Video: 7 Tips For Saving

Here’s another installment from my KLRN public television video series “It Just Makes Cents.” This one is on how to save money.

The text is linked here, if you like to read.

Or…if you like your juicy savings tips in podcast/audio format…we’ve got that too!

Fine, fine. Here’s the actual text on KLRN

You want to save money. Duh. Who doesn’t?

I’m a true believer in one way above all others. Let’s start with the one TRUE thing before reverting to other tried-and-true pieces of savings advice. 

1. Automation

I believe in this above all other savings methods. Automate regular contributions of a set amount, on set days, into a savings account. You set up this automated plan with your bank or credit union once and then let it run in the background of your life. For the rest of your life. Every week, or every other week on payday, or every month (or whatever, knock yourself out, set it on daily, go crazy!) you automate a transfer from your checking account into a somewhat-harder-to-access savings account. 

The key is to make today’s decision to save happen automatically in the future. Electronic. Programmed. Unchanging. Savings by Robot. That way, You don’t have to make the decision more than once. We’re not strong enough for that. But automation doesn’t depend on us being strong. Which is exactly why it works.

My bank takes a small amount of money every few days out of my checking account, automatically, and puts it into my savings account.

I’ve also successfully used the automated savings app Qapital for this automating function. This is by far the best new school way to save money and if you’re not doing it then I don’t know what to tell you except this, in a deep Arnold Schwarzenneger voice: DO IT. 

After automation, tips 2 through 7 could also help.

2. Goal Setting

First – set a specific dollar amount. Next, name it. Write it down. Make it real. The idea here is that when you name your goal “Three fabulous new outfits to rock the house,” “Dream trip to Dollywood, TN,” or “BMX racer” or whatever you’re actually saving for, you change the feeling of savings from that grey gnawing emptiness in your belly into something tangible, exciting, colorful, and worthwhile. Going without today is a necessary step toward having something awesome tomorrow. Goal setting can help do that.

https://youtu.be/a6P40wLThbc

3. Round-ups

The old school way was to drop that pesky pocket-change of coins and small bills, collected throughout your day, into a change jar for a year or so, and then bring that all down to your bank or that coin machine at the grocery store.

The new school way is to use ‘round-ups,’ essentially the less-than-a-dollar change you’d get from making plastic purchases (via debit & credit cards) and then electronically tracking all that electronic loose change. When it reaches $5, you automate that amount into a savings account. Many banks can do this automated round-up thing for you, as will many savings apps like Qapital and Acorns.

Does it work? Yes, it works. Mostly because of (see above!) Automation.

4. Identify the Tiny Leak, maybe?

Maybe you can’t save, and you don’t know why. The answer is, maybe, in the small stuff? The dreaded answer, if you’ve ever read those other finance blogs aimed at Millennials, is your regular latte or your avocado toast. And you’re sick and tired of hearing that cliche. So you hope I won’t mention the words L*tte or a*ocado t*oast anymore.

Look, the big idea here is not to forbid you from having those things, or some other small luxury item you crave. The big idea is to find out – maybe just for informational purposes! – what you’re spending money on. So…try for a week…write down every single purchase you make. Tic-tacs. iTunes. Hulu subscription.  Everything. Did you find the leak? I’m not saying you can’t have those things, but rather – it’s worth maybe knowing where the leak is coming from. Right? Well, maybe.

5. Sorry, But It’s Actually The Big Stuff

The worst thing about the avocado toast and latte lecture to Millennials is not that it’s a cliche (although the cliche is admittedly bad) but that it’s not even the heart of the matter. The ‘matter’ being your struggle to save money. The true fact is that most of your money is going to housing and transportation every month, not lattes and avocado toast. Which seems pretty immovable. But also…the correct answer to the savings puzzle – the mathematical answer – is your house payment and car payment. Do you really, really, really want to save money but can’t? Big changes in savings won’t happen without making difficult choices about your house or car payment. Sorry, I didn’t invent math. I’m just reminding you of it. 

6. Only Carry Cash

You take out a certain amount of money. You buy stuff with that limited amount of cash. You don’t use plastic. When you run out of the cash, you don’t buy anymore, because: NO MORE MONEY. Your grandparents did this. They saved money this way. This is decidedly old-school and a bit extreme, but try it. Maybe it will work for you. 

