Nickeled and Dimed

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.

Yesterday we talked about the personal finance formula, which is cash flow= how much you earn - how much you spend.  There are two ways to improve your formula, and in effect your cash flow.  You can either earn more money, or you can cut your expenses.  Today we will look at the latter, cutting your monthly expenses.

Following is a list of 30 different ways to cut your monthly expenses.  Some of these will work for you.  Others won’t.  Some could save you hundreds of dollars a year, others will save you a few dollars a month.  But even the smallest savings do add up when you combine a few of them together. 

Here is my list of 30 ways to cut expenses:

1. Turn your thermostat up or down at least three degrees.
2. Pack your lunch at least three times a week.
3. Push your haircuts back two weeks.
4. Make lists when you go grocery shopping, and stick to them. 
5. Negotiate a lower cable bill.
6. Negotiate a lower cell phone bill.
7. Sign up for the higher deductible, lower premium options on your insurances.
8. Clip coupons.
9. Buy generic foods and medications (if your dr. permits).
10. Drop your home phone line and use only your cell phone.
11. Carpool to work.
12. Use bank accounts and credit cards with no annual fee’s.
13. Change your own oil.
14. Start a garden to make your own veggies, fruits and herbs.
15. Discontinue magazine and newspaper subscriptions you rarely use or can get online.
16. Rent books, CD’s, DVD’s and magazines from the library instead of buying them.
17. Turn down your hot water heater.
18. Only use ATM’s at your bank to avoid $2-$4 fee’s.
19. Sign up for a credit card with good cash back offer and make all purchases on it (and then immediately pay them off ).
20. Make your own gifts instead of buying them.
21. Make coffee at home instead of making daily stops to Starbucks.
22. Use Craigslist to buy anything from furniture to electronics.
23. Buy pet hair trimmers and trim your own pets hair.
24. Refinance your mortgage.
25. Order water when out to eat instead of pop or alcohol.
26. Quit smoking.
27. Install a programmable thermostat.
28. Shop around for car insurance (especially if it has been a few years since the last time you updated your coverage).
29. Pay all bills on time and avoid late fee’s.
30. Switch to a credit card that offers 0 percent interest on balance transfers (as long as the rates after the introductory period are still acceptable).

As I mentioned above, not every thing on this list will be realistic for you.  Try the tips that are realistic and discard the ones that aren’t.  Every dollar you cut out of your monthly expenses is another dollar you can use to pay off debt, build an emergency fund, or save for retirement.

What tips do you have for cutting monthly expenses?  Have you had success with any of the tips above?

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

Ramit Sethi’s I Will Teach You To Be Rich is one of the top personal finance blogs on the internet.  He is notorious for telling people to forget about the little frugality tips and focus on the big things that save money.  For example, instead of worrying about the cost of your coffee addiction, which could save you ten or so dollars a week, focus on how to get the best interest rates on a mortgage, which could save you tens of thousands of dollars (these aren’t Ramit’s words, just an example of his style). 

Ramit is a very polarizing guy.  You either love him or hate him.  While few doubt his financial acunem, many seem to be put off by his confident–borderline cocky–attitude.  He knows his advice is legit, and he is not afraid to speak his mind.  Make a less than intelligent comment on one of his articles and he will let you have it.  Personally, I like Sethi very much.  His blog has been a big part of my financial turn around and an inspiration for starting this site.  But I do see how his style would turn some people off.

Recently, Ramit caused an even bigger stir than normal by introducing “Scrooge Strategy: Premium Savings Tips“.  Scrooge Strategy is a subscription program that, upon signing up, will send you weekly in-depth tips on ways to save money and/or earn more money.  These aren’t just small tips like “pack your lunch for work”.  Sethi promises super-tactical, highly in-depth tips that will help you save hundreds, in not thousands, of dollars per year.  And on top of his own tips, he also promises to include tips from other top personal finance bloggers, millionaires and Ivy League educated financial minds.

So what’s the catch?  This is a paid subscription.  Eight dollars a month to be exact.  And this has a lot of people up in arms over the whole thing.

On top of Ramit catching heat for daring to charge money for his services, another top personal finance blogger is being scolded for even mentioning the subscription.  Get Rich Slowly’s normally laid back commentors were quite vocal about their displeasure for not only the idea of charging money for personal finance tips, but the simple fact that JD mentioned it.

