January 2009


Darling Slegg Queries:

“Hey, let’s say that you got around $10,000 tomorrow. What would be the best way to make that grow in a year’s time?”

monopoly

The Non-Answer:

The correct question is, what do I want to do with the money in a year’s time?

The Short Answer:

CDs.

The Long Answer:

That depends on a number of factors. Do I have any debt? Do I need the money to be liquid for the duration of that year for any reason? Am I expecting to make any big, unavoidable purchases in the next year (car repair, dental work)? How’s my job security? Do I have a lucrative college degree?*  Ever the skeptic, why do I suddenly have $10,000 and do I owe anyone — aka, THE MAN — anything for it?

Steve Buscemi is the man.

Steve Buscemi is the man.

*Not a non-sequitur.

I suspect what she’s asking me is where I would put the money so that it would create the most passive income, but there are a number of issues that arrive with an arbitrary, hypothetical situation.

If I had $10,000 and needed to access it in a year’s time, I would not invest in anything that is not FDIC insured. Very generally speaking, CDs tend to have the best interest rates for FDIC insured accounts (a quick Google search for CD savings rates brings me to bankrate.com, and right now GMAC bank is showing the best rate — 3.68% with 3.75% APY and a $500 minimum)**. See, the nice thing about CDs is that the rates won’t change — my high-yield savings account won’t promise that, which is why I just transferred my emergency savings account from FNBO Direct (~2.85%) to Dollar Direct (4% intro APY). I’d make a reliable couple hundred bucks. I’m basically being paid a pittance for patience.

**You’ll notice that my savings account has a better interest rate than CDs these days.  That’s why research is key.

The Longer Answer:

$10,000 is a good chunk of money for anyone, but everyone values it differently. This is why it’s important to have goals, both financial and personal, and ideally, your financial goals are set in order to help you reach your personal goals. It’s called “maturity” — not just for Certificates of Deposit anymore!

See, maybe you’re going to be emotionally and financially ready to buy a house in a year — then that $10,000 needs to be worth at least $10,000 to help with the down payment, so you can’t risk it in anything that’s not insured.

Or maybe you’re more professionally focused.  You could put $10,000 towards a degree or a certificate that will make you more qualified and thus worth more money and more valuable in the job market. There is nothing more worth your money than yourself, and educating yourself will increase your lifetime income exponentially. Unless you’re a liberal arts grad student, in which case you’ve already prepared yourself for poverty.

Maybe you have omnipresent student loans, or a car payment, or a few thousand in credit card debt you keep swearing you’re going to pay off.

Maybe you have a higher tolerance for risk, or a greater need for financial security.

The Responsible Anwer:

If I wanted to be really sexy and wise, I’d pretend like the money never existed in the first place and I’d put it all in an index fund and not think about it for fifty years, when it would be like receiving a gift all over again, except it would be something like $50,000 I would have to contemplate spending. Ah, compound interest. How you razzle-dazzle in the face of inflation.

The Actual Answer:

For me, personally, and this applies only to my lifestyle choices, with my current financial and personal goals in mind, here’s what I would do with a $10,000 gift (which, I believe, is the maximum amount before the taxman cometh):

  • I would max out my Roth IRA ($5000 for the year, although I feel like you can contribute to a Roth IRA for the year prior’s tax filing up through April–that’s something to research further)
  • I would pop $2500 in my emergency savings account
  • And I’d spend $2500 on a fortnight in Thailand.  You only live once, yeah?
  • I should probably donate $1000 to something worthy as well, but my altruism varies widely depending on how many BBC headlines I read that day, and today’s were particularly bleak.  Let your desire for karma dictate your tithing.

The “If This Isn’t A Hypothetical Question And You Are Coming Across $10,000 Tomorrow” Answer:

You should donate a portion of the proceeds to me, your friendly, neighborhood, non-professional, distinctly amateur, hobby personal finance advisor.

