Kirby on Finance

What is your Financial DNA?

In a conference call earlier today, Steve Jobs said, “What we want to do is deliver an increasing level of value to these customers, but there are some customers which we choose not to serve. We don’t know how to make a $500 computer that’s not a piece of junk; our DNA will not let us do that. We’ve seen great success by focusing on certain segments of the market and not trying to be everything to everybody, and you can expect us to stick with that winning strategy.”

I have always admired Steve Jobs. Not just because I use and love Mac’s but because he has an ability to seize the moment, grab our attention and inspire us to not only believe in what he’s doing at Apple, but what we can do for ourselves through the products he creates. As I kept thinking about that quote, I realized there’s a little something there for all of us – particularly with respect to our personal finances.

Think about what Steve Jobs said above, making inferior computers in order to reach a low price-point isn’t in Apple’s DNA. Essentially, the grounding principles of Apple won’t let them risk the trust of their customers by compromising their standards.

I’m sure you’ve heard of the Human Genome Project. Essentially, the project has mapped out the human genome by literally decoding our DNA in such a way that each of us are now able to have our personal genome decoded. This process will literally revolutionize the way doctor’s treat their patients, allowing them to predict what diseases or conditions the patient will ultimately develop and treat them before they even occur.

Just as Apple’s DNA won’t let it produce cheap computers at the risk of an inferior product, our own DNA has imbedded with it certain characteristics that increase or decrease the likelihood of some health related problem down the road.

All of this begs the question, what is your financial DNA? Does your financial DNA dictate that you won’t use credit cards because of the inherent risks they pose on your spending habits? Conversely, does your financial DNA show signs of potential spending problems down the road and warrant the need to “treat” the problem early and the need to develop ways to live more frugally?

It’s a shame we can’t send our financial DNA to a specialist and have them decode it for us like they can our actual DNA. However, with an honest look at the way we handle our finances, we can get awfully close.

How to stop nickel and diming yourself into the poorhouse!

When I made the decision to be more frugal with my finances, I knew that I had to cut out my major unnecessary expenses. In many ways, this was what was easy to do - look at my checking or credit card statement and locate the major expenses that I could could cut out and say, “Well by eliminating a, b, and c - I’m going to save $X amount of dollars.”

At least for me the problem was that I found myself still astonished by the amount of money I was spending every month. While those big expenses were hurting me, I found it was the little expenses that were killing me. Eating out a couple of times a week, even though it was at cheap places, began adding up. All of the times I’d stop to get a Red Bull during the week were adding up too. Basically, at $2 to $3 per expense, I was nickel and diming myself into the poorhouse.

I began to realize that I wasn’t being frugal at all, I had just decided to break the urge to spend $100 on DVD’s and iTunes music into a bunch of $2-3 splurges on little things. The worst part was that these expenses were flying under the radar unnoticed on my balance sheet.

Thankfully, I’ve been able to cut these expenses out of my balance sheet altogether. Here’s my XXX step plan on how I did it, and how you can too:

1. Get real with yourself! Before you can even begin to do anything seriously with your finances (or really life in general), you have to “get real” with yourself and be honest and somewhat critical with the financial choices you’ve made. Remember the Red Bulls I told you I was buying everyday? Well I “thought” I needed them, in fact I’m pretty sure I was convinced I actually needed them. Look, I was tired! But the fact is I didn’t need them, and those little suckers add up in the end. Three months ago, I spent about $50 on Red Bulls alone. There’s a huge psychological difference between a few $2 charges or one whopping $50 charge, but if you’re going to “get real” with yourself, you’ve got to realize that in the grand scheme of things - there’s little difference.
2. Identify where you’re nickel and diming yourself. Before you can even begin to cut out the problem, you have to realize where it exists. I suggest pulling out all of your credit card statements, checking statements, and any other form of documentation you have. When I did this I took a big legal pad and drew a line down the middle creating two columns. I named one side, “Gotta Have” and the other “Oops!” I then listed each expense I made the past month and put in the appropriate column. To be honest in the end, my opinion of my expenses was a different four letter word than oops! If you don’t have a checking account, ATM card, or a credit card you can still do this too. Just keep a running ledger of expenses for a month (which may skew your spending), or just try to think back what you’ve spent for the past few weeks or month.
3. Once you realize you’ve got a “problem,” promise yourself you’re not going to make the same mistake twice. The best news about these little expenses is that when you realize you’re nickel and diming yourself here and there, it’s easy to cut them out altogether. Make a game out of it - see if you can go a day or two without spending unnecessary money. One of the things I’ve done is that whenever I spend money, I get a receipt and at the end of the day I pull them all out of my pocket or take them out of my billfold and I do a quick “trash can analysis” of my spending for the day. It worked for me, and it may or may not work for you - but if not, I’m sure something shockingly easy will. I promise you, it’ll add up quickly and the positive reinforcement you’ll get from a week, or even a month of cutting out the “small stuff,” will allow you to get the “big stuff” down the road.
4. Stay “real” and hold yourself accountable. Just making decisions like these are only half of the solution. Action is often meaningless if you’re not going to set out to hold yourself accountable in the end. If you’re your own worst critic then you probably don’t need to - but setting up a “I Didn’t Nickel and Dime Myself to Death This Month Award” might be the perfect thing to keep yourself motivated and accountable. Personally, knowing that I achieved my goal and having some extra money in the bank account feels good enough and serves as my reward. The point is that whether there’s a pot of gold at the end of the month for yourself is just a detail, the fact is you’ve got to be real and honest with yourself as to whether you continued to nickel and dime yourself. If you found you have - the good news is you just found more ways you were nickel and diming yourself, and you know where you can cut out more expenses. If you found that you cut out the nickel and diming altogether - pat yourself on the back, but don’t digress back into silly spending!

