Nickeled and Dimed

If this is your first time visiting Nickeled and Dimed you may want to see what we are about , read about me, or read our introductory post.

If you are like most people, you are probably wondering what the point of contributing to your 401 (k) is right n0w.  Your investments are almost certainly down at least 30 percent over the past six months and probably more.  You are literally watching every new dollar you put in vanish before your eyes.  I’m sure the last thing you want to hear right now is someone else telling you to not worry about the short-term results and just keep on contributing.  But at the risk of having stones thrown at me, that’s exactly what I’m going to do, and I’m going to take it a step further.  Not only should you still be contributing to your retirement accounts, you should be glad the market is doing what it is doing and should increase your contributions if you can afford it.

To clarify, what I’m going to say only pertains to those who are relatively new to the workforce and thus have a small sum accumulated in their retirement account.  If you have been contributing to your 401 (k) for ten or more years, the opposite of what I say could be true for you and you have every right to be freaked out about the market right now.  For the rest of us, the current market is providing an excellent opportunity for our retirement accounts and any other long-term investment accounts.  Here’s why:

Last month, Carl Richards at Behavior Gap wrote an article titled “Investing 101: Average is NOT Norma”l.  The article was so good it landed guest post gigs on two of the top personal finance sites, Get Rich Slowly and I Will Teach You to Be Rich.  In the article, Richards explains the difference between average investment returns over a long period of time, and average returns during each year of that period.  For example, while it is safe to assume that over a 30 year period you will receive at least a seven percent return in a properly diversified retirement account, that does not mean each of those thirty years will have a seven percent return.  You may have years of 40 percent return and years of -30 percent return.

Timing is everything

This is not new news for anyone who has been paying attention the last six months.  It is pretty obvious to us all at this point that seven percent returns are not guaranteed every year.  But what’s not so obvious to most of us is that when you experience the worst returns has a signficant effect on the overall return your account will provide.  Experience a market crash near the beginning of your investing  life (as most of our generation is), and you could be set up for above average long-term returns.  Experience a market crash in the middle or end of your investing life, and you will likely face below average long-term returns.  Here is Richards explanation of why experiencing the crash early will boost your overall results:

You start with a small initial investment and then do the right thing by adding money each month. You feel like you are throwing good money after bad because each month your statement arrives and it is lower. But you continue to accumulate shares of the investment. After years of “bad” performance you have built up a sizable portfolio and the market turns, and you have years of “above” average returns. In this case the “good” returns came at the time when you had the most money to benefit from them.

So by accumulating your market shares while the prices are down, you set yourself up to have the most amount of shares when the market goes back up. 

Dollar cost averaging is the key to profiting from market crash

Dollar cost averaging is the act of investing a set amount of money in regular intervals, such as monthly or yearly.  The idea behind this strategy is that you will automatically purchase more shares when a stock is at its lowest and less shares when it is at its highest (optimizing the idea of “buying low and selling high”).  When you contribute to a 401 (k) or other retirement account, dollar cost averaging is done automatically.  Here is an over simplified example of how dollar cost averaging works:

Let’s say you invest $100 monthly into your retirement account.  This is what your account would like look if the following price changes occurred:

• First month- Fund is selling for $25 a share, allowing you to purchase four shares.
• Second month- Fund falls to $20 a share, allowing you to purchase five shares.
• Third month- Fund falls to $10 a share, allowing you to purchase ten shares.
• Fourth month- Fund falls to $5 a share, allowing you to purchase 20 shares.
• Fifth month- Fund falls to $4 a share, allowing you to purchase 25 shares.
• Sixth month- Fund climbs back to $10 a share, allowing you to purchase 10 shares.

At the end of this sixth month experiment, you have invested $600 into this fund at an average cost of $8.11 per share.  If you sold all your shares at the current market value of $10 a share, you would make $139.86, good for a 23.31 percent return on investment.  That is a phenomenal return under any circumstance.  When you consider you achieved that return in a market that saw the price drop from $25  a share to $10 a share from the time you started investing, it is a mind blowing return.

Had you invested all $600 during the first month, instead of dollar cost averaging, you would own 24 shares at an average price of $25 dollars a share, giving you a net loss of $360 or -60 percent.

The power of dollar cost averaging is remarkable.

What this all means

Summing up this long post, this market crash that we are all complaining about could prove to be a benefit to your retirement account.  By continuing your annual contributions, (or even increasing them if you have the extra money) you will set yourself up for well above average returns in the long-run. 

So rip up your monthly statements if you have to, stop worrying about the doom and gloom you are hearing on TV and be comforted in the fact that if this is the worst market we face in our working lives (as it very well should be if history is any indication) it could not have happened at a better time.