A lot of people seem to be under the impression that both Ramit Sethi and JD Roth are being hypocritical in charging a fee (or mentioning the program) while at the same time telling people to be frugal.  Here are my thoughts on the situation.

• The idea that charging for financial tips is wrong is laughable at best.  If that is the case personal finance books, magazines and newspapers would be out of business.  There are many times in life where it makes sense to spend some money in order to make (or save) money.
• Ramit is not being “hypocritical”.  He preaches the idea of making money off your hobbies.  Coming up with ways to save money is a hobby of Ramits.  He’s found a way to make money off it.  That sounds to me like he is practicing what he preaches, the opposite of being a hypocrite.
• JD is doing what a personal finance blog should do, which is bring all major personal finance news to his readers attention.  The Scrooge Strategy is major personal finance news.

As for the subscription service itself, I’m leaning towards signing up.  Here’s why:

1. It offers a 60 day money back guarantee if you do not save more than it costs to join.  There is virtually no risk.
2. It had a six week trial period and offers testimonials from several of the original users.  They seem to be quite satisfied.
3. It gives me something to write about here.  I can let you guys know if it is working.

Do I recommend you sign up for “The Scrooge Strategy”?  No.  But I do recommned you check out www.iwillteachyoutoberich.com, see how you like Ramit’s style and decide for yourself whether or not you want to sign up.

I do not think the subscription is right for everyone, or even most people.  I do think it has an audience that it can be very useful to.  It is up to you to decide whether or not it is worth (or you can afford) the eight dollar a month charge.

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

All this week on Centsability to Wealth we are going into detail on each of my four steps to financial freedom.  So far we have covered strategies for paying off debt, how to open an emergency fund, retirement accounts and how to open a Roth IRA.  Today is the final step, creating passive income.

What is passive income?

Passive income is any form of income that is derived while an individual is not actively involved.  It is the ultimate achievement in personal finance.  Many people consider the true measure of “financial independence” to be when your passive income equals or exceeds your expenses.

I believe financial independence can mean whatever you want it to mean, however there is no denying the importance and power of passive income.  Create enough of it, and you may never have to work another day again.  Creating the passive income, on the other hand, could take a lot of work and/or money.  Let’s go over some of the different ways to create passive income.

Ways to create passive income

1. Real Estate- Real estate can be an excellent form of passive income.  By buying a property and renting it out to others, any cash flow becomes passive income.
2. Dividends from stocks or bonds- Any dividends paid out from your stocks or bonds is passive income.
3. Network Marketing- The phrase network marketing has a lot of negative connotations thanks to a lot of scams, but there are legit network marketing businesses out there which can create passive income for you.  We will discuss this more in another article.
4. Start an online business- This can be anything from a website that sells goods to a simple blog that makes money off ad revenue.  It takes a lot of work, but there are several success stories from people who have created passive income online.
5. Create a trademark, copyright, or patent- Inventing or creating original content that can be copyrighted, trademarked or patented can lead to passive income.

As you can see, nothing on this list is easy.  Most are either incredibly difficult to create, or cost money.  The good news is, by the time you get to the point of worrying about passive income your debt is paid off, you have an adequate emergency fund in place, and you are fully funding your retirement accounts, so you presumably will have extra money to invest in things that create passive income.

And this is by no means an all inclusive list.  There are plenty of other ways to create passive income.  Basically anything you do can be turned into passive income if you can find a way for it to earn money.

Just because passive income is usually something that is achieved later doesn’t mean you shouldn’t be on the look out for opportunities now.  Keep being disciplined with your spending, funding your retirement accounts and staying out of debt, and you will be ready when an opportunity to create passive income presents itself.

Passive income is not something you achieve over night.  It is the pinnacle of your financial journey.  When you achieve it, you can set your finances on cruise control and enjoy your time however you want. 

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

All this week we are going into detail on each of my four steps to financial freedom.  So far we have covered strategies for paying off debt, how to start an emergency fund and retirement accounts.  Today we will take the retirement accounts one step further and discuss how and where to open a Roth IRA.

What is a Roth IRA?

As we discussed yesterday, a Roth IRA is an individual retirement account that offers tax exemption on all gains made from the investments in the plan.  You can contribute up to $5,000 per year ($6,000 for those 50 or older) and may use the contributions to invest in anything from stocks and bonds to real estate.