A variation on creating an all cash world is the envelope trick. Some people swear by this one. It’s similar to the “Only Carry Cash” tip, but a bit more organized. You label a bunch of physical paper envelopes with your specific monthly budget. Things like “Rent,” “Utilities,” “Groceries,” “Entertainment,” and “Gas Money/Transportation.” On payday, or the beginning of the month, you withdraw a set cash amount and put that amount in each envelope. When the money runs out this month, no more spending on that category until the next pay day. No plastic. No cheating. Again, it’s extreme. But this has worked for millions of people, and might for you.

7. Bargain/Haggle

You know what else Grandma did? She haggled. Everywhere. With her limited wad of cash. With all the shopkeepers. Like, every day. You can offer less than the store wants at pretty much any place that isn’t a complete chain store. All furniture stores, for example. Any service provider. All locally-owned businesses. Pretty much every business owner has a bit of flexibility in their prices, if you ask.

Arnold_Do_It

Does that seem uncomfortable? Would you be embarrassed to do this? 

Well, put it this way: Would you make yourself momentarily uncomfortable by sticking your arm under the driver’s seat of your car to retrieve a $20 bill? I would. Well, haggling at the store is more like sticking your arm in an uncomfortable position with hundreds of dollars within grasp, and thousands of dollars at stake per year. Try a little discomfort. Your grandma actually enjoyed it. You might also.

But can I remind you of the one best way? Ready? 

Automate your savings! 

DO IT.

(Thanks, Arnold.)

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Automatic For The People

robot_finance

For getting started with basic finance goals, we need robotic automation, not human resolution. I’ll explain.

Did you know that January 17th of each year is officially “Ditch New Year’s Resolutions Day?” This post lands squarely in the spirit and timeline of that tradition. Resolutions never work. Instead, automation works.

I’m a finance guy so my “automation, not resolution” idea pertains to your savings and investment goals. Like most sentient beings, you’d like to save more money and invest more money. But your best financial intentions for savings and investment in 2018 have already been ditched in advance of Ditch New Year’s Resolutions Day.

And I’m so, so sorry to learn your other 2018 New Year’s resolutions about eating clean, exercising more, and paying closer attention to family members isn’t working anymore. Same here.

If only I were a robot, I think, I would fulfill my resolutions so much better. Robot-Mike would never miss leg day at the gym. Robot-Mike would never eat those donuts. Robot-Mike would pay close attention to his beautiful children, instead of reading Twitter on his phone.

I just want to describe for you three automation things for savings and investment that worked for me in the past year. The beautiful thing about automation is that it brings that steely robotic resolve to solving the squishy human problem of savings and investment. Each one took about 10 minutes (maximum!) to set up. Then the automated process just hums in the background of your life. Human weakness regarding sugar, carbs, exercise-laziness and Twitter-distraction can’t knock these financial bots off track.

In the beginning of June 2017 I signed up for an automated savings program offered by my bank called “Tracker.” This is a goofy and effective savings scheme in which my bank slips a varying amount, between $1 and $9, out of my checking account and into my savings account, every Monday, Wednesday and Friday. The amount varies according to the bank’s own proprietary system, although it will not transfer any money if my checking balance drops below $100.

The “Tracker” app, with a picture of a dog, then sends me an encouraging text message to my phone every day about how much I have in my checking account, or how much I’ve saved, or some dumb factoid about either dogs, or money. This is silly except that I saved $504 over the course of 6 months without even noticing how. (Well, I noticed the text messages.)

And I know, $504 is not life-changing, but it’s also much better than not having that extra $504 in my savings account, without even trying. My bank built the Tracker app but I’m pretty sure any bank you may use in 2018 will let you set up an automatic transfer program to slip small amounts out of your spending account and into a harder-to-spend-from savings account.