Please send any questions, concerns and story tips to josh@nickeledanddimed.com.

I have some fairly big changes in mind for this website coming in the next few weeks.

First of all, the general theme of the site is going to change a little bit.  Instead of simply being a personal finance website, it will now be more of a young professionals website for Gen Y.  A lot of the content will remain unchanged.  Most articles will in some ways be related to personal finance.  But the advice will be geared to Generation Y young professionals.  Why am I making this change?  Well, most importantly, it gives me more things to talk about.  I enjoy talking about job hunting and interviewing and career changes.  With more of this broad scope I can do this topics.  Another reason is that most of the readers of this site seem to be in the 20-30 year range.  I will be catering more to my audience.

Secondly, the name of the site is going to change.  I need your help here.  I would like it to involve something with “Generation Y” in it, or some abbreviation of it.  But I’m willing to listen to other offers.  Any ideas?  If so email them to centsabilitytowealth@gmail.com (this will remain the email address until the websites name is changed).

And lastly, I’m thinking of changing the layout of the site.  I’m going to look at options and maybe try a few out.  If I have one up that you absolutely hate, PLEASE email me and tell me.

So as you can see, I have a lot of changes in front of me.  As a result, my posts the next week or so may be a bit shorter and there may be a few weekdays that don’t have a post.  I apologize for that.

And if you are one of my readers who are not a Gen Y’er, have no fear, most of the stuff we talk about will in some way apply to everyone.  I hope to have you stick around.

This week I will be on my first week of unpaid furlough at work, so I will have a lot of free time on my hands.  I plan to use it working on this site and writing a lot of good articles for the coming weeks.  If you have any story ideas you would like to see my write about, please feel free to send them to me at centsabilitytowealth@gmail.com.

In the meantime, here are the top personal finance blog posts from the past week.

JD at Get Rich Slowly had an article up about the difference between the national economy vs. your personal economy.  JD was a speaker at a local financial planners assocation and the article highlights what some of the financial planners are saying in the current environment.  Very interesting stuff.

Penelope at Brazen Careerist had an article about how to talk to a friend who has been laid off.  With layoffs happening left and right these days, chances are you know someone who has been a victim of it.  The article has tips on what to say and what not to say to people looking for jobs right now.

Ramit at I Will Teach You to Be Rich had a guest post from Carl Richards of Behavior Gap about why average is not normal.  The post highlights why average investment returns can be misleading.  While I don’t necessarily agree with the concept, it is a very interesting subject and very well written.

Erica at Eric.biz wrote an article about why you should blog.  Everyone should have a blog.  Very few people will make money off them, but the secondary benefits are nearly endless, and Erica highlights several of these.

Check out the articles above and let us know if you read any other personal finance related articles this week.

Please continue sending any personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com

If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

As I’ve said before here, Groceries are one of my largest monthly expenses.  I am always looking for ways to cut down on both the money and I spend on groceries and the time I spend grocery shopping.  Consumer Reports recently put up an article with several tips on saving money buying groceries.  Here are the highlights of those tips:

Plan a Route

Before going to the store, the article recommends making a list of exactly what you need and then researching which stores carry those items at the lowest prices.  They also say you should consider shopping at several stores in a close radius for different items.

A recent study suggests this tip can save $17.45 per trip.

Get Coupons and Store Loyalty Card

A fantastic way to save money grocery shopping is to clip coupons for items you need.  Opening a store loyalty card is essentially giving yourself a permanent coupon for all items.  The amount saved will very from item to item, but a ten percent or more total savings on your bill is very realistic.

Try Manufacturers Websites

A great tip I have never heard of, the article recommends checking the manufacturers website for coupons on items you need.  For example, they went to www.iams.com and found a coupon for $5 off a bad of dog food.

Evaluate Circular Savings

Just because items are featured on fliers or in special sections of the store it does not mean they are a bargain.  Compare the prices of  these items as you would any other item.

Avoid Common Spending Traps

Several good tips here.  First, they suggest to pass on free samples (I don’t have the discipline for that one!).  They are offered to cause impulse buying.  You may have no interest in buying a rack of ribs, but that delicious free sample could tempt you into buying them.

Their second tip is to search the tops and bottoms of aisles for better deals.  The most expensive items are placed at eye level.

Finally, watch out for items strategically placed at the beginning or end of aisles.  Once again their purpose is to cause impulse purchases on items you had no intention of buying.

Try New Brands

Store-brand items can be as much as 50 percent less than name-brand items!  And you will usually not be able to tell a difference in taste.

Give the store-brand items a try.  You can always return to your favorite name-brand if you aren’t satisfied.

Stock Up on Sale Items

Take advantage of large sales on non-perishable foods by stocking up on them.  If you can get a great deal on an item that doesn’t go bad, load up on it and save money on future purchases.

