an annual percentage rate, which also exposes the MASSIVE profits that a bank can make.

As I mentioned at the start of this article, the new fee for my “Free” checking account is $7.00/month, but only if I fall below $1500.00…at any point during the statement period.  That means that if I have a balance of $1501.00 for 30 days, but on one day I fall below $1500.00, I get charged.

Let’s break this down.  $7.00/month is the same as $84.00 per year.  Divide $84.00 by $1500.00 and you get 0.056, or 5.6% annual interest rate.

According to Bankrate.com, the current national money market average rate of return is 0.16%.  If the bank is charging you 5.6% to simply have a checking account that’s below their stated minimum, and they’re paying you .16% on your account, the difference, which is 5.44% is pure profit.  It’s not just profit, it’s astronomical profit, in the area of 3000%.

KEEP IN MIND, THIS IS A CHARGE BASED ON A MINIMUM BALANCE OF $1500.00.

Could it get worse?  Yes.

If you have $1400.00 in the account, then you’re being charged 6%.  $1300.00 = 6.5%.  $300.00 = 28%.  You can see that the less money you have, the more expensive it is to have money.  Banks LOVE it when you’re broke.

Let’s say all you have is $300.00 in your account.  You get charged $7.00 monthly for simply having an account ($84/year.)  You’ll earn 48 CENTS in interest from the bank and the net result, after a year, without accounting for compound interest, will be a balance of $216.48, or a LOSS of  about 27.8% of your account’s value.

So why would the bank do this?  Brick and mortar banks have operating costs above and beyond what current technology suggests they should have.  There’s no reason for a brick and mortar bank anymore.  We live in an electronic world.  The ONLY reason I EVER go to a bank is accommodate other people who continue to issue PAPER checks to me in consideration of services rendered.

Can I complain?  I suppose I can, but really?  Maybe not.  After all, I am using Wells Fargo as a vehicle to simply transfer my deposits somewhere else.  I’m not loyal to them.  Why should they accommodate me?  They can’t possibly profit from it…and anyone who tells you banks have any other motive than to profit from you is lying or is uninformed.

What they will realize, sooner than later, is that customers like myself, who are not loyal to their over-achieving financial institution, will abandon ship, and skip them, going straight to someone else, or simply stash the cash in a mattress.

 

 

Filed Under: Stupid Tax Tagged: , , , ,

The Other Snowball

Posted on July 27, 2011 Written by Leave a Comment

The Debt Snowball is a debt reduction plan that focuses on keeping all debts current with minimum payments while over-paying the smallest debt until it’s paid off.  Then, the amount paid to the smallest debt moves over to the next smallest debt, and so on.  The speed at which each debt is paid off increases as you throw more and more money at your balances as the smaller debts are paid off.  By the last debt, your attack power will be so strong that you’ll pay it off faster than you ever imagined you could.

When you’re in debt, your income + the interest charged to you, makes your financial plan operate like a formula 1 race car in a mud bog.  Your wheels will spin, but you’ll go nowhere.

The very second you earn a single dollar, you have unlocked an amazingly powerful tool which makes earning that second dollar even easier.  You have the means to build a foundation of wealth that, over time, will begin to build itself.  Your most powerful wealth building tool is your income.

Compound interest is a monster of a tool that can either make, or break you.  Unfortunately, so many of us would rather commit our future income to a “now” purchase than save that money and buy it later, at a discount.  When we do this, we allow compound interest to benefit the bank rather than our bank account.

When you’re out of debt, you get to experience the opposite of the debt snowball.  You get to see your money start to grow on its own, which is the most powerful aspect of your financial future.  Building a nest egg requires planning and sacrifice, and it’s never too late to stop the old ways and start anew.  Drop the anchors holding you back and start building your wealth snowball.

 

Filed Under: A Call To Action Tagged: , , , ,
« Older Posts