Finance – Cognition Sphere

8 Penny Pinching Tips

1. Be Conservation-Minded

Turn of the lights. Throw away less food. Being wasteful over time can accumulate in lost savings. Think of it as improving efficiency. The closer you approach money out = benefits generated the more you save! The apartment I live in is poorly insulated and heating it in the winter time is difficult. On cold nights I turn on an electric oil heater to warm up the room for a half hour before bed and then I turn it off. Taking a hot shower/bath before bed is another good way I like to warm up and avoid having to run my heater.

2. Cut the Cord

The internet has become a utility, but TV? Not so much. It’s no secret that cable TV is expensive. Not to mention the hidden fees like the broadcasting fee for the sporting event you aren’t even tuning into. Nearly everything can be streamed online via Netflix, Youtube, Hulu, Amazon Prime Video, WatchESPN, and many others. Need access to live TV to watch sports or another live event? Try splitting the already discounted Youtube TV ($35 per month) or Hulu TV with family members. Buying a digital Antenna can give you access to local channels and the big players (ABC, NBC, CBS) that host big sporting events like the Superbowl or the NBA Finals.

3. Get a Roommate

Own a home and want help with the mortgage and utility bills? Splitting the costs with someone responsible is not rocket science. For so many people that spend long hours at work and commuting, the short amount of time spent at home not sleeping might be worth sharing with someone else. Renting to a roommate makes more sense than having a nearly vacant house that you pay a mortgage and utilities on.

4. Ditch the car

Cars cost money. Gasoline, insurance, normal wear and tear, and routine maintenance all add up. Not to mention the depreciation from racking up miles (or driving it off the lot), licensing/fees, and major maintenance that you hope you never have to shell out money for. The IRS mileage reimbursement rate in 2016 was 54 cents per mile. So if you’re commute is mileage intensive and costing you valuable time, consider public transportation, carpooling, or relocating closer to work. Many companies will even subsidize public transportation costs. Living 20 miles closer to work could save you an estimated $15,000 per year!

5. Minimize Eating Out

Eating out is expensive. Taxes, expensive drinks and entrees, and the tip (15-20% or more of the total) all add up. Most restaurants charge a 300% markup on the items they serve. This means that any time you spend $15 on an entree, the food only cost $5 to make. That’s how restaurants make their money despite paying waiters, cooks, managers, rent, and the cost of the food. Home cooked meals cost much cheaper especially when cooking for a large family due to economy of scale. Going out to eat should be a rattle treat. Though, Americans aren’t treating it as such. 54% of Americans eat out at least three times a week or more. Consider “brown bagging it” and packing a lunch to work. Eating leftovers can minimize the amount of food thrown away and save money in the process. We can all eat out less and our savings accounts will thank us.

6. Hold on to Things

The buy, buy consumerism might be good for the economy, but not for your pocketbook. There is a lot of junk at there. Buying junk inevitably means it won’t last long. When purchasing things, especially more expensive items, do your research and buy durable, well-reviewed products. Well-made clothes tend to last a while. Hand-me-downs are great if you have kids since they grow faster than they wear out clothes the first time around. Be maintenance minded. Keep things in good condition and you won’t have to buy things as often. Be happy with the things you have and focus on making memories.

7. Buy Generic

Not everything you buy needs to be the best brand. Plenty of things including some medications, canned food items, and other household goods are better off bought generic. Many generic items are manufactured in the same factory as name brand items. Save money, live better, and not just at Walmart.

8. Hit up Thrift Stores – functional

My dad is king at thrift shopping. Specifically at Goodwill and Desert Industries. He found a tennis racquet still in the packaging for $20 and the retail value was $200 brand new. His best thrift shop purchase was a mint condition goose down feather winter sleeping bag from goodwill for $40. The retail value was $600! I have not been as lucky. My best purchases were name brand clothes that fit well and had no stains. A vast majority of stuff donated to Goodwill and other thrift shops is junk. But beneath the layer of junk a diamond in the rough that may be right underneath your nose.

Budgeting: Why do it?

Budget your money. It’s what your parents told you in college. It’s what every financial adviser implores. It’s sage advice that is so often quoted that it’s become cliché.

A 2013 Gallup poll showed that 2/3 of Americans don’t have a budget. Why are so many missing the mark? I used to be one of those that didn’t keep a budget because I’m pretty frugal and I wasn’t buying things that I didn’t need. Or so I thought. Don’t be caught in the trap that being an anemic spender is a good substitute to not having a budget. Governments and corporations keep budgets. Why? Without one how can you track progress? Money should be used to help individuals and families reach goals that they have including: college, home ownership and repairs, vacations and recreation, car purchases, retirement planning, general financial security, and more. A budget is not set in stone, only to be interpreted by judicial constructionism. It is a living document. It should be tweaked and fine tuned month-to-month to ensure you are on track to meet your goals. Think of it as a feedback control system, like cruise control in a car. If you are going up a hill the cruise control senses the speed dropping and it opens up the throttle to maintain constant speed on the hill. Similarly, if you notice one month that you had some unexpected expenses of some kind (medical bills, a speeding ticket, etc) and you’re off track to purchase a new car you can adjust your budget for the next month to allow for more of your money to be diverted to savings.

