Myths On Money

The internet is a fantastic resource for anybody looking for the opportunity to shave a few bucks off their monthly budget. Well, actually, it can shave much more than a few bucks. Here is a tip on how to leverage the power of the internet to decrease your expenses and increase your savings!

Cut the Cable

Think about how much your monthly TV bill is. $50? $70? $100? $200!!? While it may not seem like a big deal to you to spend “just” $50 a month on cable, here’s something to think about. If you cut the cable and save even just $50 a month, then, if you invested it in the stock market, you would have $625 in one year, $3,871 in five years, and $113,024 in 30 years. Is your weekly fix of CSI:Miami worth $113,000 to you?

Am I suggesting you cut TV out of your life completely? No. I mean, you can, and that would probably be a good thing overall, but who wants to do that? I don’t. This is where the power of the internet steps in to save the day. There are great resources out there that let you watch your favorite shows online, FOR FREE. The major networks all post the latest episodes of most of their shows on their websites (CBS, ABC,NBC, etc.) Even some of the cable networks have free episodes on their websites (one such is HGTV, my wife’s personal favorite!) While these ‘”official” websites may not have EVERY show and EVERY episode, they are great resources and my family uses them regularly.

If you can’t find what you want to watch on official channel websites, don’t give up. Hulu is a great resource for finding literally millions of television show episodes. It divides the shows up by category, then you can simply browse by category until you find something that you like, or you can search for something specific. Another fantastic resource is Ovguide. This site searched many different video hosting websites for the show or movie you want to watch, then displays the results. A resource that I just recently stumbled upon is called Freetube. While I have not personally used Freetube very much yet, it seems to either feed a channel LIVE to your pc (which is way cool), or, if a live feed is not available, then it stores past footage and presents that to your pc. Just today I watched part of Get Smart on The Movie Channel off of Freetube. (be sure to turn on family friendly browsing when you go to the site; this makes it so that the adult channels do not ever appear as an option). There are many other options out there.

One thing to be wary of is a thing called Zango. Some websites that host video will want you to install Zango before they will allow you to access the content of their website. I would strongly encourage you to LEAVE any website that asks you to do this. Don’t click on anything except the ‘Back’ button on your browser. What Zango purports to do is essentially install a bug on your computer that allows them to track where you go and what you do on the internet. They use this information to present “helpful” and “relevant” advertisements directly to your internet browser window. Now, I am no tech-guru, but I smell a rat. Don’t ever ever do anything like this. There are so many legitimate and safe places to watch video online that there is no need to stay on a website that is even slightly questionable.

Using your TV

I know that computer monitors are generally not was easy to watch a show on as a TV, especially when many people want to watch at the same time. Well, there is a solution for that too. Most laptops have an s-video output that looks like this
You can get an s-video cable that will transfer the image on your computer screen to you TV screen. If your TV does not have an s-video input, then you can get cables that convert an s-video output to an RCA output. Last I saw, Radioshack had such a cable for $40, although I am sure that you can find it much cheaper other places. Cutting the cable not only saves you money, it also lets you watch what you want, when you want, wherever you want, and you can even do it on your existing TV.

Okay, I may be guilty of perpetuating a money myth. In my post you must use credit to get credit I am afraid I may have given the impression that the quality of your credit history and score is not an important consideration for lenders (see how easily these myths can spring up?). That was not the point of the post. The point of the post was to show how important it is to make sure your income exceeds your expenses by fair margin, and that by using credit heavily, you reduce your available income and thus hurt your credit worthiness in the eyes of lenders. However, your credit score is a very important factor in your life. It can affect your work, your insurance rates, and, of course, your credit worthiness.

Tricks of the Trade

Your credit score is a strange creature. The most bizarre things can hurt it, and even more bizarre things can improve it. Let’s take a look at some tricks of the credit scoring game.

1. Increase your credit limit. An important factor in your credit score is a ratio called the “debt utilization ratio”. This ratio is calculated by the following formula: 
   Debt Balance ÷ Available Debt
   For example, if you have two credit cards each with a credit limit of $2,000, then your available debt is $4,000.  If you have a balance of $300 on one card and $700 on the other, then your debt balance is $1,000.  This would give you a debt utilization ratio of $1,000 ÷ $4,000 = .25, or 25%.  Generally, the people who keep their debt utilization ratio around 10%-20% have the best credit scores. A low debt utilization ratio shows lenders that you use your credit wisely, not excessively.  Just make sure that you are making prompt payments!
2. Don’t wait for your bill to pay down your card. The credit card company reports the balance on your credit card to the credit reporting agencies at the time that they process your monthly bill. If you have a high balance at the time the bill is printed, then that is the balance that goes on your credit history, regardless of when you pay it off. So, if you have a high balance and pay it off after you get your bill, the high balance will still hurt you. Go check your card online and make payments on it, even when your bill has not been sent to you yet.
3. Keep a small balance on your card when your bill is processed. If you pay your credit card off comlpetely right before your credit card company sends you your bill, it will show a zero balance when they submit the bill to the credit reporting agencies. By keeping a balance on the card to show up on the bill, you how that you are using your credit, and by keeping that balance small you prove that you are using it wisely. After the bill has processed, immediately pay off the remaining balance so that you don’t have to pay any interest. A good strategy would be to make regular payments to your credit card and keeping the balance always below 20%, and making sure that you pay the full balance after your bill is printed. By doing this, you will improve your credit score quickly, and you won’t have to pay any interest.

