September 19, 2018

About Kevin Mercadante

"Kevin Mercadante, is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He also works in public accounting, and had a previous career in the mortgage industry. He lives in the Atlanta area with his wife and two teenage children."

How to Save Money Even If You Aren’t a Saver

Develop Good Savings Habits

Develop Good Savings Habits

It can sometimes seem as if some people are natural, born savers, while others simply aren’t. If you’re not one of them, it’s possible to become one by changing a few tactics and by committing to making it happen.

How can you start saving money even if you’ve never been a saver in the past?

Make Use of Payroll Direct Deposit – Start Small and Work Your Way Up

Payroll direct deposits are a non-savers best friend. You can have money direct deposited from your paycheck into your savings account without you ever knowing it’s happening. Most people are well aware of this tactic in regard to depositing money into checking accounts. But you can have money direct deposited into as many accounts as your employer will allow. Some have no limit on the number of accounts at all while others may cap it at, say, three. If they do, make sure that one of the three is a savings account.

You don’t have to go crazy here, and risk leaving yourself short money to pay your regular bills. Start with a small amount, like $10 per pay period, that way you don’t notice it. Wait a couple of months, then increase it to $20.

One of the best tactics for increasing your payroll deposits into savings is by directing the amount of your annual pay increase into your savings account. Let’s say that you earn $3,500 per month, and your employer gives you a 2% raise on your next review. This will result in a pay increase of $70 per month.

Allowing that something around 30% of it will go for income taxes, that will leave you with about $50 of additional net income each month. Instead of having the money deposited in your checking account, have it direct deposited into your savings.

If you are already depositing $20 per month in your savings account, and you now increase that by the net amount of your pay increase, you will then be up to $70 per month. On an annual basis, that means you’ll be putting $840 into your savings account each year.

If you repeat that strategy with each annual raise, after a few years you will have accumulated thousands of dollars in your savings account – while you’ll hardly know that it’s happening.

Direct Deposit Your Income Tax Refund Into Savings

According to the IRS, the average amount of a federal income tax refund is roughly $3,000. If you currently have no money, depositing your refund into savings will add a chunk of money that will fast-forward your savings efforts.

Sometimes the best use of a cash windfall is simply to keep it in the bank earning interest. Though you won’t be using it to buy something you might enjoy, the peace you’ll feel from having money in the bank will almost certainly be worth more than anything you can buy with the refund.

Just as is the case with direct deposits out of your paycheck, it’s best to have your tax refund direct deposited into your savings account from the IRS. You can do this simply by providing the bank routing number and your savings account number at the bottom of page 2 of IRS Form 1040 – just above your signature. Complete that information, and the money will go directly into your savings account, removing the temptation to spend it on something else.

Set Up a Cash Cookie Jar

While this sounds incredibly old school, it can nonetheless be highly effective. The idea is that you have some sort of container somewhere in your house where you can drop extra cash when it’s available. It could be a glass bowl, a cardboard box, or yes, even a cookie jar. But if you drop $10 or $20 in cash into the container a couple of times a week, you’ll be amazed at how quickly it builds up.

The key to the strategy is that you’re using small amounts of money, that won’t have a material effect of your monthly budget. And for some people, the visual aspect of being able to see money accumulate helps to motivate them to save even more.

Try and see if it will work for you.

Sell Your Stuff Periodically

Most of us have stuff in our homes collecting dust because we’re sure that no one else will buy it. Don’t be so sure! As the saying goes, one man’s junk is another man’s treasure.

And that really is true. That item that you think is nothing more than a piece of junk could be exactly what someone else is looking for, and willing to pay for.

If you have large items, like furniture or appliances, that you’d like to get rid of, put an ad on Craigslist. There’s no charge for placing such ads, and you can just write a simple ad and attach one or two photos. I’m guessing that you will sell at least half the stuff you put up for sale on the site.

Another good way to convert your junk into cash is by having a garage sale a couple of times each year. We do that in my family, and pick up an extra $150 on average for each garage sale. If you do this twice each year, that’s $300 of found money that you can put into savings.

Earn Some Extra Money When and Where You Can

Develop Good Savings Habits

Develop Good Savings Habits

This isn’t nearly as complicated as most people think it is. You’ll have to use your imagination here, to develop some possibilities that will suit your abilities and preferences, but here’s a list to help you get started:

  • Cutting a lawn or two in your neighborhood
  • Babysitting
  • Helping someone clean out their garage
  • Helping someone straighten out their budget
  • Taking advantage of a customer referral fee at work
  • Taking advantage of a new employee referral fee at work
  • Offering to help a small, local business with a task that you are qualified to do (cleaning up the back office files, customer follow-up, inventory, etc)
  • Tutoring a student in a subject where you are knowledgeable

Figure out one or two jobs you would be willing to perform, and plan on doing it once or twice each month. If you can pick up $50 each time you do, doing it twice each month will bring in an extra $100. In a years’ time, that will be $1,200 going into your savings account.

