I am a steadfast believer of the Pay Yourself First strategy, but today, I wanted to publish the ideas and thoughts of someone with some unconventional, alternative viewpoints about the saving process. Earlier, we had a chance to discuss the money saving advice of Rob Bennett, a personal finance writer (theorist?). Rob wanted to follow up on the saving concept he’s dubbed “Paying Yourself Last” and tells us why it’s a better long term strategy for savers. Do you agree with him? Herewith are his words:

Image by The New York Times.

Thoughts On Paying Yourself First

The most popular saving advice of all time is: Pay Yourself First. It does work. There are millions of people who swear by it. There are millions who were never able to save until they adopted a “Pay Yourself First” strategy. If you don’t save at all today, you might want to try this popular approach that has worked for so many others.

Paying Yourself First is mindless saving. But I don’t mean that as a dig. The reason why this strategy works is precisely because it is mindless. The idea is to save a specified percentage of your income (usually 10 percent) automatically, without thinking about it. For Pay Yourself First savers, saving becomes the default money management option. And it really does work for millions.

But I see a downside. My concern lies in its long-term effects. Here’s where I ask a few questions starting with “Why?”

Why is mindlessness such a great thing in the saving arena when it is generally viewed as a bad thing in most other areas of life endeavor?

I believe that the reason is that most of us have negative mental associations tied to saving. We think of savers as responsible but boring and even somewhat small-minded (non-generous) people [yeah, just check this post about the cheapest people out there]. We know we have to save. But we don’t really like the idea all that much. So we force ourselves. We save automatically because we cannot bring ourselves to do it any other way.

I believe that we need to encourage a more uplifting view of the saving experience. Saving is wonderful. Saving brings us financial freedom. Who doesn’t want to be more free? We shouldn’t have to force ourselves to save. We should be excited about it, we should be thrilled about it.

The reason why we are not is that even great savers have fallen prey to the conventional idea that saving is boring. When we save unthinkingly, most of the time we are also agreeing to the idea that saving is painful, not fun, and that it needs to be forced. Does it? I don’t think so.

Save Your Money By Paying Yourself Last

I favor an approach to saving that I call “Passion Saving.” The idea is never to save unthinkingly, never to save automatically, never to Pay Yourself First but instead always to Pay Yourself Last.

To Pay Yourself Last is to decide on your savings rate after comparing the value proposition associated with spending vs saving percentages of your income, and to elect to save only when you know it will offer you greater life enhancement. Passion Savers acknowledge that both spending and saving can both be wonderful choices. Pay Yourself Last savers often choose saving without having to force themselves to do so.

The Pay Yourself First strategy is a good way to get started saving if you have never before been able to save. The Pay Yourself Last strategy can take you to more exciting places. It’s a more positive approach to money management and one that can take you to an appreciation of the benefits of saving not possible for those who automatically put aside a percentage of their income. Paying Yourself Last allows you to think through what saving and spending can add to your life as you work to accomplish your most important life goals.

Rob Bennett is the author of A Rich Life blog. The “RobCasts” section of his web site contains over 120 podcasts in which Rob describes the Valuation-Informed Indexing investing strategy, an approach to indexing that greatly reduces the risks of stock investing by having investors lower their stock allocations at times of insanely dangerous valuations.

Save Your Money By Paying Yourself Last

I wrote about OptionsXpress the other day, which is a suitable online broker for active traders. Their support for options trading is their specialty, although they are careful to note that they also support stock, ETF and mutual fund investors as well.

Today, I’d like to cover another online stock broker with the term “Options” in its name: OptionsHouse. And yes, it’s another brokerage that promises to offer you a ton of features for very low cost. So what makes them stand out in the sea of discount brokers out there? And how different are they from OptionsXpress?

Don’t let the word “options” scare you though. It’s true that OptionsHouse has its roots in the world of options trading, having been founded by PEAK6 Investments, which is one of the biggest options trading brokerages around. But while their main goal is to help the investor understand how to trade options effectively, they also offer a platform for stock investors who want to own stocks, ETFs or mutual funds for their core portfolio. Here’s a little bit more about them:

Awards

The Barron’s 2009 Online Broker Survey has listed OptionsHouse as the “Best For Options Traders”, with a score of 4 and a half stars. OptionsHouse is rated #1 in Trade Experience, above notable brokers like OptionsXpress and ETrade.

