Rage Over A Lost Penny

Part of the reason I started this blog, other than documenting my progress, was to make extra income in order to get to my goal of saving $100,000 faster.  Passive income, in all its forms, is extremely important for any ambitious wealth building entrepreneur.  I am happy to announce that I have made the first penny, of many to come, from this blog!

As a classically trained pianist, and no other piece I can think of fits this occasion better than Beethoven's Rage Over A Lost Penny.  In all my life, I've never had such a happy fit of rage and excitement over one penny.  If I can make money online, you most definitely can as well.  Enjoy!

 

The Richest Man in Babylon

One of the personal finance books that I've read in the past and decided to read again is The Richest Man in Babylon by George S. Clason.  Getting good at anything in life, whether it is sports, an instrument or skill requires mastery of the basics.  Personal finance is no exception.

Regardless of how much you may or may not know about personal finance, implementation of basic financial principles is key to building wealth.  Take myself for example, as a financial analyst I know tons of financial formulas that are used for everything from bond valuation, equity valuation and derivative valuation; unfortunately, I never took the time to create a simple personal financial plan for paying myself first.  A principle that The Richest Man in Bablyon refers to as, "A Part of All You Earn is Yours to Keep".

Reading this book again may seem like child's play but it is essential to reinforcing the basic principles that lead to amassing wealth.  Once you're wealthy you can worry about the fancy things like level 3 options strategies, arbitrage-free bond valuation or trading non-directional market volatility.

Many years ago, during a piano lesson, I was struggling with a particular passage of one of Beethoven's later sonatas which are known for their technical difficulty.  When I finished the movement I looked to my teacher for a profound bit of wisdom that would improve my technique.  She looked at me for a moment, asked me what key the sonata was in, and upon telling her it was in E-Major, she told me to spend the next week doing scales and arpeggios in the key of E-Major and the respective modulations that occur during the piece.  To a non-musician this may sound like a complex instruction, when in actuality scales and arpeggios are really basic techniques that are taught to beginning pianists.

The more you know about a particular subject, the more imperative it becomes to review the basics from time to time.  Otherwise, our own bad habits will become the burdensome chains that prevent any further financial progress.

Money Saving Tips

The past few days I've been thinking about my goal so hard that I'm sure I've collapsed more than a few wave functions (kudos if you get the joke).  First order of business, trim the fat.  I'll share a few things that I do but I'm really more interested in what everyone else is doing.

1. Change Your Own Motor Oil

It can be intimidating if you've never changed your own motor oil before but the savings are more than worth it.  Most quick lube shops in my area charge around $90.00 for a fully synthetic oil change when you can get the same oil and a factory filter for around $30.00.  Depending on your oil change intervals you can save about $360 per year.  I change mine every 5000 miles just to err on the side of caution.

2. Cut Your Own Hair

This might be harder for women than it is for men but if you can master this skill you'll never have to pay for another haircut again.  Not the haircuts for men are terribly expensive, but $20.00 every few weeks that you don't have to spend on a haircut is money that you can keep in the bank. If your too scared to try this, wait until summer comes and cut your hair on the hottest day of the year.  If you make a mistake blame it on the weather.  You won't die if you go bald for a few weeks, don't worry hair grows.

  
3. Learn how to cook

It has been a few years since I started cooking, trust me when I say that I wouldn't want my worst enemy to eat the first few dishes I've ever made.  Eventually you'll learn to cook so well that you find the food you make is better than most restaurants.  Not only is cooking cheaper than eating out, it is way healthier than any of the crap you would eat at fast food joints.  It costs me around $4.00 a day to eat well, and that includes grass fed meats and organic produce.  BTW, $4.00 a day includes lunch and dinner.

4. Quit Smoking

This was actually one of the harder things for me to do.  Not only was it costing me a small fortune, it was costing me my health.  I tried numerous times to quit by cutting back but it never seemed to work for me.  At one point, everything I owned stank so much that I just decided to quit cold turkey.  For me that was the only method that worked.  As a pack a days smoker I'm saving around $63.00 a week.  Yea, cigarettes are $9.00 a pack in my area, I can probably retire at age 65 just by investing what I was spending on cigarettes every month.