In May 2017 I wrote about a funny savings app called Qapital (which I enjoy pronouncing incorrectly as Kwapital.) Qapital, like Tracker, slips small bits of money – you determine the amount and timing – out of your checking account and into a Wells Fargo account you access through the app. Qapital encourages you to set final goals for your savings (I chose to save $500 in order to purchase shares of stock for my daughters) and to pick the triggers for transferring. My trigger was a “52-week rule,” which started with $1 in the first week, and increased by $1 each week that followed. By November 2017, right on schedule, my Qapital savings account reached $500. The beautiful thing about Qapital, like the Tracker app, is that the tiny amounts of weekly money never pinched. I never missed the money removed from my checking account.

In May 2016  I downloaded and started investing through the Acorns app. Like Qapital, Acorns lets you determine an amount you’d like to automatically transfer from your checking account on a daily, weekly, or monthly basis. After a bit of prodding from the app, I settled on a plan to transfer $5 per day to Acorns according to their “Aggressive” (aka risky) portfolio of ETFs. Why $5?

Like many caffeine addicts, I can easily spend $5 or more on coffee and other non-essentials per day, so I decided $5 was the right “punishment” amount to contribute to Acorns.  21 months later I have $5,875 in my Acorns account. Most importantly, I’ve never missed the daily $5 hit to my checking account.

Maybe you’re thinking that $500 of savings ($1,000 if you count both Qapital and Tracker!) or $5,875 of investments doesn’t make a whole lot of difference in one’s life. You’re not impressed.

“Big deal, finance blogger,” you’re thinking, “what about the real money?”

“Ok, Big Shot,” I’d respond to you, “fine.” All of these automated processes work at a larger scale as well. Crank it up to 11. Make my day. Go for the real money. That would really show me up. But also, the Acorns app has a neat little projection graph that shows my dumb $5 per day building up to a $100,000 portfolio by age 65 and a $400,000 portfolio by age 85. Which could matter some day.

automatic_for_the_peopleThe point here isn’t that your favorite finance blogger is really good at savings and investments. Rather, the opposite. The point is that anyone not very good at savings and investment could produce similar (or far better!) results while hardly trying. The further point is that automation of savings and investments means you don’t have to be disciplined throughout the year. You don’t have to stick to any resolutions. You make the robot do the thing for you.

After the initial 10-minute set-up of automated transfers, just literally do nothing the rest of the year. Heck, the rest of your life. Doing nothing becomes, in fact, the key to your success. “Doing nothing” feels like a New Year’s resolution we can stick to, long past January 17th.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle

 

Please see related posts:

Whoa…Acorns is really good

Qapital is goofy but might help kickstart savings

 

 

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Book Review: Automatic Millionaire Homeowner

How important is homeownership to building wealth in the United States? I’d put it on a list of the top five most important things people should do.

Off the top of my head the other four are probably

  1. Stay out of high-interest debt
  2. Automate your savings and investments
  3. Invest in risky, not safe, things
  4. Invest for the long term, greater than 5 years.

As a top five action, why and how is homeownership important? And can it go wrong? Oh yes, it can go wrong. It’s been less than a decade since homeownership went terribly, horribly wrong for many, so even while I want to extol ownership, it’s worth reviewing painful lessons too.

In 2014, the last time the Federal Reserve published their Survey of Consumer Finances, reporting median homeowners’ net worth of $195 thousand compared to renters $5 thousand net worth. Homeowners have nearly 40 times as much net worth as renters.

Of course you scientists will point out that correlation does not imply causation, and also that causation goes both ways. People own a house because they have wealth, AND people have wealth because they own a house. Even so, the mechanism by which home ownership builds wealth matters.

Homeownership works to build wealth because of automation, tax advantages, and leverage.

By automation, I really mean to highlight the way in which paying a mortgage over 30 (or even better, 15) years steadily builds, month after month, year after year, your ownership in a valuable asset, and in a way that matches your monthly budget. Your monthly mortgage payment is a combination of interest and principal, and every bit of principal you pay adds a steady drip into your bucket of positive net worth. Sleep like Rip Van Winkle and then wake up 30 (or even better, 15) years later and boom! You own a valuable asset free and clear of debt.

By taxation, I really don’t want to highlight the mortgage interest tax deduction that everyone seems to know about already, and that quite frankly I’d be happy to see disappear.