The awards are good, but fall a little short of highly awarded brokers like ETrade, which just won the all around top ranking for SmartMoney’s Broker Survey for three years in a row (from 2007 through 2009), and TradeKing, which has garnered similar awards in previous years.

Pricing

What may catch your eye about OptionsHouse though, is their rates. For ultra-cheap stock trades, you can’t get cheaper than a flat transaction fee of $2.95 a trade (online or broker-assisted). Their commission rates for options is a flat $9.95, which is better than what other discount brokers offer, since rates from OptionsHouse remain the same regardless of how many trades you actually make.

With many other brokers, your trading fees may vary based on the volume of your transactions, and not always for the better. Thus, if you’re looking for the cheapest trading commissions, you may want to check out OptionsHouse. The only brokers that may possibly beat their rates are those that offer limited free stock trades (such as Zecco) that you’ll get if you meet certain conditions (e.g. you make a lot of trades or have a high balance).

One more thing, if you do decide to sign up with Options House, you’ll get any transfer fees reimbursed up to $100.

My Review of OptionsHouse, A Low Commission Broker

Here were a few more things that stood out for me when I checked out their site.

Virtual Trading. This online discount brokerage offers a Virtual Trading environment, much like its competitor, OptionsXpress. Once you sign up for an account, you’ll get instant access to a virtual account that’s funded with fake money and you can raise your funds anytime without risk.

Products and Accounts. You can open pretty much any type of account and rollover your IRA into this firm. You also have the ability to write checks — first 40 checks are free, reorders are $5.00 for every 100 checks — and you can use a debit card. The debit card has an annual fee though, and you need a minimum of $10,000 to qualify. OptionsHouse allows you to trade and own equities, mutual funds, options, U.S. treasury bonds and listed corporate bonds. But you’ll need to do phone orders for the bonds.

Investment Platform. This broker pitches a trading and investing platform that is simple, and devoid of those extra bells and whistles that may only serve to confuse or distract you from managing your transactions. You can also customize your dashboard and screens, which I suppose adds some points for usability. Now one thing I like about certain top online brokers like TradeKing and Zecco is the fact that they have built in investment communities. OptionsHouse, like most other brokerages, hasn’t incorporated this feature into their site just yet.

Tools and Education. My take is that OptionsHouse’s tool chest is geared for more sophisticated and professional traders who are dealing with options trading. Their broker’s education resources section is also heavily focused on the subject of options, with books, guides, papers as well as learning tools, calculators, simulators and screeners available to support traders. They’ve got regular webinars on more advanced investing and trading topics that you can register for.

Conclusion

My opinion? If you’re a new investor who’s still learning the ropes, this is not the place for you. I believe that the ideal customer for OptionsHouse is someone who already has some background with investing and trading, who’s fairly comfortable with the markets and who’s really looking for the cheapest trading fees and lowest commissions and transaction rates. But if you fit this profile and you’re watching your trading costs carefully, then this discount brokerage is one I’d consider signing up with. For more details, you can visit them here.

OptionsHouse Review: Low Commission Broker

Last time, I wrote about how we can predict inflation using a market index as an inflation indicator. For the chartists and other crystal ball readers out there, here’s something else for you: is there a way to predict when the economic downturn has ended?

Is The Economic Downturn Really Over?

Based on some simplistic observations, here’s how I can tell when things are getting better: the stock market has recovered somewhat from its lows (despite claims by some technical analysts that it’s supposed to “retest” previous lows before any meaningful recovery can resume) and the job market has either stabilized or begun to improve, with more companies looking to hire again. I’m actually getting more inquiries from headhunters about my availability for technical jobs around here in Silicon Valley (imagine that: they still have my resume!), and I’m getting more inquiries from online advertisers as well. Signs of life?

According to a certain economist, the recession is indeed now over. Do you believe it? It may be hard to catch on to the idea that we’re now supposedly out of the economic slump that was so dramatically sparked by the twin American nightmares that were the subprime mortgage mess and credit crisis. Then again, the thing about recessions, they’re in with a bang and out with a whimper (or if you prefer another analogy, they’re in like a lion, but out like a lamb).