Check Prices in Other Departments

Certain products may be offered in more than one section, with the more expensive options strategically placed where you are more likely to find them.  The article uses cheese as an example, saying the more expensive cheese is placed in the deli, while you can usually save money by buying from the dairy section.

Grocery stores may also attempt to trick you with large packages, which are normally considered a better deal.  Always compare unit prices to make sure this is accurate.  The article says one recent study found that peanut butter, ketchup, coffee, canned tuna, and frozen orange juice all frequently cost more money in large packages than in smaller ones.

Watch the Scanner

Consumer Reports claimed that one in five shoppers who claim to watch scanners frequently notice an error.  Watch what they are ringing up and check the receipt for double ring ups. 

Groceries are expensive enough, no need to pay for more than you actually bought.

Next time I go grocery shopping I will try all these tips and report back on their effectiveness.

Do you use any of the above tips?  Have any other tips for saving money on groceries?

Please continue sending any personal finance related questions, suggestions and story tips to centsabilitytowealth@gmail.com.

Today is a milestone for me.   If you recall from my New Years Goals post, my first goal for this year was to pay off the $1,800 remaining on my credit card by February.  Today, one day before February, I made the final payment on my credit card.

After graduating from college last May, I had about $4,200 in credit card debt.  I am now credit card debt free.  And it feels phenomenal!

What does this mean for my personal finances?  For one, it is going to improve my FICO score.  Even more importantly, it frees up $500 to go towards debt and savings.  With every debt that’s paid off, you have that much more money to go towards paying off further debt (or reach savings goals).

Being free of credit card debt is an incredible feeling, and one I plan to have for the rest of my life.  I will never again carry a monthly balance on my credit card.

On to the next goal, paying off my $5,000 loan by June.  This could be derailed slightly due to recent developments at my job, but if it is I will simply re-adjust my deadlines for the goal and keep plugging away.

Please continue sending any personal finance related questions to centsabilitytowealth@gmail.com.

Store discount cards can be a great way to save money on anything from groceries to books.  But if you are like me, you have so many of these cards that you lose them, forgot which ones you have and rarely use them.  Off the top of my head I have store discount cards to Acme, Giant Eagle, Barnes and Nobles, GNC,  Amazon, Best Buy, Office Max and American Eagle.  If there were a way to store all these cards on just one card, I would be much more likely to use them and take advantage of the savings.

At Just One Club Card, you can do just that.  They allow you to save up to eight different store cards on a single card that will be accepted just like the original card.

How it Works

Using Just One Club Card can be done in four simple steps:

1. Gather up to eight store cards you would like to load to just one card.
2. Log on to www.justoneclubcard.com.
3. Type in the bar code for each card and choose which store or club it belongs to.
4. Print out your new card.

After printing out your new card simply store it in your wallet or purse and you will never have to carry around the other eight cards again.  By reading the bar codes saved on your Just One Club Car, each store can access your account without the original card.

Store and Club cards can be an excellent way to save money on both necessary and discretionary expenses, but only if you use them.  By organizing all the different cards on to one card you are much more likely to take advantage of the savings.

Give Just One Club Card a try and let us know if you used the savings more often.

Please continue sending personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com.

Technorati Tags: personal finance, Just One Club Card, savings, money

There have been plenty of articles out there the last few days about how President Obama will impact your finances.  From cutting taxes to creating jobs, people want to know how Obama will help, or hurt, their financial situation the next four years.  I have even received two different questions from readers asking how I think the change in Presidents will effect our personal finances.

My answer?  Very little, if any.

First let me say that this is not a political blog.  You will never hear me support or cut down any political party on this site.  So if you are looking for a place that will tell you how good or bad Obama will be as president, this isn’t it.

But even more important than that, I don’t believe the President has much of an effect on your personal financial situation.  Regardless of the tax rate or the economy, the equation for financial independence remains the same, spend less than you earn.

My advice for adjusting to the new Oval Office?  Continue paying off debt.  Continue building an adequate emergency fund.  Continue saving for retirement.  Continue looking for ways to cut your expenses.  Continue making smart financial decisions.

There have been 43 different Presidents before Obama, and not one of them have managed to change the principals of financial prosperity.  The 44th President will be no different.

The President of the United States has plenty of responsibilities, managing your finances is not among them.  You will ultimately determine your financial fate.  Regardless of your feelings on President Obama, choose to make the next four years the best of your life financially.

Please continue sending any personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com.

Every Sunday I will post links togood articles from other personal finance blogs that occurred throughout the week.  Here’s the first edition.

