Take advantage of your Flexible Spending Accounts!

The absolute best thing you can do is spend pre-tax dollars before you spend after tax dollars on things you will use anyways. Pre-tax dollars are deducted from your pay check before the government applies a tax rate to it and takes it for their own. Thus, spending pre-tax dollars means that the government takes less of your money and you get to use more of your money on necessities.

The government offers three types of pre-tax Flexible Spending Savings plans - one for healthcare, one for daycare and one for parking/transportation to work.

To simplify these I will just touch on the surface of how they can help you out. There is a lot of legal mumbo-jumbo that you should read, but this is the gist of these plans. Warning: plans differ based on the coverage and plans your employer is enrolled in - so be sure to ask your HR department about the differences.

Healthcare Flexible Spending Account:

Your healthcare flex account (also called cafeteria account) can be used for all types of "health" care. The term Health is outlined by your insurance company, but mostly includes braces, dental, other orthedontal work, whitening, massages (yup - seriously), accupunture, laser eye surgery, laser hair removal, surgeries, lyposuction, and any over the counter or perscription medicines you can think of - from hers to Viagra! Your deductibles, or any premiums not fully covered by your insurance are also eligible.

Your insurance company will have claim forms that you have to fill out and submit with receipts. The best part about most Healthcare Flex Spending Accounts is that they are fully funded on January 1st. Which means if you plan to put $1,200 in the account over the full year ($100 a month, $50 bi weekly or $25 a week) - and you have your healthcare "enhancement" on January 1, you can submit the claim immediately (even before you have any money - or very little - in the account!) and it will get fully paid out to you. If you leave the company (and insurance company) before the end of the year, you don't need to pay into that account any more and the insurance company loses out.

The bad news? If you don't spend all of these monies (on any of the flex accounts) by the end of the year (usually December 31st) then you lose it. Yup - gone.

Daycare Flexible Spending Account:

This one is pretty self explanatory - any daycare, fees for daycare, after schooling, home nannies, third party watching of your kids is valid (most of the time) as long as you provide the companies Tax ID Number or Social Security Number for an individual.

The bad news is that this is limited to $5,000 a year, and yes, you lose any funds that are not spent by the end of the year. You still need a receipt to submit these charges for reimbursement.

More bad news is that unlike the healthcare flex account, this is not automatically funded - you only can get reimbursed for what you have put into the account - this limits the exposure to the insurance company.

Transportation Flexible Spending Account:

I don't know much about this one, but I think you can put money into this account for public transportation and parking to and from work. This is more useful in large cities and encourages the use of public transportation.

Example:

Let me give you a real life example. In 2004 I got LASIK on my eyes on January 20th. I elected to put $2,000 in my healthcare flexible spending account during open enrollment for my benefitd (usually in October of the prior year). The surgery cost me $1,950. I had the receipt that day and submitted it with the paperwork to my insurance company within a few days. Within 2 weeks the funds were depositted in my checking account. It was that easy.

How much did I save? It varies for every person, but I will simplify. A single person is usually taxed at a lower rate as long as they don't make a lot of money for the year. Married couples get good breaks too, as long as they don't make a lot of money. I was married, and was in a low tax rate, let's say I was in the 15% tax bracket. The $2,000 was depositted into a special account pre-tax - which means that saved me $2,000 X 15% = $300.

If I had paid that $2,000 out of pocket after tax, it would have cost me $2,000, but that would be $2,000 divided by 85% (my earning rate) = $2,352 because I would have had to earn $2,352 X 85% (my take home pay after taxes amount) = $2,000.

As you can see that is a good chunk of change. Use your flex accounts smartly - put a little in and use it for the things you are going to buy anyways. It makes money sense!