Robert Gordon is the economist who’s responsible for this call. He is using a single indicator upon which to base his conclusions: unemployment benefit claims. According to MSN Money’s article on this, history has shown that when the number of employees who file for unemployment benefits has peaked, the recession bottoms out shortly after that. It appears that this has in fact been true over the last 6 recession cycles we’ve had. Just check out this intriguing chart, care of MSN Money:

The chart plots the recession cycles (pink shaded areas) against Initial Jobless Claims. As you can see, the peak in claims coincides with the end of each recession since the late ’60s. But if you aren’t entirely convinced that you can read the recession this way, then there are also a few other variables that have been used to make determinations about the health of the economy: total payroll jobs, industrial production and the unemployment rate.

Well, I’m all for better times ahead. So what happened to all that talk about the “Next Great Depression”? Do you feel that we’re finally out of the woods? I want to exhale just a little, but my spouse is still waiting for the next shoe to drop. I wonder if he’ll be waiting for a while.

Is The Economic Downturn Over?

We’ve often talked about how to get rid of debt. But this time, we’d like to cover an actionable plan comprised of simple steps you can perform to fully eliminate your debt.

While some families I know can pay off their credit cards each month, most people I know maintain mortgages, car loans, credit card and other debt. In the past, I felt like I was climbing a mountain that I’d never pay off, but I learned how to set up a debt repayment plan. The process isn’t too complicated to set up and with consistency, I found out that I could find zero balances at the end of my hike.

How To Get Out of Debt: Set Up A Debt Repayment Plan

Allow me to go through what I’ve done to set up my personal debt reduction program.

1. List your debts.

First off, I took all my latest billing statements and listed all my debts.  If spreadsheets aren’t your thing, just start with the nearest sheet of blank paper and start writing down items like:

• credit cards
• auto loans
• student loans
• personal loans
• medical bills

2. Add up your debts.

Next, I added the amounts I owed and the interest rate for each debt.  For example, let’s say I owed the following:

While a grand total of $40,400 might make anyone woozy, I’m sticking with the program and focusing on the amount I want to repay each month.  I then asked a debt calculator how long it would take to pay off my Visa if I paid only the credit card minimum payment due each month. When the calculator came back with an answer of 32 years, I decided I needed to pay more.

3. Set your monthly payment amounts.

So how did I cut down the payback time so I wouldn’t be in debt for the rest of my life? Here’s an “easy” approach: I first looked at the minimum amounts due for each of my bills, then came up with a grand total. For the list above, let’s say the minimum total amount for all my bills is $520.  For each day of my debt management plan, I resolved to pay $520 each month.

Now over time, my balance should start shrinking, and eventually, my credit card statements will show a readjusted minimum payment; but I’m planning to keep paying $520 overall to shrink the debt in a reasonable amount of time.  Once I finish paying off one debt, I need to apply the payment to the next debt in line, a tactic familiar to many of us thanks to Dave Ramsay’s Debt Snowball plan.

Highly recommended: If you want to be more aggressive about paying down your debt, you can always pay more than the minimum from the very beginning. For instance, you can hike up your total payment by 10% (i.e. pay 10% more than the minimum across all bills) and keep paying this amount till all your debts are retired. You’ll reduce your debt much faster this way!

4. Decide which debts to focus on first.

How can I decide which debts to pay off first?  Some experts, like Suze Orman, have favored paying off the debts with the highest interest rate first.  That benefits you because you’ll end up paying less money over time, if you do the math.  Also, you may want to call your credit card company if you’d like to negotiate for lower interest rates.

However, Dave Ramsey argues that paying off the smallest debts first is going to give you the push you need to continue your plan.  For example, if I had a smaller zero-interest hospital bill of $400, I could pay it off within months — and kick that worry out of my head all that much sooner.  If I choose to tackle larger bills at a highest interest rate first, it may be a while before I retire this debt and feel like I’ve accomplished something.

5. Pay more whenever possible.

Five years or longer can seem like forever on a debt repayment plan.  To reduce the amount of time spent on the plan, I learned to send in extra payments when I could, and eventually, I began to send in a larger amount on a regular basis. Cutting my other expenses helped, too.  I became a frugal shopper for groceries and household items.  In addition, I avoided trips to the mall so I wouldn’t be tempted to spend too much.  For those with big debts, why not take second jobs? These other debt elimination tips are also worth trying out.

I’ve also discovered Paid Twice’s Snowflaking method.  With snowflaking, no amount is too small to be applied to a debt repayment plan.  If my credit card company doesn’t limit the number of times I can pay them online each month, then I can take the extra $5 rattling in my old PayPal account and send it in to the debt at the top of my list.