Unlike a 401(k) and other retirement plans, it does not need to be company sponsored, which means you can open one up and start investing in it right from the comforts of your own home.  I’ll show you how to do just that later.  But first there are some questions you will want to ask yourself to get a feel for where you want to open your account.

What qualities do I want in my Roth IRA?

Before choosing a Roth IRA, you should ask yourself the following questions.  There are several different places to open an account, these questions will help you narrow down the choices.

• How much can you afford to deposit right away- Some banks will require you to make an initial deposit as high as $2,000.  Know how much you can deposit right away and then check what the requirements are for each bank you are interested in.
• Do you want to make automated monthly deposits- If you don’t have the money to make a large initial deposit, you will likely have to agree to make automated monthly deposits of at least $25.  Figure out how much you can afford to contribute each month.
• How much control do you want over your investments- Do you want total control over what stocks, bonds and other things your account investest in, or do you want to invest in a well diversified fund and let them do the rest?  Different banks offer different investment options.
• What kind of fees are involved in the plan- Know up front if there are fees or other charges involved and try to find an account with as little as possible.

By answering these questions ahead of time you can quickly and easily navigate through the different options to find the one that best fits your needs.

What will I need to open an account?

Opening a Roth IRA online will generally require only the following three documents.

1. The routing and account numbers of the bank you will be using to deposit funds.
2. Your social security number.
3. Your home and employee information.

Have those documents ready and you can have an account up and running minutes after choosing which one you want.

Which bank should I choose?

This part is entirely up to you and the qualities you are looking for.  I’ll discuss the qualities of three of the top online Roth IRA’s, but you will still want to do your own homework to see if there are others that better fit your needs.

• ING Direct- Like with their savings accounts, ING Direct offers a Roth IRA that is incredibly easy to open and use.  They offer a low initial deposit requirement of $250 and will waive it altogether if you choose to automatically contribute at least $25 a month.
• Fidelity- Has a minimum initial deposit of $2,500 that they will waive if you agree to automatically deposit at least $200 a month.
• T. Rowe Price- A minimum initial deposit of $1,000 that can be waived with automated monthly deposits of at least $50.

All three of these are excellent, well respected banks to start your Roth IRA with.  Do your own homework.  Check out their other features.  Explore other options.  Ultimately the most important thing isn’t which bank you choose, it’s that you make a decision and get started investing.

Example

Let’s go over a step by step example for opening a Roth IRA using ING Direct .  Please note that with ING Direct you will have to have another account with them to use their Roth IRA’s.  So if you chose them for your emergency fund, this could be a good choice for you.

1. Log on to www.ingdirect.com.
2. Choose open an account.
3. Scroll down to “Investing and Retirement” and click on “IRA Center”.
4. Choose “Roth” in the open now box on the right hand side.
5. log in to your account.
6. Fill out all the requested information and choose how you will make your investments.
7. Begin maxing out your contribution and watching your retirement account grow.

Should I make a large initial deposit or make regular monthly investments?

While some investors will recommend the large deposit, most will tell you to make the regular monthly deposits.  And I agree unequivocally.  Making regular contributions, or ”dollar averaging” can be an unbelievably effective way of investing, especially in a volatile market like this.  We will cover the concept of dollar averaging later, but it is maybe the best tool you can use to invest.

How much should I contribute?

The max.  Period.  If you can’t afford to do this yet, do the max you can afford and continue working to contribute more.  A Roth IRA, or any IRA, can be the difference in a great, enjoyable retirement and a miserable one.  Find ways to cut expense and spending so you can contribute more to your retirement accounts.  As Dave Ramsey likes to say, “if you live like no one else now, you can live like no one else later”.  Don’t fear this market, embrace it.  There has never been a better time to start funding your retirement.  Use this article to open your Roth IRA and start investing in it today.

Tomorrow on Centsability to Wealth we will discuss creating passive income, the ultimate financial achievement.  Please continue sending any tips, questions and story suggestions to centsabilitytowealth@gmail.com.   

All this week we are going into detail on each of my four steps to financial freedom.  On Monday we  discussed the strategies for paying off debt and Tuesday we talked about how to start an emergency fund.  Today we get to retirement accounts and will outline the differences between the two main options; a 401(k) and a Roth IRA.