Ideas on how to save $1,000 a year

I get a lot of people who ask me how can they save money - they look into their lives and just can't figure out how to squeeze out a little extra cash. After looking into their lives, I usually can find a couple thousand dollars of waste that they don't even realize. Some of these sound really dumb - but they work. Just take a look and see if they relate to you:

• Starbucks - stop going over to Starbucks every morning and drinking that liquid crack - drink the office coffee, it is free. The average cup of Starbucks is $3 and change. At 200 work days a year X $3.50 = $700 + gas for driving over there.
• Soda - cut down on your soda drinking and drink more water. Reuse that water bottle! Water is cheaper, and it is healthier for you. At $1.25 a day X 2 a da X 200 work days a year = $500.
• You know that old gym pass you have hanging around and go once a year? Cancel it.
• Get rid of your home phone! Everyone has a cell phone, and your home phone is a waste. Technology today has basically eliminated the need for a land line. At $40 a month, that is a $480 savings a year.
• COUPONS! You aren't cheap if you use coupons - you are smart if you use coupons! Use coupons when you shop online too. Try this website for coupons on everything on the net: http://www.retailmenot.com/
• Get a credit card that gives you cash back or rewards. I have a Costco American Express and every February they send me a check for $300-$400 depending on usage throughout the year.
• This will be a weird one, but I could save my mother money by putting her on my cell phone plan - that's right - it costs $10 extra a month for her to be added. She could keep her number and use my minutes. That would save her $45 a month. The net savings is $45 - $10 = $35 X 12 months = $420.
• Use these family plans on your cell phone. Everyone in our family uses Verizon - calls made to any Verizon phone are free and don't count towards your minutes. The savings there are minimal, but add up.
• Don't buy premium gas. You don't need to! Cars these days are designed to run on regular gasoline - no need for the premium crap. You will save 30 cents a gallon! That could be a huge savings over the course of a year.
• Send email Christmas cards! Yes, you will still have the 10 or so cards you have to send out to the old people - but you will save a few bucks in postage.
• Sell your junk on eBay or Craigslist. Yes, your junk. Some peoples junk is another person's.....junk. There are so many valuables lying around your house that you could sell on eBay.

Of course for other reasons besides saving money you should still: stop smoking, car pool, ride your bike more, recycle, and exercise more. There are monetary savings in those activities as well, but I don't want to preach to anyone.

To summarize, if you want to save money, you should look at all the little aspects in your life and analyze them. There is savings under every stone in your life!

Risk vs reward

Everyone wants to invest their money and make a lot back without any risk. Unfortunately there are no can't miss high yield investment opportunities because as soon as they are discovered, other investors ("the market") jump in and take away that competitive advantage.

Sure, there are high yield investments out there, but they come with their risks - and the higher the return potential = the higher the risk potential. Every investment out there comes with some risk, the lower the rate of return the lower the risk.

Examples of low risk investment opportunities:
- Savings account at 1% - no risk at all since your bank is FDIC insured up to $100,000 of deposit. That means that if the bank goes under you get your money back.
- CDs at 2%-5% - no risk either (also FDIC insured), but there is the inconvenience of having your money tied up for a period of time (depending on the CD terms).

Examples of high risk investment opportunities:
- Investing in the Stock Market - high risk, chance to lose every dollar you put in.
- Investing in the Options/Futures market - very high risk, need a PHD to understand, but can yield great returns.

Examples of medium risk investment opportunities:
- Real estate - the returns can be high, but usually you have to wait a very long time to recognize them. Real estate (at least your primary residence) should be viewed as a necessity, not an investment.
- College - again, the returns can be high, but it is a huge time and effort investment. Also, the higher the college price the higher the level of education (usually) which means the higher the returns later in life.

The point of this message is to access how much risk you can handle in your investment portfolio and then invest accordingly. Generally, if you are younger you should invest in higher risk investments because you can afford to lose more, because you have many years before retirement to earn back or save up the money. The older you are the less risk you should take because you can't afford to lose the money you are setting aside for retirement because you have less years to earn it back or you are on a fixed income. Fixed income is generally the interest you earn on your investments and social security. Social security is not guaranteed, so no one should rely solely on that as a source of income.