6. Find help if you need it!

Although many people can tackle their debt repayment plans on their own, you may decide that you need the structure of a debt counseling agency’s program.  If you go this route, you may be able to check in with a counselor to discuss your questions or problems for free or for a nominal amount each month.  The National Foundation for Credit Counseling can help you locate a credit counselor. CNN Money has a debt reduction tool to assist you, too!

How To Get Out of Debt With A Debt Repayment Plan

We’ve discussed credit report monitoring services here before, which help you in a couple of ways. They can keep an eye on your credit standing by monitoring your credit reports: they’ll let you know if your credit has been affected in any way or if you’ve somehow become a victim of identity theft.

Sure, the business of protecting our identities via credit monitoring and other means has offered consumers a way to be proactive. However, I thought to write about a few considerations we should all be aware of before signing up with a fraud protection service like Lifelock or Trusted ID, which are two big names in the industry.

Identity Theft Protection: What To Watch Out For

Your credit card company may have given you a pitch about fraud protection at some point. Or you may have heard about the promises that id theft services can bring you. Peace of mind is what they’re selling. If you’re shopping for such a service, here are some things to take into consideration before you sign up.

1. Read the fine print carefully.

Instead of assuming you’re covered for the worst, make sure you do some research and read the terms, conditions and contract (or service agreement) from any company in the business.  For example, are you signing up for a range of services, or just a few items? What actions will the fraud protection company take in the event of a fraudulent charge on your credit card? TrustedID actually has a detailed set of terms and conditions that limits the company’s liability and tells you what’s covered.  It helps to read a company’s FAQs and forums if these are available as well.

2. Know the benefits offered by the fraud protection service.

Different identity theft protection companies offer a variety of services. But what is it exactly that you need? Don’t assume that you are covered for any or every incident that happens to you. A chat with a customer service rep might help you clarify when your coverage begins and what the extent of your benefits are.

So what can you expect from such a service? Some of the features include:

• Credit score monitoring
• Your FICO credit score and other free credit scores
• Automatic fraud alerts
• Automatic fraud alert renewals
• Service guarantees or identity theft insurance for up to a certain amount (e.g. $1,000,000)
• Free annual credit reports and monitoring of those reports
• Legal help in case you encounter fraud or have your identity stolen
• Coverage of lost wages
• Removal from mailing lists
• Credit card monitoring
• Lost wallet protection

You may not receive all these services once you sign up with a company. You may be getting just a subset of these features, so make sure you understand what it is you’re getting!

3. Know which credit bureaus are monitored by the service.

While there are three credit bureaus, an id theft protection service might not check in with all of them.  Say I sign up with a service that monitors Equifax such as myFICO Score Watch; that doesn’t necessarily mean that they’ll also track my Experian credit score and report. I’d prefer the wider coverage of a service like Equifax Credit Watch that monitors all three bureaus since I’ve lived in various parts of the country over the years (credit reporting by one company may dominate a certain region).  Check if the service will monitor all three bureaus for free or for an extra charge.

4. Check with the Better Business Bureau.

It should be easy enough to follow the track records of established companies such as:

• the big three credit agencies: Equifax, TransUnion and Experian,
• identity theft protection service providers like LifeLock or Trusted ID,
• credit monitoring service providers like myFICO.

But how about newer or lesser known fraud protection and credit monitoring service companies? It may be harder to find out how well newer providers handle their customers because of their limited track record.  In a way, I’m reminded of warnings to be careful of those companies that promise to fix your bad credit; do some research online and check with the Better Business Bureau to see if the provider you’re interested in has any complaints lodged against it. Avoid any fraud protection company that makes hyped up claims without the evidence to back them up.

5. Evaluate whether you can do the work yourself.

Have you considered monitoring your own credit reports? Is signing up to a service really worth your money? Find out if your budget can handle the expenses of a subscription service over time. You’ll need to decide whether you’d prefer to do all the work of monitoring your credit and watching for signs of id theft on your own time, or pay hundreds of dollars every year to outsource this job. By subscribing to a service, you’re paying for convenience.

Finally, you’d want to know how easy it would be to cancel a service and get a refund in case you do need to trim your finances. I love the idea of having my own ID theft watchdog, but I still need to know how to back away gracefully.

Should You Get Identity Theft Protection?

Various ways to predict inflation.