Hope this helps, slegg.  Xoxo, m

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This guy has a lot of great information about advanced traveling (and the philosophies that form when you experience ways of living life that differ from the one to which you’re currently accustomed). His latest offering describes how he spent $500 and a few hours applying for credit cards that gave him an estimated $12000 worth of airline miles.

I’m one of the weirdos who adores the process of flying, so this is a hugely attractive system for me. Again, it’s more based towards the segment of the population with no consumer debt, no interest in consumer debt, and for those of us who pay attention to the excruciating details. I’ll plot my progress as the miles start pouring in.

Open an Ameritrade savings account, contribute $100 once a month for a year, keep the money in there for a year, get $100. You’ll have saved $1300 and, when you squint your eyes and think about it, made about 8% interest on that balance–twice that of the current highest savings account APY available.

You have an extra $100 a month. It’s around $3 a day. What do you spend $3 a day on?

Coffee?  Make your own. I got a really cute french press and mug set at a thrift store and created a morning ritual to replace that of the addictive latte-buying process.  No time, you like the socialization, you just can’t give it up?  That’s fine; try something else, but stop complaining about being broke.

Cigarettes?  Start to cut down, right now. Eliminate the ceremony of one cigarette a day.  If you really want to know how I quit my five-year, pack-a-day habit, I’ll tell you, but it’s a personal process and you’re better off figuring it out on your own.

Lunch?  Bring your own.  Try, for a week, to make the foods you usually buy at lunch.  A week’s worth of lunches can be made organically and healthfully for the cost of one or two days’ worth of eating out.  Recipe suggestions available on request.

Gym membership? Do you use it only for cardio stuff, if at all?  Try replacing driving to the store once a week with walking to the store a few times a week. Save on gas, get exercise, learn about your neighborhood, take pride in your urban exploration.

Movie rentals?  Do you really watch enough movies a month to make Netflix worth it?  Alternatively, start reading–books are free, and libraries often have free movie rentals, too.

It’s altering or doing away with the littlest habits that will have the biggest effect.  Just like a workout regime or any goal-oriented project, this is a long-term process.

I take requests for anything you want more information on, but here’s what I’ve got coming up in the meantime:

How I budget.
How I got out of credit card debt.
How I use my credit cards to finance my travel habit.
How I pay less for everything.

This is funny.

This is my little trick for getting free money from my credit cards.  It is only my story of how I was able to accomplish this.  I don’t recommend that you do this, but if you do, know that:

This is a risky maneuver insomuch as you need to be very responsible and very aware of where your money is at all times.

  • If you tend to miss due dates, don’t do this. It will end up costing you money.
  • If you have any consumer (credit card) debt, don’t do this. I’ll talk you through how to get out of debt later.
  • If you need your credit score to be in tip-top shape because you’re about to buy a house or a car or re-fi or borrow money in any way, don’t do this. Your score will take a slight hit for around three months after the duration of the project since your credit card debt and the ratio of debt available to debt owed will become less desirable.  It usually takes mine about three months to bounce back above 800 if everything goes like clockwork, and I think I ultimately lost forty points as a result.  This is not a big deal if you are in control of your finances.  Oh, yeah:
  • If you are not in control of your finances, don’t do this. If you don’t know what that really means, don’t do this.  I’ll get to that later.
  • Remember: the reason this is an option is because most people screw up and end up owing the credit card companies way more than what the company loses in loaning money at 0% interest.  This isn’t a gamble, but it is a science.

Okay?  Still curious?

If you still get 0% balance transfer offers in the mail, take a closer look at the next one.  In the fine print, look at see:

  • if there is a maximum fee.  These days, this is atypical–usually, it will say something like, “3% balance transfer fee, $10 minimum.”  If that’s the case, in this economy, you’re hard pressed to find a decent savings account with an interest rate above 4% right now, so you’ll only be making 1% of money borrowed, which is not worth the effort.  If there is a maximum fee, make sure you’ll be able to make more money off keeping the balance in a high-yield savings account than you will pay in fees.
  • if there is a maximum balance transfer amount. This is especially crucial if you are using those checks that sometimes come with balance transfer options, because those checks count as cash advances, and the amount of you can borrow as a cash advance tends to be much less than the amount you can spend point-of-sale.  I think this is for security purposes.

