One-Year Tightrope » Personal Finance

Treat Renting like Owning

Michael — Thu, 04 Mar 2010 19:36:36 +0000

Many people have trouble making the decision as to whether they should rent or buy. If you choose to rent, however, My Life ROI has some suggestions about what to do in order to still be building equity while you rent.

My favorite part?

Take the amount you would have used for a down payment and put it into an index fund or other investment vehicle depending on your risk tolerance.

If your mortgage payment would be greater than your rent, take the difference and invest that, too.

If you’re looking for a good summary of the rent vs. buy debate, or if you just want a pretty good personal finance read, check out the full article.

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The Best Investment I’ve Ever Made

Michael — Sat, 27 Feb 2010 05:47:26 +0000

Personal finance blog I Will Teach You To Be Rich has an interesting post about personal investments, with a few good examples of things not normally considered to be investments, but that have paid off thoroughly over time (either monetarily or otherwise). The post sparked an idea for me, and I feel the desire to share my best personal investment here with all of you.

I think my best personal investment was buying the domain name for this blog, and the time I’ve put into researching and writing about the various topics I’ve covered. The last few months, I’ve learned a lot, especially about myself, and I feel like I have a cheap form of therapy and education right here. I don’t mind that this blog has not yet taken off; I’m just happy I get to meet all of you interesting folks who comment here.

What has been your best personal investment? Did you spend time, money, or something else?

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Find Motivation by Budgeting Savings

Michael — Thu, 18 Feb 2010 16:01:01 +0000

A key to motivating oneself during times of hardship is to set tiny rewards for working toward goals. Another wise idea for motivation is to always have something in mind – the positive end result – while making progress toward a goal. One way to do this financially is to budget a savings account.

By budgeting, people normally mean balancing spending so that there is as much or more money coming in than leaving. For this kind of budget, however, we are going to use a familiar denomination: percentages.

Take a moment now to write down any financial outcomes sought. They may include placing a substantial down-payment on a home, funding a semester of college for either oneself or a child, or saving up enough money to retire one year early.

Next, we will assign a value to each ending. My personal long-term savings goals are for my own and my partner’s retirement, buying my first home (with some furniture), and having a child (diapers are expensive, after all). My short-term savings goals are for an emergency fund of $1,000, a new pot and pan set, and a KitchenAid.

Anybody versed in personal finance knows about Dave Ramsey’s snowball method of debt repayment. We will use a similar method to gain momentum in meeting savings goals. Short-term goals will receive a hefty priority – say, 50% for me. The short-term goals are broken up as follows:

Emergency fund – 50%
New pots and pans – 30%
KitchenAid – 20%

That means 25% of my total savings will be dedicated to building an emergency fund.

Long-term goals are broken down similarly:

First home purchase – 80%
My retirement – 5%
Pete’s retirement – 10% (His retirement age is closer than mine)
Children – 5%

The exact amounts may need to be tweaked if I decide something in particular is more important.

As for keeping track of everything, you may choose to go the difficult route and open up separate savings accounts for each individual budget, or you may choose the easy (and easy to screw up, if you’re not careful) method of using an Excel spreadsheet. I, personally, use the latter choice.

How do you budget your savings? Do you just have one account that you contribute to because you feel you should?

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Spending Time and Spending Money

Michael — Thu, 28 Jan 2010 16:17:35 +0000

Rather than have a personal finance post this week, I would like to give some link love to one of my favorite blogs: The Simple Dollar. Trent has written an interesting post asking readers how they spend their time and how they spend their money. The point is that there are some areas, like gym memberships, where we may spend a lot of money, but not very much time. There are others, like cooking, where we spend a lot of time but have not invested very much money.

The Simple Dollar is always a great place to look for realistic advice for saving money and using it wisely. If you want a good read, check it out.

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Are You Credit-Ready?

Michael — Thu, 14 Jan 2010 16:23:44 +0000

Personal finance advice often creates two camps: those who oppose credit cards and those who support their usage (with responsibility, of course). I fall into the proponent camp, because I think building good credit is a great way to finance a car or house without paying in cash, which is difficult for most to accomplish. Additionally, cash back and rewards cards are a nice way to generate a windfall. As long as credit usage is within reason, it is an easy way to get more out of shopping.