We all can’t wait to emerge out of the clutches of this economic recession. The government has done its job to jump start the economy, with many attempts to revive it through a massive stimulus package and a series of bailouts. All well and good, but then there’s the payback. Could we end up facing inflation in the near future? As the economy starts to pick up, should we expect an increase in prices too? Well, that remains to be seen, but let’s explore the possibilities here.

Predicting Inflation

Apparently, anyone can predict inflation. There have been studies that have shown that both professional economists and consumers alike have been successful at forecasting inflation, albeit through different approaches. Both arrive at pretty much the same conclusion and can be fairly accurate at sensing impending price increases.

But while experts use numbers, charts and statistics such as the unemployment rate, money supply growth, exchange rate fluctuations and various market indexes to track the economy, consumers can also detect what’s going on based on what they see at the cash register. As consumers, we can use our intuition to tell ourselves what’s in store: our weekly grocery bills and gas bills may be enough to give us an inkling of things to come.

Using Commodity Market Prices As An Inflation Indicator

So can I simply trust my gut to warn myself of inflation ahead? By checking the weekly prices of puppy chow and pancake mix, and by gluing myself to financial news stations, I’m supposed to be able to tell where rates will be going. Well, I’m not sure about this. That’s because as an investor, I prefer to approach things a bit more technically, if possible. Some supporting analysis will add credence to what my gut tells me.

In my research, I’ve found some interesting facts about inflation. Gold and commodities can be used to forecast and beat inflation. Here’s one video that shows how one commodity market index, called the Reuters-Jefferies CRB Index or NYBOT_CR (fancy name), can be used to see where overall prices are headed.

Click this link or the image below to watch the video.

Considered to be a well-recognized benchmark for global commodity markets, the Reuters-Jefferies CRB Index (NYBOT_CR) is used as a technical indicator for large cyclical trends in the economy. The index tracks 19 markets including:

• Metals: aluminum, copper, gold, nickel, silver
• Energies: crude oil, heating oil, natural gas, unleaded gas
• Grains: corn, soybeans, wheat
• Food & Fiber: cocoa, coffee, cotton, orange juice, sugar
• Livestock: lean hogs, live cattle

While traders using technical analysis do trade this index, you can also use the same analysis just to get the bigger picture on economic cycles (inflationary vs deflationary trends). I found this to be a useful approach for gauging one more aspect of the economy, and to lend some support to your suspicions about what could be happening to your grocery bill.

Why do we care about this? Maybe you’d like to get a heads up about how your budget will be affected going forward so that you can be proactive about your money. Maybe you’d like to ensure you’re in the right investments as well; knowing what’s ahead, you may be inclined to add some gold, commodities, REITs and TIPS to your portfolio, or you may desire to keep your money in short term funds and liquid high yield savings accounts to await a (relatively) higher interest rate environment ahead. For more information, you can check out this post on how to beat inflation using various strategies ranging from buying TIPS to hedging with gold.

Commodity Market Index: An Inflation Indicator

As one of California’s denizens who also has school-aged children, I was quite interested to learn about a site called Next10, through Lazy Man’s post called “Can You Fix California’s Budget”? Next10 asks you questions about how you stand on certain issues that have an impact on the California budget, and based on your responses, comes up with a new, proposed budget. Their questionnaire is aimed to determine how you’d prioritize issues for the sake of resolving the budget crisis.

The California Budget Crisis: How Do We Close The Budget Gap?

Here’s a sampling of the issues which received the most responses:

• 40.7% of respondents want to reduce spending for K-12 pupils in California. The consequence here is that spending will fall below 28% the national average. Unfortunately, schools are already hurting with many resources and programs being cut each year, and are relying more and more on volunteers and fundraising to cover gaps in services.
• 52.5% want to reduce Medi-Cal eligibility for undocumented and new immigrants and are open to eliminating some health care programs for low income people.
• 40.8% want big reductions in human services programs (is this what is called welfare?). This will of course, affect the aged, disabled and poor children and families.
• 50% (including Lazy Man, by his own admission) are willing to release less dangerous inmates and those who end up violating parole.
• 55.4% want to keep unemployment and training benefits as they are.
• 48.3% want income taxes to be raised for the wealthy. There’s a recommendation here for reinstating higher tax brackets for those earning $300,000 a year and above.
• 53.3% want to increase the corporation tax rate. With taxes growing more slowly than corporate profits, increasing taxes in this case makes sense to me.
• 42.8% are for limiting tax breaks.