Instead, the tax-reducing key to wealth building through a lifetime of home ownership is the capital gains tax exclusion of $250 thousand, or $500 thousand for a married couple. Home ownership doesn’t work like other investments. It works better. If you buy a house for $200,000, and then manage to net $450,000 when you sell it many years later, you have a $250,000 capital gain. Normally, Uncle Sam takes a cut of a wealth-gain like that, like 20 percent, or $50 thousand. But as long as certain conditions are met – you lived there 2 out of the last 5 years – then that entire $250 thousand gain is yours to keep, tax free.

In the bad old days – before 1997 – Congress only let you do this tax trick once in a lifetime. Since then, however, you can do it over and over as much as you like. Now doesn’t that make you love Congress more? Congress is WAY better than cockroaches, traffic jams, and Nickelback, even if it consistently polls worse.

By leverage, I mean that middle class people can’t normally borrow four times their money to buy a valuable asset. If you experience home inflation, that borrowing juices your return on investment in an extraordinary way.

Please forgive the oversimplified math I’ll use as an illustration of leverage: If you invest $50 thousand as a down payment and borrow $200 thousand for a home, and then the home goes up in value by 10 percent, what’s the immediate return on your investment? Hint: The answer isn’t 10%.

If you managed to sell your house with a 10% gain in value, you’d clear $75 thousand after repaying your loan. If you invest $50 thousand in a thing and net $25 thousand on that thing, you have a 50% return on investment. That’s the power of leverage.

When you combine automation, tax advantage, and leverage, you have a powerful wealth-building cocktail from home ownership.

Ready for the cold water to spoil your mojito? Home ownership as an investment can also go terribly wrong.

I was thinking of this recently because I checked a personal finance book out the library that has aged very badly, David Bach’s The Automatic Millionaire Homeowner.

Published in 2005, a few years before the 2008 Crisis, Bach’s book is a combination of good advice, like I reviewed above, and terrible advice.

Bach urges people with weak credit scores to check with their banks about alternative mortgages specifically tailored to them. Bach also describes in detail the opportunities for prospective homeowners to purchase with just 5 percent or 10 percent down, or even “no money down,” rather than seek the conventional 20 percent down-payment mortgage. Bach describes without apology the idea that your house could increase in value by 6 percent per year, every year for 30 years, turning your $200,000 starter home into something worth $1.1 million. In fact much of the book reads, in retrospect, like an excited exhortation to flip one’s way from a starter home to a millionaire mansion through risky mortgages, low money down, and price appreciation as far as the eye can see. Needless to say, that isn’t the way to do it.

I’m not saying low down payments, or buying with weak credit will always go wrong and should be forbidden. I’m just saying that, given what we experienced a few years later, we know it will lead to tears for many. And I’m not saying your house won’t appreciate, I’m just saying that a more normal annual price increase like 2 percent – in line with inflation – is a much better bet.

millionaire_homeowner

Good personal finance books are evergreen, and that one isn’t. If you want a good one however, may I suggest Bach’s excellently readable and important The Automatic Millionaire, in which he extols the concept of automating savings and investments, a key for most middle-class people to build wealth over a lifetime.

 

 

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IFTTT with Qapital

qapitalTransitioning from being a paycheck-to-paycheck person to a person with actual accumulated savings in the bank is one of the classic problems of personal finance.

Maybe you got there easily, as soon as you started earning money. If so, you are not the majority. Some never get there. A large number of people are in the middle, struggling from year to year to make progress on the problem of building up some savings.

If you have a problem saving money, maybe you need a fin-tech crutch, one of which I just tried using last month, called Qapital. **

The national average savings rate of 5.7% (saving $5.70 for every $100 earned) is not only well below the minimum recommended 10% rate, but also is well below historical averages in the United States. Not only that, but average means that for every above-average saver, many have no savings at all.

We know from behavioral economics that automation is one of the things that works for both savings and investments. Automation – the slipping away of bits of unnoticed money from your account over time – is the most important tool for savings and investment that I know of. Automation is why 401(k)–type plans work

I picture the power of automation in the context of dieting. If I’m served a big plate at a restaurant, you’re darned right I’m going to finish everything there. Proudly. But if I had a secret invisible robot to remove a portion of food from my plate at every meal, unnoticed by me, I might just slim down faster. Acknowledging my human frailty and appetite, I might just benefit from this technology solution.

