Monday, February 11, 2008

Money Tips

John found the article below a few weeks ago and told me to memorize it like it was the bible. I told him that wasn’t going to happen, but I would read it and try to remember the most important parts. Lucky for me the ‘Money saving tips’ were at the end of the article…and no I didn’t skip the main parts, which I expect you not to do as well.

I know all of us want more money in the sense that we want someone to give us more money. Not in the sense that we have to alter our lifestyles to have more money. Due to the lack of leprechauns located in the US we should all take that as a sign and start to get serious about our money…that is if you care to be wealthy down the road.

I thought the article below was very interesting and I really enjoyed the last section about ways to save money. I enjoyed it so much that I’ve already started! Last week I bought two things off of eBay and saved a total of $70! I found exactly what I wanted BRAND new! One was a gift, so I can’t mention it on this site, but the other was a new Mac mighty mouse. It normally sells for $50, but I got I for $30 (including shipping). For those Mac users out there you should totally look into getting one. It has a right click feature and a scroll button!! (The eBayer I bought it from also has a few more available, so if you need any info, just let me know).

So now I am doing my best in trying to remember to look on eBay if I need a specific item. (I am currently in the process of buying the printable fabric off of there as well!) I know this article may seem long, but I’m sure there is at least one thing in there that you could benefit from! Enjoy!

Characteristics of millionaires
According to a fascinating book I highly recommend, The Millionaire Next Door (published in 1996, so the statistics are dated, but the conclusions are not), here are some characteristics of millionaires that might surprise you:

"More than 80% are ordinary people who have accumulated their wealth in one generation. They did it slowly, steadily, without signing a multimillion-dollar contract with the Yankees ..."

Fewer than 20% inherited more than 10% of their wealth, and more than half never received a penny of inheritance.

They "wear inexpensive suits and drive American-made cars. Only a minority ... drive the current-model-year automobile."

About half have lived in their current home for 20 years or more.

80% are college grads, and 38% have advanced degrees (which reminds me of the bumper sticker: "If you think education is expensive, try ignorance"). 20% are retired.

Of those still working, about two-thirds are self-employed -- mostly entrepreneurs, but also self-employed professionals, such as doctors and accountants.

On average, they invest nearly 20% of their household realized income each year. OK, so most millionaires aren't rock stars or scions of wealthy families, but surely they have high incomes, right? Think again. Their median annual income was a mere $131,000. So how did they become millionaires? The answer is so simple it sounds trite: "They live well below their means."

In short, the book explains most millionaires are "FRUGAL, FRUGAL, FRUGAL ... Being frugal is the cornerstone of wealth-building ... The affluent tend to answer "yes" to three questions: 1) Were your parents very frugal? 2) Are you frugal? 3) Is your spouse more frugal than you are?"

Yet we've become more a nation of consumption than of frugality. Freely available credit has made it easy for Americans to take on debt to live above their means.

Consider: Consumer credit -- which includes most types of debt other than mortgage loans -- stands at nearly $2.5 trillion, versus $800 billion in the early 1990s and just $350 billion in the early 1980s. Debt service as a percentage of disposable income was around 11% in the mid-1990s, but has now risen to more than 14%, despite (or perhaps because of) the fact that interest rates have plunged to multidecade lows. This means the average American family is spending one-seventh of its disposable income simply paying the cost of its debts. It shouldn't be surprising, then, that the net national savings rate has remained below 1% since 2005, and has turned negative during some months. These unsustainable trends have alarming implications for the U.S. economy, as consumer spending accounts for roughly two-thirds of the nation's economic activity, as well as for the retirement prospects of most Americans. Are you wealthy?

The Millionaire Next Door has a simple test to calculate what your net worth should be right now:

"Multiply your age times your realized pre-tax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be." So, if you're 40 years old and earn $95,000 in salary and $5,000 from investments pre-tax, then your net worth should be $400,000 (40 times 100,000 divided by 10). If this test shows you're an "under accumulator of wealth," then you might want to think hard about making some changes.

Money-saving tips
Assuming that your boss would take a dim view of a demand to immediately increase your salary, and given that job-hopping in this economic climate is unlikely to lead to higher pay, the key lever for increasing your savings is to cut expenses. There are two ways to do this: Consume less or pay less for what you consume.

Let me share a few tips on paying less. (This is by no means a comprehensive list; there are countless websites and books dedicated to money-saving ideas.):

If your mortgage is more than a couple of years old, look into refinancing to take advantage of mortgage rates that remain near all-time lows. (For more on this, see the Fool's 60-Second Guide to Optimizing Your Mortgage.)

Pay off high-interest debt such as credit cards, or at least shift the balance to teaser rates on new cards until you can do so. Buy generic rather than branded products. I'll admit that I have my brand loyalties, but in general, why pay for big advertising budgets and fat profit margins? To save 20%, 40%, or even 60%, I'm willing to give a generic product a try -- and more often than not, I find that I'm pleasantly surprised.

Buy on eBay. No, I'm not your stereotypical eBay junkie, buying and selling trinkets and collectibles; nor do I have the patience for auctions. Instead, I buy a range of products, almost always new (or at least factory refurbished) and at fixed prices. I've purchased lots of things there, including a printer, toner cartridges, a kids' game, a Sony PlayStation (not for me, unfortunately!), a video camera, and an inflatable air mattress. I always shop around and estimate I save 20%, on average, by buying on eBay. There's some risk of unscrupulous sellers, but if you buy only from highly rated sellers, you should be OK. I've never had a problem.

Shop at Costco. I agree with Berkshire Hathaway vice chairman and Costco board member Charlie Munger, who once said, "Costco is God's gift to consumers." It has lower gross margins than competitors like Wal-Mart and Home Depot, minimizing markups, and it can generally buy for less by carrying only a limited number of products.

If you travel quite a bit, the Web offers amazing bargains. I stopped using a travel agent years ago and instead use Orbitz, Expedia, and Travelocity regularly. But my favorite travel site is Hotwire, which is like priceline, but without the annoying auction process. For example, I once took a trip to Las Vegas and needed a hotel on short notice. Hotwire offered me a room at a five-star hotel on the Strip for $99/night, but -- here's the catch -- I didn't know which one. But for $99, I didn't care! (The Venetian was over the top, by the way.)

The key to accumulating wealth is to consistently spend less than you earn over time. How obvious and simple in concept -- yet difficult in practice!


Sarah said...

I'm saving money already. I read this instead of buying the book. Yeah me!!

Anonymous said...

"Their median annual income was a mere $131,000." I too am living WELL below that median annual income. Especally at mere $131,000 in 1996!! I'm like a forth of that!Thanks for the money saving tips! I loved them!

Anonymous said...

"Their median annual income was a mere $131,000." I too am living WELL below that median annual income. Especally at mere $131,000 in 1996!! I'm like a forth of that!Thanks for the money saving tips! I loved them!

Anonymous said...

Dose net worth include my clothes :)