Use two or three of these strategies to help you get started saving money. Once you get into the habit, it will eventually start to become easier for you, and even natural. And as the money begins to build up in your savings account, you’ll start to get really motivated.

But the first, most difficult step, is always getting started – do you think you can do it?

Five Reasons to Have Two Checking Accounts

Keep Your Family Happy

Keep Your Family Happy

Many people have multiple accounts in different categories – savings accounts, investment accounts, and even retirement accounts. But there’s often resistance to the concept when it comes to checking accounts. On one level, this makes sense because checking accounts typically impose fees on the accounts. Two checking accounts means two sets of monthly fees. But if you can have two checking accounts with low fees or no fees, there are at least five reasons to have two checking accounts.

In case of a security breach

People worry about identity theft, particularly the biggest kind where your entire identity is hijacked and all of your accounts are compromised. But it’s far more common that a thief gains access to a single account. Though it is possible for them to acquire access to all other financial accounts, the theft of the original account is often discovered before the thief can access the others.

A checking account is particularly vulnerable to identity theft because checks include not only your personal information, such as your name and address, but also the bank routing number, and most important, your personal account number. Both numbers are imprinted at the bottom of your checks. By issuing checks to pay bills, you’re putting this sensitive information out to other people, some of whom may be thieves.

It’s worth noting that identity theft is usually an inside job, which is to say that an employee of any company that you do business with could gain access to your account information if you pay by check. It’s not always possible to avoid paying your bills by check, so you have to be aware of the possibility that account information can be stolen. It’s a reality that we all live with.

But if your account information is hijacked by a thief on one checking account, you can continue to transact business with your second account. This will minimize the disruption caused by the theft. Just be sure that the second account is held at a different bank than the first one, so that it will not be so easy for the thief to get access to both accounts.

To allocate expenses

We often hear of people budgeting using envelopes – either virtual as part of an application, or even literal envelopes. Having two checking accounts can help you to do this without having to resort to buying and implementing an application, or maintaining physical envelopes.

For example, you can use one checking account to pay minor expenses, such as grocery bills and ATM charges. You can use the second account to cover larger expenses, such as your mortgage payment, health insurance or car payments. This will help you have the money available to make the larger payments, without running the risk that the swipe of an ATM card could leave you short funds.

To maintain a budget

This is similar to the concept above, except that it gets more specific. For example, you can use one checking account to pay for fixed expenses, like your house payment, debt payments, and insurance premiums. The second can be used to pay for variable expenses, such as groceries, entertainment, gasoline, and impulse purchases.

Once again, the separation will create a wall between your expense categories, and will keep you from over spending in either category. By limiting your variable expenses to a single checking account, you can limit the amount of money that you might have available for impulse purchases, such as clothing and entertainment.

To save money for large expected expenses

You should always have a checking account to pay for your expenses, and an emergency fund to be available for true emergencies. But there are what you might call halfway expenses – outlays that are large enough to be worthy of an emergency fund withdrawal, but don’t rise to the level of an actual emergency.

Car repairs are just such an example. Though you can’t know when they will strike, or how much they will cost, you know that they’re coming at some point. That means that while the cost will be disruptive, it won’t be entirely unpredictable. You can use a second checking account as a place to accumulate money to handle such expenses, that will help you to avoid dipping into your emergency fund.

Other uses could include using the second checking account to accumulate money for an upcoming holiday season or vacation. You may even use it if you know you’re going to have a major repair, such as replacing your roof or HVAC. Once again, these are large and disruptive expenses, but they’re not emergencies because you know they’re coming.

To have a second account to tap instead of using a credit line

Many people fall into the pattern of tapping their credit lines whenever their checking account is empty. But if you have a second checking account, always stocked with at least some money, you can access the funds in that account, rather than using a credit card or withdrawing money from your emergency fund.

The idea is to create levels of liquid cash that you have available so that you will not take on debt or withdraw money from accounts that have other purposes. This can work especially well for married couples where each spouse has their own checking account. If one spouse is running low in their checking account, they can get funds from the other spouse’s account.

If the fees charged on your checking accounts are reasonable, look into maintaining two checking accounts. Sometimes maintaining a smooth cash flow is worth paying the extra cost of the second account.

