Advanced Personal Finance

Finding room in your budget for saving and investing isn’t always easy. Here are some painless ways to find that extra couple hundred dollars per month.

1. Ask service providers like satellite TV companies and credit card companies to lower your rates. A simple call to DirecTV got me $10 off per month for a year. I just called and told them I could get such-and-such deal with Dish Network and would they lower my bill. Their response - sure; no problem. Took five minutes. If you have a credit card balance, the exact same technique can work. Call the issuing bank and simply ask them to lower your rate. Most times, they’ll do it. This technique works anywhere there’s good competition and/or customer acquisition costs are high.
2. Get quotes on auto and life insurance. Though the phrase is cliche, fifteen minutes actually can save hundreds on car insurance. It’s really easy to compare with tools like Lowermybills.com. Life insurance premiums, too, have dropped significantly over the last several years. Getting a quote is free and can save several hundred dollars per year. And you won’t necessarily have to switch insurance companies. With a better offer in hand, you can use it in the same manner as tip #1 above with your current insurer.
3. Cancel unused or underused subscriptions. Take a look at subscriptions you pay for - magazine, DVD, whatever. How much use do you really get out of them? If you’re not sure, just try living without them. Call the company and tell them to suspend your subscription for a month or two. If you don’t miss it, cancel, and don’t forget to get a refund for the remainder of your subscription. The same goes for pay TV channels like HBO.
4. Use the library. If you read or watch movies at home a lot, get acquainted with your local library. The books are surprisingly new and DVD rentals are a buck or two.
5. Review your auto insurance coverage. Check out what your deductible is, what add-ons like rental reimbursement you have, and your collision coverage. It doesn’t pay to pay for collision on older cars, so drop it and save a couple hundred bucks. Deductibles should be set as high as you feel comfortable. Check also to make sure you’re not paying for an add-on twice. By that I mean if you have AAA, it makes no sense to pay for towing through your insurance, for example.
6. Eat out once less per month. Just eating out once less per month can save decent money. For the three of us at a ‘regular’ sit-down restaurant, we’re looking at $40.
7. Pack your lunch. By eating yesterday’s leftovers for lunch every day at work, I figure I save in the neighborhood of $120 per month. Besides, it’s most likely healthier.
8. Ask for discounts. Make the most of being a AAA member or a student - ask for a discount. What’s the worst that can happen? They say no.
9. Compare prices on drugs. The legal kind. It’s shocking the variance in prices for prescription drugs from retailer to retailer. So before you fill that prescription, just call the pharmacies for a couple of different places.
10. Consider consolidating investment accounts. It’s common for investment companies to charge a quarterly ‘account maintenance fee’ for balances under some amount. We used to be charged every quarter because our mutual fund account was under $10,000. Once I consolidated, we were over their minimum amount and the charge disappeared.

None of these ideas are going to pull you back from the brink of bankruptcy, but if you’re looking for a little bit of extra room in your budget, trying one or two might do the trick.
Photo credits: fief.org, cri-dove.org, maine.com

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Using borrowed money, like from a HELOC, to invest in the stock market has to be one of the dumbest ideas I’ve ever heard. But, taken to its logical extreme, the advice commonly given to not pay off your mortgage early would have you do just that.

So maybe I should take my bank up on their offer:

(click to enlarge image)

Like I’ve pointed out a couple of times before, I believe strongly in paying off a mortgage as soon as is reasonable. By that I mean sending extra money each month toward principal curtailment or any of the other methods I’ve written about.

There’s a contrary school of thought that says you should not prepay your mortgage and instead invest that money into a low-fee index fund. The reasoning being you’ll get a better return in the stock market than you’re equivalent return based on your mortgage rate. Liz Pulliam Weston, Ric Edelman, and Walter Updegrave are all adherents to the ‘invest instead of pre-pay’ school.

Borrowing to invest

But taking that line of thinking to its logical conclusion, it would be a good idea to borrow additional money against your home (in the form of a HELOC, cash-out refi, or second mortgage) and put it to work in the stock market. Call me risk averse, but that’s insane. I actually had a friend do just that and he got smoked when the market dropped in 2000.

What people forget is that pre-paying your mortgage is a guaranteed return. Ok, maybe it’s only a guaranteed 6% return, but it’s a sure thing. The historical return on the S&P 500 is 10.4% (thanks MossySF). The mathematically savvy reader will note that 10.4% is greater than 6%. That 4.4% can be thought of as your risk premium. But for me personally, I’ll pay that 4.4% per year in exchange for having no mortgage payment.

One other quick thing. While in an emergency I can suspend my principal curtailment payments, you can’t do that with a HELOC payment. It sure would suck having to write a check each month to repay a loan while simultaneously watching a bear market destroy your portfolio.

Think I’ll stick with my 6% return.

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Seems you can now save money on car insurance if you only let the insurance company spy on you.  It was only a matter of time.

GMAC is now offering lower car insurance rates for owners of GM vehicles with OnStar who let them track how many miles are driven.  Both OnStar and GMAC say the only information being tracked is mileage.  I’m sure.

Apparently, a couple of companies have been testing similar programs for some time with varying levels of invasiveness.

I realize there’s very little privacy left in America today.  But it seems to me that voluntarily providing information like where you drive and when is asking for trouble.  I’m all for saving money, but this ain’t the way to do it folks.

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The 109th Carnival of Personal Finance is up at The Mint Blog this week.

My favorite submissions:

Grad Money Matters has a great post on the myths of mortgages and home ownership.  I didn’t know about myths 7 & 8.  Great information.

Mighty Bargain Hunter wrote about the war against pawn shops. I like the idea of pawn shops, but I haven’t yet gotten myself to actually go into one.

Stop Buying Crap asks the eternal question “Are you a cheapass or a dumbass?“

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Suze Orman and a bunch of other personal finance gurus counsel you to not cancel credit card accounts. The reason being it ‘damages’ your FICO credit score. See, when you close accounts, it reduces your available credit. If you have any balances, your ratio of credit used to credit available is higher. That’s bad because if you need a loan, you are charged an interest rate based in part on your FICO score.

I just closed two credit card accounts I’ve had for a little less than a year. I got them both for the free up-front rewards they offered. The AMEX Gold offered the something like $200 in account credit after first purchase (it’s now $250 or a plane ticket). The Citibank card offered $150 in gift cards if I remember right. They’re both gone.

I don’t care what Suze Orman or anybody else says about closing unused credit card accounts. If you’re a responsible person with a good credit profile, you won’t care whether your FICO number dips 15 points for a couple of months. And it only may dip. Depending on your available credit ratio, it might not change at all.

Though the exact formula Fair, Isaac (the company behind FICO) uses to calculate the common FICO is guarded like a state secret, it’s generally agreed it’s composed like this:

As you can see, amounts owed is about a third. This component is really the ratio I talked about earlier - credit used to credit available.

Why not keep the accounts open anyway? They’re only a couple of pieces of plastic, right? Simple - hassle. I don’t want two more cards hanging around. These days, with our second child coming in a couple of months, I’m all about reducing. Reducing clutter around the house, reducing complicated credit card/bill paying strategies to maximize rewards, just reducing.

So regardless of what Suze Orman says, I cut up two credit cards today.

(Graphic courtesy Consumerism Commentary)

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