Those four steps are the plan that I used to stop nickel and diming myself into the poor house. Sure, they’re pretty general and basic, but they get the job done. I’ll spare you the specifics, but by following the above plan I was able to cut out a HUGE chunk of my expenses. By doing so, I was able to accelerate my debt payments and sleep better at night.

If you have any ideas for ways to stop nickel and diming yourself into the poor house, leave them in the comments section or use the contact form seen above. I’d love to hear them!

My Current Financial Situation (January Edition)

Since January is over, I felt it appropriate to update everyone on the state of my finances. Just to bring everyone up to speed, let me explain a little bit about who I am. I’m a law school student in my early twenties, who’s accumulating quite a bit of student loans with the anticipation of a fruitful career. I hate to get into specifics, but it costs about $25k per year to goto the law school that I attend, and while I don’t borrow that full amount every year, I’m awfully close to it.

In addition to that debt, I have roughly $2K in credit card debt that I accumulated during trips to New York and various other places. Up until now, roughly half of it was interest free and the other half was sitting around 8.9% APR. Within the next week or so, 100% of the balance will be transferred to a 0% account.

Many of you may frown upon the credit card debt, and I feel a sense of frustration with it myself - but I promise you my money is better spent elsewhere. I do plan to have the entire balance paid off before the end of the year. I just didn’t want to touch savings or any money from my brokerage accounts because I felt the money was best suited there. This of course assumes I can maintain a 0% APR on the debt. Whatever portion of the balance remaining by the end of the year, which will hopefully be none, I will pay for outright with money from savings.

So, for the month of February, I have a few financial goals:

• Complete switch of credit card debt to 0% APR accounts.
• Make a minimum of 1/12th payment to credit card debt.
• Pick an ETF to begin accumulating a position within.

Monday, I’ll post about some of my personal goals!

Another reason to use fee-only advisors . . .

Blogger JLP from All Financial Matters recently wrote about the way financial advisors use prospective client’s fears as a means to game them into buying products that offer them kickbacks in the form of commissions.  I can’t tell you how many times I’ve read articles that highlight financial planners abuse of their clients trust by pushing products that offer them some form of a kickback. It really underscores the need to use fee-only advisors, and is well worth the read.

Watch Out For This Loaded Question [All Financial Matters]

Cutting health care 50 different ways!

If there’s one thing we can all agree upon, it’s that health care is getting to be ridiculously expensive. Luckily, our good friends at Money magazine have outlined for us 50 ways to save money on health care. I’ll spare you the full list, which you can get linked to at the end of this post and offer you my five favorite ways to save money on health care costs.

#1 Ask for a Deal: The rate that your doctor charges isn’t set in stone. According to a 2005 Harris Interactive poll, about two-thirds of adults who negotiated for lower prices with a hospital or dentist succeeded, as did three out of five adults who bargained with their doctor. If you’re paying out of pocket or face a high deductible, call your insurer’s customer service number and ask about the rates it pays physicians in your area, which are typically lower than the sticker price set by providers. Then ask your doctor if he’ll accept a similar amount.

#2 Look for Mistakes: As many as eight out of 10 hospital bills contain errors, increasing the tab by 25% on average. Keep a log of every test and medication you get, and check it against your medical file, which you can order from the hospital’s billing office. If you spot an error, send a certified letter requesting a corrected bill, and a copy of all documentation to your insurer.

#3 Be Flexible: Add up your co-pays, deductibles and other out-of-pocket medical expenses from last year to figure out how much to put into your flexible spending account (your benefits department can tell you what’s eligible). For every $1,000 you put in, you’ll slash about $300 in taxes.

#4 Grab Generics: Whenever you can, opt for generic drugs, which on average cost less than a third as much as their brand-name counterparts, according to the National Association of Chain Drug Stores. If you’re paying retail for one prescription a month, you’ll save $863 a year by going with the generic version instead of the brand name. Got drug coverage? You’ll still save $13 on the average prescription co-pay, or $156 for a year’s supply. And don’t forget about over-the-counter medications: By sticking to the no-name store brand, you’ll save $100 of the $400 that the average American spends annually on over-the-counter drugs.

#5 Take an Aspirin: and maybe you won’t have to call any doctor in the morning. If you’re a man over 40, a woman past menopause or a smoker or have high blood pressure, high cholesterol, diabetes or a family history of heart disease, you can sharply lower your risk of a heart attack by taking an aspirin every day or every other day (consult your doctor first). The cost of aspirin: about 20¢ a day. The average cost of treating a heart attack: $25,000, including hospital, doctor and drug bills.

50 Ways to cut your health-care costs [CNN Money]

Does buying a home make you a sucker?

As many of you know, I love reading posts by other bloggers that challenge what we consider to be the “norm” when it comes to investing and finance. So you could imagine that an article written by Chris of Investor Geeks challenging some common notions about buying a home really got my attention.

His general rule of thumb is that for every $100 you would spend in rent a month, you’d be better off buying up to $12,500 in property instead.

Buying a home should not be about what you can afford. It should be about wasting as little money as possible. For example, let’s say you can afford to pay $1,200/mn for a condo, but rents in your area are only $800/mn for a nice 1-bedroom. You’d actually be building more assets if you rented, and saved the extra $400/mn in a mutual fund.

This is a really interesting argument and it’s a way of looking at the decision to buy a home that few of us have actually taken. The whole article is well worth the read as he points out a lot of the additional costs of owning a home that should factor into your decision to buy a home. Remember, it’s not just the mortgage that will come out of your pocket – you also have to factor in taxes, furniture, etc. in your home purchasing equation.

Misconception: Renting is for Suckers [Investor Geeks]