If you’re really serious about doing this, read this guy’s system before embarking on this little monetary adventure.  (Did anyone else just get an image of a raft made of money floating down an African river with monkeys hanging over the water? Just me?)  He goes into a lot more detail than I will.  I adapted my system from his, as his is a bit more complicated, but you’ll yield more money if you’re of the hyper-organized sort.

Away we go.

  • I received a 0% cash advance or balance transfer offer for 8 months with $99 maximum balance transfer fee and the maximum transfer amount the same as my credit limit from a credit card that I already had open (not one that I had to apply for, though those very common and work the same way) with courtesy checks attached.
  • My available balance and credit limit was $8500, so I wrote a check for $8000 to give myself a bit of a cushion and so that the fee would not make my account go over the limit (the fees of which are hard to negotiate and may make this project a moot point).
  • I deposited the amount into brick-and-mortar bank account and waited for it to clear (always wait for it to clear before you move it out of your checking account.  I made this mistake — once, key — and ended up on the phone for weeks with my bank’s fraud department trying to explain to them that I am who I say I am.  You can tell it’s cleared when you log into your credit card account and see the new balance, which in this case was $8099).
  • I transferred the money to my online savings account, where I don’t have immediate access to it.  Right now, Dollar Savings Direct has an introductory APY of 4% with no fees [this is key–make a rule, right now, to never, ever pay fees to control your money (it’s okay to pay limited fees for some investments)] and a minimum $1000 balance, which is incredible with this Fed administration (thanks, Bernanke, for rewarding the borrowers and punishing the savers of the world).  My personal level of comfort is such that, if anything goes wrong — including, but not limited to, the credit card arbitrarily raising my interest rate for some asinine reason, or me forgetting to pay the bill on time which would make the interest rake hike up from 0% to anywhere from 13-29% — I want my money to be accessible.  I don’t have a checking account associated with my online savings account as a way of making me really have to work for the money in my savings account (it takes 3 days to transfer money to my checking account), but if you’re better organized than I, you could deposit it anywhere that’s FDIC insured (which is basically CDs and checking and savings accounts).  The FDIC insurance is key, because, as this current economy demonstrates, you don’t know what’s going to happen with the free market and you don’t want to be in the hole for thousands of dollars just for trying to be crafty.  Basically, don’t be greedy.
  • I pay $100 a month onto the credit card balance, which is above the minimum (and a good way of helping my credit score bounce back).  Also, I pay the money out of my checking account, not out of my savings account, so I’m actually tricking myself into saving an extra $100 a month because that’s money that I’ll already have essentially paid back in full by the time I need to pay off the credit card.  Some credit cards give you the option of setting up an automatic payment system, where you tell it how much to pay the credit card (minimum, full balance, or other amount) on a certain day (scheduled or just defaulted to the due date).  If you do this, I would double check that each month, just to be safe.  I always schedule it manually when I receive the e-bill, and I schedule it for the business day <b>before</b> the payment is due because credit card companies can assign you a due date that is on a weekend and not process online payments until the following business day, and they will make you pay fees, and it will hurt your credit score.  Credit card companies are evil.  That’s why we’re taking advantage of their limited generosity.
  • A few days before 9 May (to allow for all-too-common credit card “clerical” “errors”) when the promotional interest rate on the credit card is over, I’ll transfer the remaining balance due on my credit card (which will be around $7400) from my savings account to my checking account and pay off the card.  I’ll have made about $150 in interest and have tricked myself into saving a total of $600.
  • I’m going to leave the money in my emergency savings account and let it continue to gain interest, little by little.  If I really wanted to win at life, I would transfer the amount I made in interest into my Roth IRA to get closer to maxing out my contributions, but that requires the phone call to my investment banker that I keep forgetting to make.

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