Let’s cap this with an image of the California Budget projections over the coming years (numbers are in billions). Click the image for a larger picture:

It’s going to be interesting to see how this budget situation will be addressed. Our family will be feeling the effects of this crisis for years to come, with fewer services in our schools. We’ve already experienced some of the fallout firsthand; for instance, just this past school year, our public school lost its principal when she unexpectedly retired (rumored to be because of financial reasons). On top of this, my child’s class ended up with a substitute teacher for most of the year. To add insult to injury, how about this: our school district happened to be invested in Lehman stock last year, and was part of an investment pool that lost a reported $150 million after the Lehman bankruptcy!

For more of my thoughts on this, check out the article: Coping With The Recession In Silicon Valley.

Site News

On to more pleasant news….! We are honored to be chosen as one of the nominees for the Best of the Money Blogs contest by The Globe And Mail, which is Canada’s largest financial publication. You may want to vote for your favorite blog here (you can select multiple blogs)!

Personal Finance Articles

And finally, some great reads this week:

• Free Money Finance: The King of Debt
• Five Cent Nickel: Four Ways To Ruin Your Investments - Guaranteed
• Get Money Energy: More Stress, Less Money?
• Generation X Finance: Can I Use Unused Credit as an Emergency Fund?
• Million Dollar Journey: Budgeting Simplified
• The Sun’s Financial Diary: What Can You Expect to See on Your Credit Reports?
• Brip Blap: Time Travel Writing
• Frugal Dad: If You Could Only Take Three Things From Your Home, What Would They Be?
• Money Smart Life: Money and Your Health
• My Dollar Plan: Student Loan Rates Will Drop To All Time Low

California Budget Crisis: Can We Close The Budget Gap?

Try these money saving tips, rules and formulas to motivate yourself into saving more!

Image from ScionDriver.

I recently caught an ABC News video which featured a fellow whom I’ve seen actively participating in the financial blogosphere. Rob Bennett is a personal finance enthusiast and writer who was interviewed by ABC News’ Money Matters. Here’s a clip of the show.

I like Rob’s fresh views and tips on the subject of saving, some of which I’m sure I’ve been subconsciously employing myself. These Unconventional Money Saving Tips are powerful strategies that can help you change how you think about saving:

Unconventional Money Saving Tips From An Expert Money Saver

While there are 10 such tips that Rob has expounded upon on his site called Passion Saving, I’ve chosen to highlight those that were mentioned in the video:

1. Set a savings goal of a $100,000 and focus on getting over this “hump”.
I like the idea of visualizing your goals and creating savings milestones for yourself using hard numbers. The idea here is to have a target that you can see yourself achieving. Your target doesn’t have to be $100,000; if this number seems too gargantuan, try a lower number — a nice round one like $10,000. The important thing is to get started. Also, the more you save and get over the “hump”, the easier it should get.

2. Find out the true cost of any purchase.
We’re often beset by tools of convenience like credit cards, which are geared to separate us from our money; cash back credit cards make spending so much more pleasant with all their promised rewards, after all. So if you’re committed to cutting back your spending, make the spending process more painful by tallying up the true costs of those purchases you make. Once you determine the true price of a particular item, it may be just the thing to discourage you from buying it. In particular, include income tax when figuring out how much something costs.

You can do this by taking the price of something you’d like to buy, then adding not just the sales tax, but the associated income tax that comes with earning the money required to afford that particular item. Now if you decide to put this purchase on your credit card, just imagine how much this will ultimately cost you in interest over the years! Hopefully this is enough to scare you out of making impulsive shopping decisions.

Example: You want to buy a nice camera that’s priced at $250. Now add the sales tax, say $23. Then figure out just how much money you’d have to make to afford that camera. The real answer is roughly $330 before income tax is taken away. Remember that you pay for stuff in after tax dollars!

A corollary to this rule? Know the maintenance costs of things you buy (e.g. a car or a home). They all add up!

3. Determine how to finance the stuff you spend on, for life.
Rob describes this as the most powerful of his 10 rules: it’s called the multiply by 25 rule. How does this formula work?

Take a look at each spending category in your budget. For each one, determine its cost for an entire year, then multiply it by 25.

That resulting amount, when saved up, will throw off enough income to support your spending on that item for life (e.g. indefinitely), assuming a 4% annual real return on your savings. The “magic” here is that by using this rule, you’ll figure out what it takes to fund something for life. Once you’ve saved up for something in this manner, it can be quite liberating to realize that you’ll never have to worry about affording that particular budget (spending) category ever again.