One way to reduce risk is to "diversify" your portfolio. Your portfolio is all your investments in total. If you put all of your money into one type of investment or market, you run the risk of that market going up, or worse, going down. For instance, putting all of your money in the stock market is a good idea - putting it all in one stock is not such a good idea. Your entire return will depend on only that stock - if that stock crashes you will lose everything. The same can be said for one type of industry, like oil and gas, or something tangible like real estate.

The best way to diversify your risk is to spread your investments around. Your home is a great investment because even if the market tanks, you will still need a place to live. In the stock market there is mutual funds and index funds that are made up of pieces on many stocks. This way if one stock goes down it is only a small portion of the total investment. Some mutual funds are built for steady returns, and some are built for fast returns - each will have the proper return associated with it.

Then of course, you should have some of your investments in bonds and CDs - these are liquid assets that have steady controlled returns with little risk. These are designed for people who are risk adverse but still want to make something on their money. You should consult an investment advisor if you have any questions on any of the investment vehicles out there on the market.

The other thing you need to do is create a plan for the future. What do you want to do in retirement? Do you want to live on the beach? Live on a golf course? Live with family? Travel the world? Estimating your living expenses when you retire is a difficult step, but one we all need to do.

Let's say you are 40 years old and have 25 years until retirement. You'd like to live in FL in a retirement community and travel a couple of times a year. Well, your living expenses will include monthly rent, groceries, phone, supplemental medical insurance, car insurance and extra cash.

Let's say all that costs $2,500 a month in 2007 dollars. Anticipating a 1.5% inflation rate for every year until you are 65 would add 37.5% to that total. So, a $1 today = $1.37 in 2032. Thus, it would probably cost more than $3,400 a month to live in 2032. $3,400 X 12 months is over $40,000 a year. Plus, you probably want $10,000 a year for travelling and other expenses. Assuming you live to be 80, that's 15 years X $50,000 = $750,000 needed to retire.

That seems like a lot, but if you break it down over the 25 years you have left until retirement, you would have to save or invest $9,500 a year (at an 8% interest rate). That may seem like a lot today, but if you think about it, you spend a large portion of your income on a huge investment - your home! All the equity you are building will help you later on when you sell your house and buy a smaller one, or sell it and retire to a condo/townhome on the beach in FL. It will also get easier to save money as you get older and after you have kids, they get through college, you travel less, you decrease your spending, etc. Its not impossible to save for the future.

So, before you think about dropping your hard earned dollars on the next sure investment that pays tons of cash - remember that if you aren't willing to lose every cent, you shouldn't invest it. But be sure you are investing something - the biggest mistake is missing out on planning for your future.

Visualize your check book.

Your check book is that small 6 inch by 3 inch paper pamphlet that the bank gives you, right? WRONG! You choose how you balance your check book and keep a running journal of ins and outs in your check/savings account.

One thing is certain though - YOU NEED TO HAVE A CHECK BOOK!

My recommendation is to use an online program or database software to manage your check book. Don't want to spend a lot on software? You don't have to. Microsoft Money or Microsoft Excel everyone has access to - and most of the time it comes with your operating system on your computer.

This spreadsheet or software is for smart people right? Um, no. Microsoft Money is simple, and has tons of other options that can help you learn to use your money better. So you need easier? Excel is even easier. A simple Excel spreadsheet is easy to create and use. Here is how I would set it up:

1. Open a new workbook
2. Save it on your hard drive as "Checkbook - 010108" (that is the date).
3. In cell A1, put "January 2008", in B1 put "1" for day.
4. Copy down in column B the days from 1 to 31 for January days.
5. In cell C1, put "Bills" and in cell D1 put "Deposits"
6. In cell E1 put "0" (this is your opening balance in your account - if you have an opening balance, put it here as a positive number)
7. In cell A2, put "Mortgage #" (this assumes your mortgage is due on the first of the month)
8. In cell B2 put "-1000" (this assumes your mortgage is $1000 - put whatever number is correct - remember, bills are negatives and deposits are positive numbers)
9. Cell C2 is "0" or blank - because this is not a deposit - it's a bill
10. Cell D2 is a formula "=D1+B2+C2"
11. Copy cell D2 down the entire column D
12. Now, put your bill descriptions into the Column A throughout the month - for example I would put "Phone Bill #auto" on the 9th of January (it's due on the 9th), and I would put "-$100" in Column C for my estimated phone bill expense. The reason I put "#auto" in there is because that bill automatically comes out of my checking account on the 9th.
13. Another example is my Truck payment - I put "Truck #" in Column A next to the 16th of January because my truck payment is due on the 23rd. Why did I put it on the 16th then? Because I have to mail the check early enough to get there by the 23rd. This is my reminder! Also, when I actually write the check, I will go back and change the description to "Truck #1234" - the check number I used was #1234 in this case. This helps me keep track of the checks I've written.
14. Basically enter all your descriptions in Column A and the estimated amounts in Column C. Remember to put bills in as negatives and deposits (in Column D) as positives.
15. By putting in estimates, you are scheduling out your expenses over the course of the month and setting a buget. This helps you visualize your expenses and how much you save or spend.
16. As the days pass in January, you will put in the actual amounts you spent on those expenses (change the round numbers to the actual amounts down to the penny).
17. After you set this up - Copy all of January to February - and March through December. This basically is building you a budget.
18. If you do two transactions on the same day, you can add a row (remember to copy the balance down though!) very easily.
19. Don't forget those pesky once a quarter/year bills - like pet insurance, excise taxes, HOA, etc. Put those in less than once a month!
20. Put only one bill/withdrawl/deposit on one line.

After you create this spreadsheet you can see how I build it out for the whole year. This pretty basic spreadsheet will help you to visualize your check book and money.

So why put your check book on the computer? Well, for starters, it is easier than lugging around a paper check book that gets ratty and could get lost easily. It also teaches you how to use computers better (that one was for all those people that need to get better acquainted with the keyboard - HI MOM!). It will also help you visualize your expenses. Why visualize it? Because if you can see upcoming bills and know when they are due, there are less surpises during the month. Hopefully this will help you plan your money better and not over spend.

This spreadsheet will also help you plan ahead and save money. You can track items by categories as well by using consistent names. This would require a little bit of Excel formula and pivot table skills - but it can be done.

Remember to always keep copies of your checking account spreadsheet or program on a separate disk/hard drive or email your self a copy to your internet email address - so you always have a copy if your computer takes a dump or you somehow mess it up.

To summarize - visualize and organize and you can make better use of your money!



Good luck!

Invest in YOURSELF and pay off your debt!

The number one question I get from friends is, where can I invest my money. My very first answer to them is - IN YOURSELF!!

First off, if you have any external personal debt, pay it off before trying to SAVE money. External debt would be any debt that you have on personal property (your house is considered an asset - not personal property), any credit card debt, a second mortgage, student loans, etc.

These types of debts are harmful to you and won't help you save any money - mainly because $1 saved in your savings account at 1% interest is worth $1.01 in a year. But if you have $1 of credit card debt at 10% you have to pay -$1.10. That equals a $.09 loss!

EXCEPTION ALERT!!
Of course there is one exception to this rule - that is if your student loans or car loan have an interest rate that is lower than the interest rate at which you can invest (usually the highest risk free interest rate you can get is under 5%). For example: You buy a car and take advantage of the 0% financing (which is not always a great deal - but that is for another blog topic), and you can put your money in your savings account at 1%. You should NEVER pay a penny more per month for that car than you are billed - that 0% is free financing!!!

So why pay off your debt? Because all your debt/credit cards have higher interest rates than you can get back in any straight forward investment opportunity. Credit cards average between 10% and 30% in interest rates. Car loans average between 6% and 12%. Second mortgages average between 6% and 9%. Student loans can even be higher than 6%. These types of debt are expendable! If you pay off your student loans or credit card debt they are gone! Just imagine paying $300 a month in student loans - if you pay them off that is $300 more a month in your pocket (or bank account)!