Be Careful

What creditors are looking for in your credit score is evidence that you are in control of your own finances. If you cannot have a credit card and remain in control of yourself and your spending, then do not use credit cards. If you do, your lack of control over your finances will be evident and you will have a poor credit score. Be careful to not get carried away by credit, because it is very tempting to some. Don’t be fooled by the low payment the credit card requires. Always pay your card off in full each month, never ever pay interest on a credit card unless you absolutely must. Maintain control of yourself and your finances, keep a close watch on your credit history and your credit card balances, and watch your budget and expenses. If you do so, you will eventually find yourself living the lifestyle you have always wanted.

The Business Cycle

In economics, the business cycle refers to the tendency of the conomy to fluctuate up and down from growth to recession and back again. It is a pattern that is notable throughout all of recorded economics. The economy flips back and forth, from the roaring 20′s to the Great Depression, back up in World War 2, down again in the 70′s, up again in the 60′s down again in the early 80′s, up again in the late 90′s, down in the early 21st century, up again for just a couple years, and now down again. A downturn is almost always followed by an upturn, and upturns are invariably followed by downturns. On very rare occasions (only a few times in all of history), an economy can take a downturn and never recover, leading to the destruction of the nation supported by that economy (a classic example is the fall of the Roman Empire).

The Personal Money Cycle

In like manner, our individual financial situation has a tendency to flip from prosperity to disaster and (hopefully) back again. Like economies, it is possible for our personal finances to take such a devastating downturn as to render them unable to recover. This is what insurance is for. The most catastrophic events can have their severity reduced significantly simply by purchasing proper insurance. Death of the sole bread-winner, long-term disability, and devastating medical bills are examples of the types of tragedies that can ruin our entire financial future if not properly insured against.

But what about the smaller, more routine downturns, like unexpected unemployment or an unexpected increase in living expense (like rising gas prices)? How can you be prepared for such events? There usually is no insurance that you can buy to protect you from such downturns. So what can you do?

This is where the emergency fund can form a key role in your financial peace of mind. Examine the chart below. The red line represents the financial happiness a person without an emergency fund experiences through their money; the blue represents the financial happiness a person who saves up an emergency fund when times are good. For the unprepared individual, their financial happiness tends to cycle through ups and downs. When times are good, they happily spend all that they have and really get the most out of their prosperity. But, when a tragedy strikes and suddenly they lose the prosperity they once enjoyed, anxiety and fear enter the picture. How will they pay their bills, buy groceries, make the mortgage payment? Eventually, though, the problem corrects itself (ie a new job is found) and the problems they faced begin to be corrected. eventually, they get back to living the good life, enjoying their prosperity. Until life deals them the next unexpected card and they have to endure the whole ordeal again.

Now, let’s consider the situation of an individual who has established an emergency fund. When times are good, they save some of their money. This effectively lowers the pleasure they derive from their prosperity, relative to their friends who do not have emergency savings. Their friends mock their “frugality” and urge them to increase their spending so that they can be happy. But the saver has a plan; the saver is preparing to have a happy tomorrow, not just a happy today. Before the saver know it, tragedy strikes and he suddenly finds himself without income sufficient to meet his needs. But he doesn’t sweat it because he has some savings to fall back on. So, while his friends endure the anxiety, fear, and depression of trying to pay the bills, the saver experiences very little, if any, drop in his standard of living. There is no fear for the mortgage, no creditors banging on his door and calling on his phone. He can make all his payments to everyone he owes, and can still feed his family and provide for their needs. During these periods of downturn, the saver ceases to save, he instead begins to use his savings. Then, once the crisis has passed and the saver again finds himself able to sustain himself with his income, he returns to his savings habit and replenishes his emergency fund. For the next unexpected turn is somewhere down the road, of that, he is certain.

A Different Timescale

As I was preparing this post, my wife made a very astute observation. Don’t we see this cycle repeating itself EVERY SINGLE MONTH for some people? When people live “paycheck-to-paycheck”, they live within a rapidly repeating version of this cycle. Each month, they get their paycheck and quickly spend it all. Once the money is gone, they enter the anxiety and fear phase. They have no money left with which to buy anything (and their credit cards may be maxed out already!), and so they live in fear of having to make an unexpected expense. But then, the next paycheck comes in and they are happy again and they go out and celebrate by spending it all. Thus the cycle perpetuates itself.

I hope that you can see how an emergency fund can alleviate most of the stress that comes when life deals us an unexpected downturn. Notice in the chart that the saver winds up in the same place as the spender, he just does so without any of the problems that come from life’s little surprises. The stability it provides can make life so much more enjoyable.

The Word on the Street:

Everyone wants to have possessions as fine and expensive as their neighbors do. Most people try to spend in such a way as to ensure that they appear no different than “everyone else”.
 

The Truth:

While it is totally possible to keep up with the Jones’, do not do so without an understanding of where it will lead.

The Destination

 
If you keep up with the Jones’, that means that you must be on the same track. Where the Jones’ track leads, you will go. So what exactly do the Jones’ get in the end? John Cummuta, in his Transforming Debt into Wealth system, cited the following fact:

95% of American’s FAIL to achieve a true definition of finanical independance, where they are independent of having to work or get charity or help from the government or help from family members…What does that mean? It means that most people, the Jones’ for example, are doing it wrong…The Jones’ are chasing a barely achievable, unsustainable model of success.

If the 5% who achieve financial independance are spread equally among people of all income levels, that implies that only 2.5% of people with above average income (about $60,000 in the U.S. for a family in 2006) actually become financially independant. Why not? Because they spend all their money before they have a chance to earn it trying to buy a lifestyle that they cannot yet afford. So, you can keep up with the Jones’ if you want, but beware: they may be leading you into bankruptcy.