Example: If your travel budget is $2,000 a year, then you’ll need $50,000 today to finance your annual traveling expeditions for life (provided you put your $50K in a solid high interest savings account or equivalent).

Caveat: Today’s interest rate environment is tough on savers and tougher on the rule, but I hope you get the gist. But also remember that interest rates fluctuate, so over the long term, things can average out and the assumption of a 4% annual real return may actually work out.

4. Know how much your time is worth, and translate money into time (hours spent earning).
One of my favorite financial books is called Your Money or Your Life: it literally changed the way I thought about saving. This book was instrumental in inspiring me to become a better saver. It presents a formula that values your money in terms of your time by translating the money you spend into the time it takes to earn that money.

Example: How much does something cost in terms of your time? Start by knowing your hourly rate — or how much you are paid to work. If you’re making $50 an hour and you decide to buy a $250 camera (which is actually valued at $330 based on Rule #2 above), then it would take you 6.6 hours of work to actually afford that camera. Ouch!

This gives you some idea just how much of your life will be spent paying off what you just bought! Once again, if you add potential credit card charges into the mix, you’ll know where a lot of your work (or life) hours will be going. If this doesn’t discourage you from spending unnecessarily, I don’t know what will!

5. Concentrate on short term savings goals.
If you’re young, think about setting short term savings goals. You’ll find yourself feeling more motivated to save by focusing on those goals that are within your reach. Rob suggests funding your savings accounts for goals you can achieve in three to five years.

6. Save for a concrete purpose.
Again, the concept of visualization is in play here. By thinking of a concrete goal or target for your saving efforts, the more likely it is you’ll stick to the program. How about pinning up a poster of your favorite vacation spot on your wall (or refrigerator)? I’ve used screen savers that would display images of things I would save up for, and they’d be great reminders of why I was sitting in front of my computer all day long.

Interestingly, Rob had one tip that I found myself disagreeing with to some degree — the idea of “paying yourself last” (check out his full tip list here). I still believe strongly in paying yourself first through automated savings programs since I can’t deny just how well this has worked for me.

Money Saving Advice From An Expert Money Saver

I had the pleasure of being a guest at Mr. Credit Card’s radio show today. Mr. Credit Card runs the Ask Mr. Credit Card site and is someone I’ve been interacting with online for a long time now. So I’m glad I’ve finally gotten the chance to actually speak with him!

My Interview With Mr. Credit Card On Personal Finance and Silicon Valley

The show is lengthy — just a little over an hour — so I couldn’t believe Mr. CC and I had enough steam to keep talking like that. I ended up spilling the beans on some interesting topics, but I hope not enough to raise the eyebrows of friends of mine who may decide to listen to this dialogue.

The basic topics covered in the interview were on personal finance and Silicon Valley and a lot of stuff I discuss in this blog. But there were also lots of personal things and details that I shared with Mr. CC that I don’t really delve into on this blog because otherwise, it would end up with me rambling forever and producing even longer posts than I already do, and well…you’d get bored.

Here’s a rundown of what we discussed (I included links to my articles that have touched upon these subjects):

• What’s it like living in Silicon Valley.
• How one’s perspective of personal finance may be different based on where you are or where you come from.
• Thoughts on the SuperMom myth or concept.
• Musings on retirement planning, how the crisis affects those near retirement age and wealth building.
• What does it mean to be frugal: earn more and spend less.
• Rants on the health care industry and health insurance. We talked about how I was able to lower my health care costs, while simultaneously decrying the health insurance industry (read about my travails with insurance claims and insurance companies).
• We discussed some debt and credit matters while I recounted how my credit card account got closed.
• How we’ve managed time and stress. And the miracles that come with adjusting and changing your lifestyle. (Hint: find out the reasons and consequences of why I quit my job… and the rat race.)

All in all, a jolly good time!

One more thing: I’d like to thank Mr. CC for the great questions and insights on personal finance. Be sure to catch his BlogTalkRadio channel here!

Interview With Mr. Credit Card On Personal Finance and Silicon Valley

A few days ago, I discussed how my credit card account got closed when Advanta decided to pull the plug on their credit card division. The irony here is that the Advanta card was once considered one of the best credit cards for the buck, as per Forbes. So naturally, like one of the million customers who were abandoned up the creek at short notice, I thought about what kind of steps to take next. If you were caught in this situation, you probably scrambled as I did to straighten out the things that were affected by this predicament.