Money can be spent so easily today. Whether it’s a swipe of a card or a click of button online, it has never been easier to spend money. Budgeting keeps us accountable. It is also nice to track reoccurring bills. Through reviewing my budget and realizing that I was $10 over budget on internet I was able to call and find out why the charge was higher. I ended up getting a promotional rate that reduced my monthly bill. Once you set up your initial budget it should only take minutes to update a whole month’s expenses, especially with access to online credit card statements. If you don’t mind be data mined budgeting apps like mint.com can be great to help you keep track of your spending. Mint will even sent mobile alerts when you go over budget in a particular category.

Suit your budget to your personal needs. But don’t forget the 50-30-20 rule as a basic guideline (not an actual rule). 50% of your money should be going to fixed expenses like rent and food. 20% should go towards savings and investments. The remaining balance, in this case 30%, goes towards variable expenses like vacations and spending on non-essentials.

I have included a generic budget that I credited in excel. If you go over budget for a certain category it highlights the cell red. If you are under budget or exactly within budget it highlights the cell green. It also takes your monthly income and calculates the 50-30-20 rule categories and it highlights the cell above it in red if it is above that percentage. It is a little vanilla but it is a great start and for those looking into building a budget for the first time.

Here is a link to my free excel budget

“When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates”

-Thomas S. Monson

Compound Interest: Make it Work for You

When Albert Einstein was asked what mankind’s greatest invention was his reply likely stunned many engineers and scientists of his time. His reply was not the vaunted steam engine or any of the other brilliant technological advances. His reply was: compound interest. If we understand compound interest we will avoid paying it and strive to make it work for us. The concepts behind it are critical in planning for retirement. Einstein also referred to compound interest as the, “Eighth wonder of the world.” The key is time. Compound interest is an exponential function and the higher the interest rate the more quickly an investment or debt reaches rapid growth.

where P = principal, FV = Future Value, r = interest rate, n = compounding period, and t = time

The exponent term “nt” does the heavy lifting. The greater the time and number of compounding periods the greater the exponent. The number of compounding periods is usually not controllable, but time is.

Stocks, bonds, and cash (held in a high yield savings account) are shown below graphically. These calculations are based on assuming a conservative rate of return of 8% annually for an index fund based on the S&P 500, a 2.8% return for a portfolio entirely of bonds based on the last 30 years of U.S. Treasury returns, and a meager 1% return from a high yield savings account. Many employers match retirement funds up to a certain percentage. Contribute the full amount to get the full match. Few investments will yield 100% return; it would be foolish to turn down free money. The full equation that takes into account a constant monthly payment is found below:

P	PMT	r, savings	r, bonds	r, stocks
$1k	$500	1%	2.8%	8%

With an initial investment of $1,000 and monthly payments of $500 per month and interest compounded monthly the following plot is obtained.

The graph illustrates the importance of time. All investments look almost identical even up through year 10. This is due to the bounds of the graph. The amounts are substantially different but not relative to the future value at year 40.

Year	Savings	Bonds	Stocks
10	$64,180	$70,472	$93,693

However, given enough time small monthly payments of $500 lead to a significant sum of money. I chose 40 years assuming you start investing in your mid-twenties and retire in your mid-sixties. Investing in your twenties is the best thing you can do to for your retirement account. The exponent is proportional to time and those dollars contributed in your twenties will compound many more times than dollars contributed later on in life. Over 40 years this particular fund entirely based on stocks yields $1.8 million dollars!

It is recommended to have enough money for retirement to replace 70-90% of your current annual income. Depending on your salary and how luxurious you want to live in retirement you should check now to make sure you are stocking enough money away (pun intended) to secure your future. Taxes will eat a chunk of your cash and the discussion of Roth versus traditional 40lk/IRA is a post for another day. Inflation is easy to take into account. The average annual inflation rate is 2%. Simply subtract that from the investment’s rate of return to get a real return of investment. The same data set from above is graphed with inflation taken into account.

This plot should further convince you that stocks should be the predominant investment in any retirement portfolio if you hope to see significant growth. Bonds and cash are useful to protect those who are about to retire from the volatility of the stock market and are good for portfolio diversification. The spreadsheet I used to generate these graphs is provided below. An iterative approach would be to adjust the monthly payment number until your retirement goal appears on the graph. Please use it as a resource to help you meet your retirement goal no matter how far away it is. The time to plan is now. Compound interest favors those who invest early and often. In the words of Abraham Lincoln, “I will prepare and some day my chance will come.”

Excel Spreadsheet Free Download:

Investment Spreadsheet Calculations

*Disclaimer: I am not a certified financial adviser and the content of this article is not meant to substitute for professional financial advice.