This does not mean, however, that I encourage all to go out and sign up for credit cards. College students, low-income families, and newly hired, entry-level workers often fall into the pitfalls of 0% APRs with the promises of fortune. This article contains guidelines for making the decision as to whether or not you are ready to take on a credit card. I think it will be useful for both those with no credit experience and those who are looking to take on a second or third (or more) credit card.

Can you get it?

The first thing you need to know is whether or not you will actually get the credit card for which you are applying. Sometimes, having a low income, little experience, many inquiries on your credit report, or being young will negatively affect your application and result in rejection. Before wasting an inquiry on a card, decide if you have good odds of getting it. I was rejected from a Shell card recently, and this was disappointing and lowered my score for nothing.

What kind of card is it?

Is this a cash back or rewards card? An introductory 0% purchase APR card? A balance transfer card? How are you going to use it? Depending, but especially if this is a card with a low introductory rate, consider how much you are going to be racking up in debt. 2011 will come quickly.

Is the card good?

A good card is defined with the following qualities: No monthly, annual, or otherwise “membership” fee*, few asterisks in the explanation, low interest rate (below 20%), good grace period for payments, and a free rewards program. Examples are Chase’s Amazon.com Visa, which is my personal credit card.

* The exception is for prepaid cards, which almost always have a fee. These are for people who cannot get a regular credit card, but still want to build their credit.

If you get into trouble with your credit card, who will be paying for it? What is your contingency plan, should you become unemployed or disabled? Are you buying things on credit, or are you planning to pay off the card at the end of every month?

A guideline: If you can’t afford it now, you can’t afford it later. Trust me.

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Finance: The Pareto Principle

Michael — Thu, 07 Jan 2010 18:26:17 +0000

Anybody studying economics, business, or many other areas has heard of The Pareto Principle: the law that states that 80% of results come from 20% of effort. It is a common rule used in businesses to express that 80% of business will come from 20% of clients, and 80% of clients will come from 20% of marketing effort, and so on.

While not necessarily and inherently accurate, it can be used in a variety of situations to some degree of truth and honesty. One such situation is that of a very important sector in personal finance: saving money.

If 80% of your savings will come from 20% of what you do to save, then it is important to identify the 20% and do more of it, while discontinuing ineffective areas.

Where I spend the most time to save money is through coupons. Locating, clipping, organizing, and coordinating with sales clocks in at about four or five hours per week. I could do it in less, but I have a sort of obsession with it at this point.

I am not currently employed, but I do have better things to do, so I value my time at about four dollars per hour. This means I am spending $20 per week in time to save money through coupons. I do not save $20 per week through coupons, so this is a futile effort. I should cut down on time spent until I create an equilibrium, but I consider it a form of amusement as it relaxes me.

We also save money by living with my parents, where we pay $275 per month in rent and utilities. This is a flat rate, so there are no savings to be found here.

Monthly cellphone bills, our gym membership, and our Netflix subscription are another thing. We could theoretically give each of these places a call and ask them to lower our monthly fees. This could save us, say, 25%, which is $50 per month. This is more than I save with coupons with a lot less of an investment.

Similarly, I could ask for a lower interest rate on my credit cards and threaten to change banks, but I do not currently carry a balance, so this would be pointless.

Where are you spending 20% of your time to create 80% of the results? Where are you spending time that you probably should not? Do you use coupons? Do you consider them money-saving form of entertainment?

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Balanced Personal Finance

Michael — Thu, 24 Dec 2009 20:02:42 +0000

As more of a site announcement, the One-Year Tightrope will be getting another new series on personal finance.

The articles will focus more on credit building and budgeting, because I know very little about debt (I have never fallen into the trap). As such, look forward to something about personal finance on Thursdays. I will continue to post other things, and the series will not necessarily be every Thursday, nor only on Thursdays.

Have a Merry Christmas and I look forward to returning with an article on Sunday. Happy holidays!

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