Where did this leave me? Bottom line: I needed a new credit card fast! While busy working to remedy our situation, I thought to review a few things learned from this experience as an Advanta credit card holder in this unique position:

Need A New Credit Card Fast? Thoughts On Replacing An Expired Card

• Don’t forget to redeem your rewards!
  If you’ve got a rewards credit card of some sort, try not to accumulate (hoard) your rewards and points for long periods in case your credit card program ends up on the chopping block. These days, the credit card industry is in so much flux that I’d prefer not to sit on my unclaimed rewards for too long. Who knows for how long your points will be honored? In Advanta’s case, they cut me a rewards check. For this reason, cash back credit cards may be less problematic than those that offer you points that could expire.
• Take note of transactions that are affected by your defunct or expired card.
  The biggest pain in the rear we’ve had to deal with in this situation was having to find a replacement card for all the automatic bill payments that were set up using our Advanta card. You can imagine how big an inconvenience this is, particularly for those businesses that are transaction heavy. To keep things running smoothly, stay on top of your card usage and automatic payment schedules to avoid disruptions of your operations.
• Keep a spare credit card.
  There are many people who’ve sworn off card debt, who’ve progressed to the point of banishing credit cards from their homes. But I find that the use of credit cards have made life so much easier for me (I’m never one to carry debt). And as someone who’s become partially dependent on cards to “make things work” both for my business and my household, I’ve realized that there’s a reason to own multiple credit cards: having a spare one allows me to keep functioning when one of my credit cards goes AWOL. As I’ve mentioned, I use cards to facilitate the financial transactions and operations I’m involved with everyday.

How To Get A New Credit Card: Shopping For A Card On Short Notice

It’s not as easy to acquire credit these days, and if you’re one of those people in this bind, how about these suggestions on how to pick up a new card?

• Get a new credit card through financial institutions you already have a relationship with.
  Because we didn’t have the forethought to double up on business cards before (we didn’t have any spares), we were stuck having to apply for new credit cards after our credit accounts were closed. So we opted to turn to the banks we were already doing business with to get us approved for new cards right away. If your financial institution carries your business accounts, and you’ve got a personal banker working with you, it’s quite likely that you’ll be able to get a credit card approved through them quickly because of your record with them as a loyal customer with an established business. Applying this strategy, we received new cards in our hands within a week!
• Go for those credit cards with brand name recognition.
  If you’re shopping for a new card, then common sense dictates that those credit cards that are associated with financial companies that are well recognized and deemed stable may be less of a risk than those offered by companies you’ve never heard of. I certainly don’t want to find myself experiencing trouble with yet another company, so I’d be careful to apply for credit cards at companies that are on solid footing. With the financial industry on shaky ground and banks asking for bailouts, where should we turn? I’d minimize my risks by selecting financial products that are backed by reputable institutions. Some such products that come to mind include Discover credit cards, American Express rewards credit cards, CitiCard rewards cards, Capital One cards, Bank of America cards. If you’ve got thoughts on specific credit card companies, the floor is open for your suggestions!
• Consider alternatives to business credit cards.
  When you’ve lost a business credit card like I have (in Advanta), your replacement business card can’t come a moment too soon. But if you’re having problems securing a quick replacement, you can always consider using your personal card to back you up. While you can always use a personal credit card for business purposes, I wouldn’t do this for the long term — it’s more of a stop gap measure until you get yourself that replacement business card.
  
  Business credit cards are still the better choice to use for your venture because they’ve got higher credit limits; they also usually offer rewards and perks that are advantageous to business owners, and most importantly, they offer a way for you to separate any liability from your person. As far as I know, if you ever encounter issues or problems with your credit through your business, having a business credit card can shield those problems from creeping into your personal credit history. Anyone care to confirm or dispute this?

Lessons Learned

As my story shows, anything can happen to our finances that’s out of our control. I doubt we can really be proactive about everything that can happen; there’s no way to anticipate all the possible issues that can arise with our financial accounts. All we can really do is have a plan in case the worst happens (be ready for damage control) and realize that no company is immune to failure. Accept these facts and you’ll be less frustrated when the unexpected happens. Always expect the unexpected!

I Need A New Credit Card Fast