5. Bring Lunch to Work

If you work at home, consider yourself lucky.  For the rest of us there are major savings to be had by bringing lunch to work.  Why spend $7.00-$10.00 a day on lunch when you can bring some dinner leftovers or a specially prepared lunch for a tenth of the price.  You'll get bored pretty quickly if all you know how to make is PB&J so it is best if you dust off your kitchen knives and learn how to cook.  I only spend at most 15 to 20 minutes making the next day's lunch and I do it while I'm making dinner.  Kill two birds with one stone and keep that $10.00 bill in your wallet.

How about it, what are some of the boring, weird or crazy things that you do to save a dollar?  Do let me know because I'm running out of ideas.

How Much Is Your Tax Refund Costing You?

Every year, without fail, I usually have a friend who is excited about his or her super sized tax refund.  Typically at this point I'll take some time to explain to them the reason why the government actually owes them a refund, because they overpaid their taxes.  That $3,000 refund you're so excited about is actually $250.00 a month in over paid taxes.

You guys know I like to take the time to express these problems so let's take a look at your opportunity costs in this particular scenario.  Instead of giving the government an interest free loan to the tune of $250.00 per month what would happen if you invested that money on a monthly basis growing in an account at 8%.

If you haven't guessed yet, this is a future value of an annuity problem, for those of you who don't remember the formula here it is again:

 In this case our periodic payment is $250.00, the interest rate is .66% (8% / 12), and the number of periods is 12.  Plugging these numbers into my trusty HP12C financial calculator gives us a future value answer of $3,111.00.

Look at that, you've given up $111.00 in forgone interest by giving the government a $250 interest free loan on a monthly basis.  But wait, there's more!  How many times do you actually get your refund in January of the next tax year.  Usually, most people procrastinate when it comes to filing so they file on April 14th and get their tax return sometime in May.

Let's assume my friend receives his return on May fourth and we grow the $3,111 dollars by another four months at .66% (8% / 12):

$3,111(1 + .0066)^4 = $3,193.00

Technically, my friend forfeited $193.00 in growth.  Which brings me to my next point, how exactly do you prevent yourself from overpaying your taxes?  Check with your HR department next time you are at work and ask them if they can give you a blank W-4 so you can raise your exemptions.  You'll want to consult with your accountant in order to make sure that you don't raise your exemptions to a point where you actually underpay the amount of taxes you owe and end up owing the IRS money.

Obviously, if you do raise your exemptions you won't receive an outsized return the beginning of the next year but you will notice that your paycheck will be a little larger than your used to.  Just make sure you actually save the money and don't increase your lifestyle expenses otherwise it would defeat the purpose of increasing your exemptions in the first place.

Benjamin Franklin once said, "In this world nothing can be said to be certain, except death and taxes".  Wise words, but there is nothing wrong with doing everything legally in your power to pay the least amount of taxes you possible.

A Fortune in ATM Fees

We’ve all been there before, you’re next in line and go to pay for your item but the store doesn’t take cash.  Conveniently, there is an ATM nearby and you go to take money out; however, before you can get your cash the ATM prompts you to accept a $2.00 fee for using their machine.  Most of the time people just grumble and hit yes, but if you really think about it, you just paid 10% to take your own money out of some other banks ATM.

The bad news is that you just got robbed, the good news is that you can be in the same exact situation and get reimbursed for the fee if your with the right bank.  One of the reasons that I have a checking account at Charles Schwab, in addition to my primary checking account at Chase, is because Schwab will reimburse you for an unlimited amount of third party ATM fees.  Chase doesn’t offer this feature so I make sure to use my Schwab debit card anytime there isn’t a Chase branch nearby. 

On the last day of the month, Schwab will credit your account for 100% of any ATM fees you paid during the month in addition to any interest accrued during the month on the balances you keep.  Many other banks offer ATM fee reimbursements but I’m not sure of any banks that offer this benefit on an unlimited basis unless you already keep large balances with the bank or you are private client status.  In any event, the next time you find yourself in this situation just make sure your bank offers to reimburse third party ATM fees so you don’t have to pay someone else to use your own money.