With the future of social security looking more glim every day and the idea of a company pension to support you through retirement all but extinct, it has never been more important to understand retirement accounts and begin investing in them.  Individual retirement accounts, or IRA’s, allow you to invest your income, up to a certain amount, into stocks, bonds and other investments in order to help fund your retirement.  They also usually offer differing tax advantages and penalties for taking the money out before reaching a certain age.

There are many different retirement accounts to choose from, but by far the two most popular are the 401(k) and the Roth IRA.  Before deciding which is best for you, let’s discuss each and their advantages and disadvantages.

401(k)

A 401(k) is an employer sponsored retirement plan that allows employees to take out a portion of money from their paychecks, place it in a retirement account and earn interest.  All contributions are tax-deferred and reduce the employees taxable income by the amount contributed.

A 401k retirement plan must be sponsored by an employer or an organization. The actual work of administration and monitoring of accounts is usually outsourced to independent banks, mutual fund companies, financial service enterprises and more. As soon as an employee gets a paycheck at the end of the month, he can transfer a portion of it to his 401k account. Types of investments available include mutual funds, stocks, bonds and money market instruments.

Advantages of 401(k)

• Tax-deferred contributions- Allows you to contribute more and also reduce your taxable income.
• High maximum contribution amount- $16,500 for 2009.
• Many employers will match contribution up to certain percent- Many employers offer a company match that will equal any contribution you make up to a certain percentage of your income.

Disadvantages of a 401(k)

• Can be some what difficult to move if you switch jobs- If you switch jobs after starting a 401(k) you will likely want to roll over your account to your new job.  Depending on your job, this could be a little stressful, but definitely not impossible or a deal breaker.
• Earnings are taxed- Unlike a Roth, you will be taxed on all gains when you pull out your money.
• Penalties and taxes for early withdraw- Should an emergency arise (beyond your emergency fund) and you are forced to withdraw any amount from your 401(k) before retirement, you could be charged a 10 percent penalty fee and forced to pay taxes on the previously tax-deferred contributions.

Roth IRA

In many ways, a Roth IRA is the exact opposite of the 401(k).  All contributions must be made after taxes, while all gains made are taken out tax free.  There are also income limitations for participating in a Roth IRA ($101,000 for single individuals or $159,000 for married couples in 2008) and a much lower maximum contribution amount ($5,000 for anyone under age 50, $6,000 for anyone over age 50).

Advantages of a Roth IRA

• All gains are tax free- This could offer you a gigantic tax savings when you withdraw the money in retirement.
• No fees for certain early withdraws- Unlike with a 401(k), there are certain conditions in which you are allowed to withdraw your savings before retirement with no penalty.
• Does not have to be employer sponsored- You can set up a Roth and invest in it on your own, independant of any companies.
• Easy to set up and never have to switch- You can get online and set up a Roth IRA in minutes and never have to worry about rolling it over due to switching jobs.

Disadvantages of a Roth IRA

• Contributions are taxed- All contributions come after taxes, which means less money to invest and higher taxable incomes than with a 401(k).
• Low contribution maximum- Can only contribute $5,000 per year ($6,000 if over 50).
• No company match- Since it is not company sponsored, there is no company match.

So which plan is best for me?

I’m sure you are just about tired of seeing me use this sentence, but as with all the other things we have discussed, it depends entirely on your personal situation. 

You will hear arguments that if you are relatively young, it is better to pay taxes now while your tax rate is presumably lower than it will be later, in which case the Roth is best.  Others will tell you to take advantage of the tax breaks now because you don’t know what the future holds, for you or our tax system.  The advice varies from expert to expert, but it all depends on you. There are a few rules that everyone can follow though.

1. If you have a company match in your 401(k), always contribute at least enough to get the maximum match.  This is free money.  Free money that you pay no taxes on.  There is no excuse for not taking advantage of it.
2. If you are maxing out one account, and still have money to invest, begin investing in the other.

The most important thing isn’t which one you choose, it’s that you choose one and start investing in it.  Invest early and invest often.  Invest the maximum your funds (and government limits) will allow you to.  The magic of compounding interest (will discuss in later article) will make your investments increase many times over.

Don’t let the doom and gloom people around you and in the media discourage you from making the best financial decision you can possibly make to fund your retirement.  The current markets make it even more appealing to start investing now.  If you have not yet done so and your debt is paid off with an emergency fund in place, open a retirement account and start contributing.

