The One Third Rule

This week I'm getting back to 'found' money or more accurately, what to do with 'found' money. Several years ago I came across this tip, not even sure where, and thought what a wonderful idea. So here goes: we all come into money that is unexpected. Think back over the last few months at all the times money came into your life that you didn't expect. You had a yard sale, someone paid you money they owed you that you had forgotten about, you literally found $20 in your coat pocket. What did you do with that money? Can you honestly say something financially smart? Most of us put it right in there and spend it with the rest of our money. Months later the money is gone and so is our recollection of what we bought with it.

The tip this week is this: anytime you come into money that is unexpected, divide it up into thirds (doesn't have to be perfect, $7/7/6 for that $20 in your coat pocket) and place one third into retirement, one third on your highest interest debt, and spend one third on you. This accomplishes your spending fix without the guilt. It also moves you in the right direction with retirement and debt repayment. By following this rule, you might actually save more or repay debt more than by following any other budget saving tip.

I lump my income tax return into this 1/3 rule. I also get creative. If I go out and buy a new coat and it ends up being on sale, my savings gets split into thirds. (I only do this if I would have bought the coat at retail. If I only buy something BECAUSE it is on sale, I won't use the one third rule). Just this week, my wife and I were taking the boys to our favorite Mexican restaurant. At the last minute, my oldest son decided he was going with Gran and Paps to eat. Just saved $5 at dinner. I also ordered something that cost $2 less than the lowest thing I usually order. I saved $9 if you include tax and tip. Three dollars in retirement, three dollars on a credit card, and three dollars on me.

Some guidelines:

1. I use an Excel spreadsheet to track my budget so I can move even small amounts around into different categories. I'm obviously not going to go out and blow $3 on me all in one place. I will put it aside until I've got enough for what I've truly been wanting.

2. Don't put 1/3 into a savings account that you will end up spending on you anyway. This one is for retirement. Start a new savings account separate from your Christmas or new house savings account.

3. Use envelopes to allocate your amounts until a lump sum builds up.

4. Have a credit card balance online that you can easily repay. If not, go ahead and have several envelopes addressed. As you save even $5-10, go ahead and send in a payment.

5. If you have no debt, this becomes a one half rule. Half in retirement and half on you!

6. Make it a one fourth rule if you have another category that is important to you, say a college fund.

Following this rule can have amazing affects on your financial future.

Rich People Earn Interest, Broke People Pay Interest

Interest is a funny thing. And powerful. It can work for you or, in the majority of Americans, work against you. I had a college professor once say, “Rich people earn interest, broke people pay interest.” That’s kind of harsh. But for much of my adult life, it turned out to be true. I may not have been poor (by society’s standards) but I was broke.

If you have a lot of debt and not a lot of interest earning accounts (savings, cds, stocks, mutual funds), then you need to start reversing that trend. Make a bar graph, with Excel or similar computer generated chart, or with poster board. Every month, or every quarter (no longer than that), make a two-columned bar. One column is the balance of all you are paying interest on: loans, credit cards, mortgages. And one column for the balances of all you are earning interest from: mutual funds, savings, 401ks, stocks. (*technically mutual funds and stocks don’t earn interest, but for this exercise we can include them) Your goal, initially, is for each month to bring these two bars closer together until ultimately the interest being paid is smaller than the interest being earned.

Each month should come closer together. If you have a bad month, a TRUE emergency happens where you’ve had to dip into savings or use a credit card, you have to immediately get back on track. Once your interest earned bar tops the interest paid bar, do not slow down. This is a time to celebrate but don’t lose your momentum. Remember the ultimate goal should be to not have any debt. All of your money should be going to earn more money. So, your homework for this week is to get your information together and start your bar graph.

Only an Idiot Buys a Plasma TV on Payments

With the holidays around the corner, I felt impelled to break my series on found money and write today's post. Simply, never use credit cards. Right now, you know who I am talking to. If you have a rewards card that earns points and you pay it off every month, without exception, then continue. But if you are carrying a balance or have ever carried a balance on your credit cards, your best bet financially is to use prepaid or debit cards for your plastic. Trust me on this one. I know. I can provide details in future posts, but for now, let me tell you a story.