Always remember that time is money and we must always think of every dollar we have in terms of its future value.

FV = PV(1 + r)^n

Whereas:

PV = Present Value

r = rate

n = number of periods

$2.00 grown at 8% over different periods can lead to fascinating amounts.

$2.00(1 + .08)^20 = $9.32

$2.00(1 + .08)^40 = $43.44

$2.00(1 + .08)^100 = $4,399

$2.00(1 + .08)^200 = $9,677,899

Back in year 1626, the Indians sold the island of Manhattan for $24.00.  If they would have invested this amount at 8% the Indians would have a sizable fortune that is nothing to laugh at.

$24(1 + .08)^386 = $1.913 x 10^14 or $191.3 trillion dollars, enough to pay off the national debt more than ten times over.

No wonder Einstein once declared that compounding is the most power force in the universe.

Is Sugar Keeping You Broke?

A guy with a $100,000 dollars is really just a guy, assuming zero growth, who didn’t spend $100,000.  Living a healthy lifestyle is just as important to living below my means, and in my opinion a healthy lifestyle will help you cut down on unnecessary snacking and prevent costly medical issues. Which begs the question, how exactly does eating sugar keep you broke?

Sugar by Lauri Andler (Phantom)
Reproduced under Creative Commons 3.0

My personal diet consists of very little carbohydrates (which is converted to glucose) and virtually no sugar, especially high fructose corn syrup.  Eating in this manner keeps me from getting the hunger pains associated with going a long time between meals.  In the morning I usually skip breakfast or, if I’m feeling hungry, I’ll have an egg with some bacon.  For lunch I typically have a salad with leftover meat from last night’s dinner and some days I’ll skip lunch altogether.   How can I skip breakfast or lunch without thinking about my stomach or spending $3 to $4 dollars on snacks between lunch and dinner?  It is because my body is fat adapted, instead of burning sugar for energy my body is able to easily access a substantial amount of stored energy, fat.

Typically, most people get hunger pains between meals and instinctively reach for a snack.  If no food is around and you are nowhere near a grocery store you are looking at spending at least a few dollars at the nearest vending machine.  $2.00 a day on snacks five times a week is $10.00.  It may not seem like a lot of money but the power of compounding will prove to you otherwise.  $40 a month can grow to a sizable sum over time. 

The problem we face here is essentially the future value of an annuity.  How does it work?

If you were to invest your monthly snacking savings of $40.00, growing at .66% (8% / 12 months) for 60 periods (12 months * 5 years), you would have $2,939 by the fifth year, only $97,060 to go to reach our coveted goal of $100,000.  You saved $2,400 in principal but have $2,939, amazing, the opportunity cost of snacking is $539 over a five year period.  Not much you say?  Over ten years the opportunity cost of snacking is a whopping $2,485, over twenty years it is $13,727.  By the twentieth year you would have $23,327 versus $9,600 in principle saved, trust me when I say that that hand full of vending machine Cheez-Its for $2.00 isn't worth it.

In case you’re wondering, I chose to live a primal lifestyle a few years ago and have never looked back.  Many of the principles of primal living are in direct contradiction with traditionally accepted dietary advice, and I am fine with that, because the financial lifestyle of living below my mean goes against the traditionally accepted consumerist ideal of instant gratification, yea I'm rebellious in nature (as long as the rebellious activity has some basis in fact).  If you are here reading this post you probably know that the root cause of the financial problems most households have, even our own country, is due to spending more than you make, consumerism at its finest.

Living a primal lifestyle has helped me save money by; getting rid of a two year struggle with chronic hemorrhoids - and its associated medical costs - in one month, cutting down on snacking binges and even helping me to quit smoking.  Full disclosure, I’m no doctor so don’t take what I’m saying as medical advice.  I do encourage you to check out a community of like minded primal individuals who know more about the primal life than I do, from there you can decide if the lifestyle will or won’t work for yourself.  Just be sure to consult with your doctor or physician before making any drastic changes to your dietary habits.

Health, happiness and wealth, in any other order happiness would never be possible.

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Living Primal @ Mark's Daily Apple