JD at Get Rich Slowly posted a very interesting article talking about his gut wrenching decisionabout whether or not to accept a very large sum of money in exchange for writing posts on his popular blog endorsing a certain product or company.  He ultimately came to the conclusion that it would violate too many of his principles to accept the money and make the endorsement posts, but the article and comments offer a very good discussion on how much money it would take for you to ignore your own moral compass.

Ramit at I Will Teach You to be Rich wrote about how he plans to save $25,000+ in 2009.  In it he offers up nine ways in which he plans to either lower his expenses or increase his income enough to save at least $25,000 this year.  Some are things you can do yourself, some are not.  But it is worth reading none the less.

Trent at The Simple Dollar writes about the secrets to entrepreneurship.  He highlights an article that offers ten tips for entrepreneurs and discusses how they relate to day to day life.  Good read.

If you have a few minutes, read the above articles and check out their sites. 

Tomorrow at Centsability to Wealth we will discuss the different forms of insurance, which ones you need, and why you need them.  Please continue sending any questions, suggestions and story tips to centsabilitytowealth@gmail.com

After outlining the four keys to my plan for financial freedom, I received a few requests to go into more detail on each.  So for the next five days I will be making all posts regarding those four principals.  Today’s will cover the different strategies for paying off your debt.

The average American pays over $1,000 a year in interest fees and carries a balance of around $9,000 on their credit cards.  It’s easy to see that debt, especially credit card debt, is a major bump on your road to wealth.  But simply deciding to pay it off is not enough.  You need to have a plan.  Here are the two main strategies among personal finance experts for paying off debt.

Highest Interest Rate First

The most widely preached strategy for paying off debt is the approach of paying off the card with the highest interest rate first, then moving on to the one with the next highest rate, etc.  Economically, this approach makes a lot of sense.  By paying off the highest rates first, you minimize the amount of interest you pay in the long-run.

Here’s how it works:

• Order all the debts you want to pay off from highest interest rate to lowest interest rate.
• Determine how much money you will put towards your debt each month.
• Make the minimum payments to all debts except the one with the highest rate.
• Apply all remaining money to debt with highest interest rate until it is fully paid off.
• Use all money you were putting toward debt that is now paid off to the debt with the next highest interest rate.

Let’s look at an example:

•  You have three debts with equal $500 balances, one with a 20 percent rate, one with a 15 percent rate and one with a 10 percent rate.  The minimum payment for each debt is $50.
• You will put $200 towards this debt each month.
• Make the minimum $50 payments on the 10 and 15 percent interest debts.  Use the entire remaining $100 to go towards the debt with the 20 percent interest rate until it is paid off.
• After the 20 percent rate debt is paid off, continue making the $50 minimum payment on the 10 percent rate debt.  Use the $50 payment you had been making, plus the $100 payment you were making on the old debt, to go towards the 15 percent rate debt until it is fully paid off.
• After the 15 percent rate debt is paid off, use entire $200 to pay off the remainder of the 10 percent rate debt.

Advantages of this plan: Organized plan to pay off debt that will allow you to pay the least amount of interest possible.

Disadvantages of this plan: If highest interest rate debts also have the highest balances, it can be psychologically draining to see little progress each month.

The Debt Snowball Method

A second method, which was made famous by Dave Ramsey, is called “the debt snowball method”.  The idea with this strategy is to pay your debts off from lowest balance to highest balance.  The philosophy behind this is that by paying off the smaller debts first, and seeing success, it will keep you motivated to keep going.

Here’s how it works:

• Organize debts from lowest balance to highest balance.
• Determine how much money you will put towards debt each month.
• Make minimum payments on all debts except one with the lowest balance.
• Use all remaining money and put it towards debt with lowest balance.
• After lowest debt is paid off, continue strategy with next lowest balance.

And an example:

• You have three debts, one has a $500 balance, one has a $250 balance and the third has a $100 balance.  The minimum payment for each is $25.
• You have $100 to put towards debt each month.
• Pay the minimum $25 to the $500 and $250 debts and use remaining $50 to go towards $100 debt.
• When $100 debt is paid off, continue making $25 minimum payment to $500 debt and use remaining $75 to go towards $250 debt.
• Continue until all three are paid off.

Advantages of this plan: Psychologically motivating to see progress as entire balances of debt are paid off.

Disadvantages of this plan: Could pay more in interest fees if higher balances are also highest interest rates.

No matter which plan you choose, or if you create your own plan, the important thing is finding a strategy that works for you.  I have personally found that the debt snowball method is best for me as I like the feeling I get when one of my debts are completely gone.  For others the idea of paying the least amount of interest will be what motivates them.  What matters is that you follow through with your plan and get your debt paid off.

Tomorrow Centsability to Wealth will discuss how to start an emergency fund.  Please continue sending any advice, questions and story tips to centsabilitytowealth@gmail.com