Car loans and second mortgages are expendable too - sure, you will always want a new car or new house, but not immediately after you pay them off. Think of paying off your car and putting $400 a month in your savings account. You won't want a new car after you see your monthly savings - you'll learn to live with that car for a little bit longer than you would have if you just kept trading it in for the next model and never getting out of car loan debt!

Let me give you an example of how paying your normal monthly payments is hurting you. On your typical car loan of $20,000 at 5% (which is a low rate) for 5 years - your average payment per month would be would be $377.44. When you mail your first payment in, $83.33 is for interest. That means you are paying 22% of your first payment to the bank and you get nothing for it. Over those 5 years you would have paid $20,000 for the car and an additional $2,645 in interest! That works out to paying over 13% more for that car - and your interest rate was only 5%!

So how do you use your money better? If you invest more money into yourself - and put a little more money towards that car every month - you can knock months off that car payment. Want an example? Ok. By paying $20 more a month on that same car, you can knock 3 months off the 60 month payoff timeline. If you paid $50 extra a month, you'd knock off more than 7 months. If you paid $100 more a month you'd knock off 13 months. That means you'd pay that car off in less than 4 years! That means that you'd be saving $477.34 a month for 13 months = $6,205 if you continued those payments into a bank account for that 5th year!

There are a couple other non-monetary reasons why you want to be debt free.

1. Less stress - the relief you get from paying off a loan is priceless. Remember that first time you paid off your credit card? Yup, multiply that by 100 when you pay off your student loans.
2. Better credit scores. This might not be important to you now, but when you go to qualify for a mortgage you will qualify more easily (less stress), qualify for more money (less stress) and get a better interest rate (smaller monthly payments! and less stress). .5% additional interest rate on a 5% $100,000 mortgage over 30 years = $31 more a month X 360 months = $11,148 more in interest! (ok, that example was monetary!)

What do you do if you have multiple credit cards, student loans, or car loans? Consolidation is always a good idea - especially if you can do it at a lower interest rate. But be very careful - because lots of times credit card companies charge you to transfer balances off other cards - these fees can range from $100 to 5% of the total! Beware of those fees.

Always pay off the highest rates first. Credit cards are always higher rates - those need to go first. But remember, you have to stop spending money on those cards to make the balance go down! Also, pay those credit cards off as soon as you can - minimum payments on credit cards are 100% interest and NO balance.

So, should you make extra payments on your house too?? The answer would always be yes, but only if you can afford it. If you make 1 extra mortgage payment a year on a standard 30 year mortgage you can pay off that house 5+ years sooner. Making large payments is not always easy though - so I would have to say that paying extra on your home should come after everything else is paid off. Why make extra house payments? Because real estate has truly been (in most parts of the country) one of the safest investments you can make. Also, you shouldn't look at your house as an investment until you sell it. It is a necessity and you need a place to live. Paying off more of your house gives you more equity in your home, which means you end up with more money in your pocket (for a bigger house or a yacht) when you sell it! That is always good!

Many people think that instead of paying off their debt, they can invest their money at higher rates than they are borrowing it at. That is called GAMBLING! And remember, investing is not gambling. If you feel that you can make more money by investing than you can putting the money into an account that earns 6% or so, that too is called GAMBLING! If you need to gamble then you have to be willing to lose big time - if you lose big time you will still have that debt and a lot less money to pay that debt. Gambling is a quick fix that has more risk than reward - remember, the house wins more than 50% of the time - you might as well flip a coin.

I will discuss investing strategies in a future blog.

So, to summarize - invest in yourself by paying off that debt! Get rid of those high interest rates by paying off higher interest rates first and get rid of those expendable loans. Invest in yourself and soon you'll have money to invest in money making opportunities! Good luck!