Tomorrow on Centsability to Wealth we will discuss how to open a Roth IRA.  Please continue sending any questions, tips and story ideas to centsabilitytowealth@gmail.com. 

All this week we are going into detail on each of my four steps to financial freedom.  Yesterday we talked about the different strategies for paying off debt.  The next step in my financial journey is to build an adequate emergency fund.  Today I will show you how to quickly and easily set one up.

But before we discuss how to set one up, let’s make sure we are clear on what an emergency fund is.

What is an emergency fund?

As we talked about last week, an emergency is the life jacket in your boat.  It is there to protect you from life’s unexpected expenses (and your life will have plenty of them). 

Last month, the brakes on my car started squeaking.  What I expected to be a minor expense turned into $450.  Had I not had an emergency fund in place, I would have had to either take money from my investments or use debt to pay this expense. 

An emergency fund is a savings account you keep separate from any other accounts.  It’s an account you only use for unexpected expenses.  An unexpected expense is not a last minute trip to Cancun for spring break.  It is a necessary expense that you haven’t saved or budgeted for. 

Here is my advice for starting an emergency fund quickly and easily:

Choose an online bank with a high yield savings account

Why an online bank?  While it is not something most personal finance experts think is necessary,  I recommend an online account for several reasons:

• It is extremely easy to setup:  Instead of going to a local bank to wait in line and fill out lots of forms, you simply go to a website, put in your information, and your account is up and running.
• It is harder to withdraw money on a whim:  Since you actually have to go in and transfer money from your online account to your local bank account in order to use it, you are less likely to take it out for anything other than necessities.
• It is easy to set up-and change- automatic monthly deposits to fund it: Instead of having to go into your bank every time you want to make or change an automatic deposit, you simply log into your account and you are done with a few clicks.
• Easier to compare and find top rates: Unlike banks in physical locations, you aren’t restricted to the number of banks in your immediate area.  With the internet, you can use a bank half way around the world just as easily as you can use one from your hometown.  And with more competition comes better rates.

Here are some of the top online accounts to choose from:

• HSBC Direct- Currently offers 2.60% APY
• ING Direct- Currently offers 2.50% APY
• FNBO Direct- Currently offers 2.80% APY

If you are not comfortable using an online bank, a local bank will work just fine.

Decide how much you need in your fund

There is not a set amount that every expert agrees is the ideal balance in an emergency fund.  Some think you should keep the least amount possible in and use the rest of your money for more lucrative investments.  Others feel you should have a years worth of living expense.  The majority seem to fall into the three to six months worth of living expenses range.  As with everything else in personal finance, it depends on your situation.  Here are some questions to help you decide how much to keep in yours.

• Is your job at all unstable?
• Do you have a family that depends on one income?
• Is your income commission or incentive based?

If you answered yes to any of these questions, you probably need at least a six month emergency fund.  If not, you can probably get by with more of the three month range.  It is important to be honest with yourself and expect the unexpected.  When in doubt, error on the side of too much.

Begin funding the account

After deciding on an adequate amount for your emergency fund, it’s time to begin funding it.  Choose the highest amount you can live without each month and have it automatically deducted from your checking account into your online bank account.  By automating the process it will be harder for you to skip out on monthly contributions.

After you reach your pre-determined amount, you can stop contributing to the account. 

Example

Now that we have covered each step, here’s an example of how to start an emergency fund.  For this example I’ll use my online bank, ING Direct.

1. Go to www.ingdirect.com.
2. Click on “Open an account” on the left hand side.
3. Choose the very first option, “Orange Savings Account”.
4. Click “Open Now”.
5. Fill out application.
6. Enter your checking account and routing numbers in order to deposit money.
7. After your account is opened, click on “automatic savings plan” and choose the day and amount of money you will be transferring to your account each month.
8. Continue plan until your goal amount is reached.

That’s it.  You’re done.  The entire process should take you less than twenty minutes.

An emergency fund is one of the biggest keys to building wealth.  It helps keep you out of debt and can be a huge stress reliever during times of financial turmoil.  By following the simple steps outlined above, you can have your fund up and running in no time.

Tomorrow on Centsability to Wealth we will discuss IRA’s and the difference between a 401k and a Roth IRA.  Please continue sending any questions, tips and story ideas to centsabilitytowealth@gmail.com