My first job after getting my accounting degree was as a bank auditor. I was tasked, among other things, with reviewing the bank's loans, or customers. I would then present my findings to a team of the bank's highest officials. I was young and they had decades of banking/lending experience. During one such presentation I remember presenting that a customer had borrowed about $3,000. The loan officer obviously got the proper documentation from the borrower on their ability to repay. But what struck me as odd, especially since the review team very much locked on to it, was that the purpose of the loan was to buy Christmas gifts! Forget the ability to repay, the fact that a person was borrowing $3,000 for presents was absolutely hilarious to the review team, in a sad way.

Twenty years have gone by since that time and I can't remember but pieces of the loans I reviewed for that bank, but that loan I recall easily. And it was by far the smallest that I can recall. I'm not against people buying presents to enjoy Christmas, but if you can't buy your presents without putting them on a credit card, you are broke! I'm not going to paint it any other way because you don't need it painted any other way. Do yourself a favor, this holiday season, if you have to put presents on a credit card, please make a point to keep it low. Bring the family together and explain to them money is tight this year and you are going to keep the purchasing to a minimum. No big electronic purchases this year. (Do not buy presents for Mom and Dad.) Figure out ways to enjoy the holiday season for free. Take the family to the park. Find a Christmas play. Many local churches do these annually. But think of your long term financial future with every purchase.

And remember the title. It was stolen from one of my favorite prosperity individuals, Randy Gage.

"A Clear Delicious Glass of Agua Purificada, Anyone?"

Today, I continue a series of posts on ‘finding’ money you didn’t know you had. This one is similar to last week’s Latte post but it might apply to more people. It actually does for me.

Just last night this one was put to the test. My wife and I took our three boys to Cracker Barrel last night to eat. Usually our bill is somewhere around $44 with tip included. Last night’s bill came to $38 with tip. When I brought it up to my wife, Natalie, she promptly stated “we ordered water to drink”. Duh. Usually we both order sweet tea at Cracker Barrel or coffee if we are having breakfast. Each would have run us $2. Probably another $1.50 each for the boys had they ordered something (luckily they are used to water when we eat out and don’t complain).

Just that small act enabled us to save $5 when you include tax and tip on that $4. Like the Latte, it is a drop in the bucket. But the drops are already adding up. If you eat out just once a week, we sometimes eat out as much as 3-4 days a week, switching to water to drink can save you $20 - $40 a month depending on your family size. And it’s healthier!

* If you are drinking alcohol, you can save even more. Track it for a month and see.

*And the title, if you don't know, is from Shrek 4.

Skip the Latte

Alright, in this blog’s very first post I talked about saving 10% of all you earn. Chances are many of you think you can’t afford to save 10%. You are doing the best you can living paycheck to paycheck. There’s no money left over after you pay your bills. First of all, you have missed how important saving 10% is. It should be pulled out of your income BEFORE you pay any bills! I know that is hard. The reality is that if you don’t pay yourself first nothing bad happens, at least not at that very moment. If you don’t pay your car payment, the bank comes and gets it! But trust me on this one. The bad happens later. And it’s way more costly than having your car taken away. But I digress. Allow me to get back to the purpose of this post. Finding money to save out of your maxed out budget.

This is the first of a series of posts that can help you ‘find’ money you didn’t know you had. Some are so obvious you’re likely to kick yourself. Others, less so. Anyway, as I sit here drinking my coffee that I prepared at home, my tip to you is to cut out the fancy latte.

Now, I love Starbucks. My drink of choice, almost without exception, is a venti, non-fat, no-whip mocha. I usually go venti because it only costs a few cents extra. For years I only got one every once in a while. The reason? I live in small town that didn’t have a Starbucks. I had no choice. Then one day I walked into my local grocery store and there was a sign that read, ‘Coming! Starbucks.’ I was ecstatic. But then I moaned. I didn’t need the daily calories nor did I need to pay $5 every day for coffee ($4.85 to be exact). Luckily, I still only get a mocha once every 2 months or so. The rest of the time I make my own coffee and it tastes great.

On to the savings. If you buy a fancy latte ($4 or so) once a week, every week, you are spending about $200 a year on those lattes (and how many times do you also buy a $2 muffin). If you happen to buy a latte every day, you are looking at about $1,000 a year! I realize this is probably a drop in the bucket. But hopefully, over time we can find some more drops that can fill that bucket. Remember, every dollar saved is a seed that can grow into a money tree! Which, by the way, is a great motto.

*Your goal this week is to cut out that small luxury that you can do without or replace with something much cheaper. Just be sure the savings actually make it to a savings account!