Analogously, the automation of savings keeps our greedy little hands from spending all of our money as soon as we get it. The Qapital app which I’ve been trying since April applies this power of automation to the problem of savings, with a few clever twists.

iftttQuick side note: I guess the app is pronounced “Capital,” because “Kwap-ital” is just too absurd and awful. My wife, however, decided to call it Kwap-ital and that makes me laugh every time.

Anyway, about the app. First, it suggests that you set a goal for savings, such as going on a trip, a specific purchase, or paying down debt. You name your goal in the app. We probably need specific monetary targets, for a specific purpose, in order to do the hard thing.

In mid-April I decided to set a goal of saving $500 so that each of my daughters could have $250 to purchase more shares in their favorite stock. Man, they just love stock investing! I mean, not really, but a Dad can dream. My wife set a goal of saving for a vacation to Scotland. Man, we just love eating haggis. Again, not really.

Anyway, next the app prompts you to link your checking account, which funnels money into a newly-created savings account, held at Wells Fargo and fully FDIC-insured. No word yet on whether Wells Fargo will create a bunch of fake accounts in your name afterwards. (I kid. But they deserve it.)

unicorn_frappucinoFinally, Qapital came up with clever rules to encourage your savings – some sensible, some goofy. You can program Qapital to transfer money into a savings account for accumulating sports memorabilia whenever you use specific hashtags on Twitter, like #TomBrady is the #GOAT. You can set a rule that transfers money to pay for your CrossFit membership whenever you make a terrible decision like purchasing a Unicorn Frappuccino from Starbucks. You can save money for a cruise vacation whenever the temperature in your town goes above 75 degrees, or whenever it rains. You can set a rule that transfers money to savings – to be donated to your favorite political cause – whenever Donald Trump tweets. Seemingly anything that can be measured electronically can be linked to a Qapital rule. These programmed money transfers are known as “If This Then That” technology – or “IFTTT” for the cool kids.

Other rules follow a more prosaic program for regular transfers into your savings account. A friend of mine uses Qapital to automatically transfer 30% of every freelancer paycheck he receives, so that he’ll have enough money socked away at tax time. That seems like a very sober and clever use of the app.

qapital

I chose Qapital’s “52 week rule” in which on week 1 I save $1, on week 2 I save $2, and so on increasing each week by a dollar for 52 weeks. More poetically, they could have named it the “boiled frog” rule, as I feel like the slow increase in savings will be practically unnoticed by me over the course of the year.

Whenever the money moves from my linked checking account into savings, the app sends me friendly reminders and small encouragements. As of this writing I have $10 already in my account. Sweet! Go me!

All of you reading have no doubt already calculated in your heads that I’ll reach my target of $500 by week 32, or around November 26th. Also, if I let it ride for the whole 52 weeks I’ll have set aside $1,378. You can mark your calendars and send me a tweet to ask how the process went. Even better, you could program your Qapital account to transfer money into savings every time you tweet at your favorite finance blogger.

 

**Also, I’m putting this link here and hoping you’ll forgive me and think I’m not just a hacky shill for $5. But if you do sign up for Qapital after clicking this link, I think I get $5. And so do you!

A version of this post ran in the San Antonio Express News and the Houston Chronicle.

Please see related posts:

Check out this Acorns thing

Automatic deductions is the key to getting wealthy

Daughter’s first stock investment

 

 

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Judgment vs Objectivity – My Recent HELOC Renewal

A version of this post ran recently in the San Antonio Express News.

My wife and I recently renewed our home equity line of credit 1  with our bank.

nutella_is_the_best
HELOCs are as good as Nutella

When the notary at my bank had us in the room for 30 minutes busily initialing and signing many dozens of pages per a minute – pausing approximately 0.7 seconds per page – my mind began to explore the absurdity of it all.

Am I supposed to have read each page? Does this signature here actually compel my compliance with everything on the page? Really?

