In celebration of New Year’s Resolutions and IlliniProgrammer’s win, I’ve decided to write up on a very telling principle of my moral philosophy: Saving your hard earned monies.
To my own personality frugality, I owe an extreme amount of gratitude to my Rich Dad, a Jewish lawyer from Chicago, who has a keen eye for even the darkest pennies. From an early age, and still to this day, the man drills the principle of saving into my head. To him, the concept is one of time-tested repertoire. To the first year analyst banking $75,000 after taxes, the devil is in desire.
With the majority of us here being finance majors or professionals, I do not doubt that some of the things I say will be refuted. Nonetheless, broken down below are three subtle principles that may even help the average college student:
1) Stay away from credit cards. Better yet, be wary of all debt, whether it be student loans or an Amex. Yes, I understand, there are benefits to using a credit card for some goods like low-ticket items, or to build up your credit score. Nonetheless, at a young age with small income streams, the impact of trying to build a worthwhile credit score will be meager compared to when you actually have large sums of monthly income. For practice sake, use hard cash for purchases. I know that with a 3.5% national savings rate, saving up in order to buy something might be a novelty these days. Yet in the long run, the principle will make all the difference.
2) Savings accounts should be relatively illiquid. What is the point of a savings account that can transfer or spend cash at the blink of an eye? Truth be told, a lot of my savings sit in an E*TRADE account that cost me nothing to open, but takes 72 hours to deploy my reserves. In my lifetime, this has prevented the majority of impulse buys or greedy desires. Knowing that I have a 3-day window to decide on big dollar purchases allows me to reflect between my needs and wants.
3) Do NOT be penny wise, pound foolish. The best example that I can think to explain this old truism comes down to suits. For me, a suit is a piece of clothing that should be designed to wear for 5-8 years. Pricier suits are designed to live a lifetime. Therefore suits should be looked at as a long-term investment and should not be skimped on. Furthermore, one should also not fall into the moral hazard of purchasing a cheap suit and affording it little to no care because of its price. Perhaps if you watch the pennies, the millions will take care of itself, but do not fall into the fallacy of saving now only to pay more later.
I have to disagree on the first point. If you can get 0-APR for at least a year - it is worth it.
I have 2 cards which have 0-APR for 2 years - I don't EVER use cash. In fact, whenever a friend is buying something with cash, I offer to pay with my card and keep it.
What do I do - a little risky, but I invest that shit...
1 is false. Use that shit and pay it off otherwise you miss out on the marginal benefit of rewards, which for some people are very significant.
I disagree to some extent with 1 and 2.
1 - get a credit card, but USE IT WISELY. The reason I say this is that my wife followed your advice and it almost cost us our house (although it could be argued that buying a house is a bad move). My wife had a very good credit score and a relatively large amount of cash in the bank. We were pre-approved for the best interest rate on the mortgage amount we wanted with absolutely no issue. Two days before we were about to close we got a call from our mortgage guy saying that my wife didn't have enough credit and they couldn't give her a loan. It wasn't credit score, defaults, etc...it was literally not enough # of ongoing credit items. We ended up being able to fax over her family's cell plan and claimed she had been paying it for years (even though that wasn't true) to satisfy the requirement.
It was a fairly peculiar situation, but apparently it happens occasionally if you live at home. If you have an apartment your utlities are considered lines of credit so there should be no issue.
Bottom line...credit will be important at some point in your life and you may not realize it until it's too late. Get a credit card, but don't use it as a financial crutch. Monitor it and build your credit score.
1,2, and 3 are all relative. If you are fool without self control you shouldn't own a credit card, e-trade account or any nice suits.
Is E-Trade insured by the FDIC? What if it goes belly up or scams people? Have you thought about that? I would rather put money in a bank and shred the card.
E-Trade Bank is insured by the FDIC and E-Trade brokerage (like all reputable brokerages) is insured by the SIPC.
"If your brokerage firm goes out of business and is a member of the Securities Investor Protection Corporation (SIPC), then your cash and securities held by the brokerage firm may be protected up to $500,000, including a $250,000 limit for cash. Some firms obtain private insurance policies to provide protection beyond SIPC limits. When a SIPC member becomes insolvent, SIPC will ask a court to appoint a trustee to supervise the firm's liquidation and to process investors' claims."
http://www.sec.gov/answers/sipc.htm https://us.etrade.com/e/t/prospectestation/pricing?id=1600000001
Yes, shredding a debt card works well if it is in a different bank than your actual checking account. I have done this before and it is similar conceptually to #3 because you physically have to go to the bank to withdraw the cash.
I employ 3, 2 makes sense and I should employ it more and 1 I disagree.
This, I use my credit card for everything I would pay for anyway. Cash back is basically free money, albeit not a lot.
Ill chime in later.
1.) Use cashback rewards cards, but only if you can pay it off every month. Fidelity has a 2% cashback Amex. It's accepted nearly everywhere VISA is these days, barring a few small merchants, who usually appreciate cash anyways.
2.) My own personal rule is that if I don't need it immediately and it costs more than $200, and I haven't been planning to purchase it for months on end, I sleep on it.
You actually need eight months of emergency savings. Two or three months worth should be available in a savings account. The balance you can stick into CDs with easy withdrawal terms (Ally.com is 60 days on a 5-year CD)
3.) My suits seem to last me 1-2 years. I never spend more than $350 on a suit.
Great advice but have to disagree on CC. Cash back is great. I use my CC like cash, pay it off every 3 days from my computer. Wrote myself a 1k check by cashing in my points that I accumulated over 4 years.
I guess 2012 is the year I sober up on spending. I don't incur debt on credit cards cuz I pay them off every month and earn cash back from 1% to 3% depending on where I spend.
Savings accounts are useless from my experience as it does not earn enough return for me to give two shits about it so it all ends up on the checking account. I actually will take your point on putting money at my brokerage firm as it does take a lot longer to get funds back to avoid stupid splurges.
Point 3 must be used very very wisely. I can honest say that I use it as an excuse to buy some expensive shit. There's no way my Speedmaster will outlast a Timex or the chrono being more accurate. I do agree on suits, but a good tailor will save you a lot of money in the long run and can turn an average suit to one looking like you just dropped a whole paycheck on.
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