Hidden in the fine print of these documents, the bank probably slipped “And, henceforth I, Michael Taylor, by my signature below, do solemnly agree to wear a rubber ducky costume to work every day. Also I agree that my banker is the super-duper coolest person ever” and there’s no way I would have caught that in the fine print.

And yet, I signed. My cursive name must mean I agreed to it all. Yes, I agreed to whatever they wrote down there!

I’ve worked on many sides of the mortgage business for many years now, so I understand the point of this paperwork. To wit, the papers have zero to do with serving borrowers and 100 percent to do with creating a CYA paper trail – a paper trail that serves the lender, not me, if things go badly.

I get that.

I wish I didn’t have to participate in this charade of me ‘agreeing’ to something which I am unwilling to read thoroughly, that the bank knows I am not reading, and yet the bank also knows they can take me to court and win by arguing successfully that I agreed to all their terms, if I fail to comply with said terms.

We’ve all had that experience of mindlessly signing and initialing page after page of unread documents.

What do all those initials and signatures, the unreadable documentation, plus all of the regulatory morass that underpins it all, stand in the place of? Human judgment.

nail that sticks outWritten rules substitute for our ability, or the bank’s ability, to make individual decisions specific to a situation.

But here’s the weird thing that I returned to in the midst of signing my name dozens of times in front of my notary: this dehumanization of the decision process is a good thing. This automated decision-making process works to our advantage.

We think we want our bankers to be able to use their judgment. But we really don’t.

We think we would all be better off if we had a banker, like George Bailey from It’s a Wonderful Life, who could look us in the eye and say: “Here’s a loan, Taylors, I trust you. Don’t worry about all that boring paperwork, your handshake is enough.”

We’d skip out of the bank buoyed by Banker Bailey’s great judgment and trust in our solid character.

To the extent that George Bailey’s world ever existed (it may have, or it may not have) I don’t think that was a better world for borrowers for at least for one important reason: Borrowing costs.

All the impersonal unreadable language assists in making mortgage loans like my HELOC (Home Equity Line of Credit, but you know that) one of the cheapest ways to borrow on this planet.

Banks do not really underwrite mortgage loans anymore. Instead, they originate mortgages for a fee, and then feed the mortgage bond investor system with similarly situated mortgage loans. To feed that system, every single mortgage or HELOC must conform precisely to the standards of bond investors.

The mortgage bond market attracts a billion of dollars of investment capital on a daily basis 2 to fund home ownership. That money invested in mortgages gets offered at rock bottom interest rates precisely because of the uniformity enforced inside a mortgage bond.

Any non-conformity in the mortgage underwriting process makes the loan ineligible for inclusion in a mortgage bond structure. “The nail that sticks out must be hammered down,” as the Japanese cliche goes.

With a signature missing here or an initial missing there, the bond structuring companies would kick our loan out, and the bank would get stuck with an inefficient product on their books, which is the last thing they want.

I’ve never worked in the Wal-Mart supply chain, but I’ve read about the incredibly strict standards by which suppliers must meet packaging specifications to get their stuff into Wal-Mart stores. Those inflexible standards help produce the rock-bottom Wal-Mart prices. Human judgment or flexibility with the rules would raise prices in Wal-Mart, just as it would for my HELOC.

walmart_mortgages
All things must be automated

When my wife and I signed our HELOC recently, we were the product being packaged for sale into the mortgage bond market. We got a great interest rate, and it only required an assembly-line approach to signing everything.

 

Please see related posts

Ask an Ex-banker – Home Equity Lines of Credit

Why You Hate Your Bank – Lack of Judgment

 

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  1. By the way, home equity lines of credit are the bomb. Tangential to the following discussion, I believe home equity lines of credit – despite causing widespread financial destruction in 2008 – are the best invention since Nutella on toast. But that’s a discussion for another time and place.
  2.  How do I get that number, you ask? Great question. The US mortgage bond market added up to $8.7 Trillion in mortgage bonds at the end of 2014. At a weighted average coupon of 4.5% (I made that up but it feels average-y at this point) that would generate about a billion dollars in interest per day. Factoring in principal repayments the US mortgage bond market has to attract more than a billion dollars every day just to stay the same size.