How to Build a CD Ladder – And Why You Should

A simple fact that is hard to learn is that the time to save money is when you have some. - Joe Moore

A simple fact that is hard to learn is that the time to save money is when you have some.
– Joe Moore

With the stock market hovering in record territory, certificates of deposit (CDs) aren’t getting a whole lot of respect these days. After last year’s amazing 32% return in stocks, convincing people to put money into CDs that often pay less than 1% is a tough sell. But if the stock market should start reversing course, CDs could be one of the best investments in town, and a CD ladder will be one of the best ways to hold them.

What is a CD ladder?

At its most basic level, a CD ladder is a portfolio of certificates of deposit that you arrange much the same way you would any other type of investment portfolio. The idea is to create a portfolio of CDs that includes both different interest rates and different maturity dates.

In a real way, this is something like building your own money market fund. And while putting your money into a money market fund would certainly be simpler than creating a CD ladder, the returns on those accounts are close to zero right now. CD rates are low by historic standards as well, but by building a CD ladder you’ll have an opportunity to earn a better return on your money, certainly better than money market funds.

You can always put all of your money into a single CD that pays the highest rate. You might decide for example, to put all of your money in a five year CD as a way of maximizing your return on investment. But what happens if sometime during the five-year period interest rates rise, and rise substantially? Your money will be tied up in your five year CD while better rates can be had in other CDs. Sure, you can usually terminate the CD early, but that will result in early withdrawal penalties that will reduce the rate of return on future investments.

You can avoid that fate with a CD ladder. Let’s say that you have $30,000 that you plan to invest in fixed income assets, like CDs. Rather than putting all of the money into a single CD, you can invest smaller amounts in various CDs, either at different intervals or with CDs of different maturities. We’ll discuss both methods in a minute.

Why would you want to build a CD ladder?

Before we get into CD ladder strategies, let’s spend a little bit of time considering why you should put some of your money into CDs in the first place. There are several reasons:

  • When equity investments, like stocks, begin to fall – and they will sooner or later – there’s nothing like the safety of cash-type assets, especially those that pay interest. Though you may not make a fortune with CDs, you won’t lose any money either. That’s a winning investment in a bear market.
  • You should always have at least some of your money sitting in fixed rate investments, even if you are an aggressive investor.
  • CDs will preserve your capital during a market downturn, so that you will have cash to buy stocks when the market turns up again. CDs are the perfect place to park your money.
  • In the current market environment, CDs pay higher interest rates than money market funds. Many money market funds are currently paying less than 1/10 of 1% in interest.
  • Non-bank money market funds are not insured by the FDIC the way CDs are.

Now that you know why you should invest in CDs, let’s talk about some CD ladder strategies…

Building a CD ladder – it’s not complicated

Building a CD ladder will probably be one of the less complicated investment ventures you will ever enter. It’s certainly easier than either the stock market, where you have to worry about unstable asset prices, or real estate, where you incur a large number of transaction fees.

CDs are completely stable assets with guaranteed returns, and there are no fees to set them up directly with a bank. And you can do this either online or, if you’re not tech savvy, you can do it through a local bank where bank personnel will handle all the paperwork for you. They’ll even create and maintain a CD renewal schedule based on your preferences.

Building the actual CD ladder will simply be a matter of deciding upon the right mix of CD maturities, or the sequence of CDs purchased.

Laddering for interest rate return

Generally speaking, the longer the term of the CD, the higher the interest rate it will pay. If you are laddering for maximum interest return, you may want to create a portfolio of CDs with various maturities – which is where the term “ladder” comes into the picture.

Your ladder may consist CDs maturing in six months, one year, 18 months, two years, 30 months, five years, and so on. In this way, the staggering of maturities will provide you with the maximum rate of return on the portfolio. The certificates with longer maturities will give your ladder a higher rate of return than if you were invested entirely short-term CDs.

The staggering of maturities will also give you the option to participate in higher-paying CDs in the event that interest rates rise. So for example, while you’ll be locked into longer terms with certificates maturing in 18 months to five years, those of shorter duration can be rolled over into higher-paying certificates as they mature.

Laddering for maximum liquidity

Maximum interest rates are not the only reason why people invest in CDs, and certainly not CD ladders. For many investors, liquidity is more important than return on investment, particularly in a low interest rate environment. If this describes you, then you can also ladder your CDs for maximum liquidity.

You can do this by investing your money in short-term certificates, and do it in such a way that while you are investing in one CD, another one is coming due. With this type of ladder, you’ll always have cash available for any purpose needed.

Let’s say that you have $30,000 that you want to invest in certificates of deposit. Instead of putting the entire amount into a 180 day CD, or even a 90 day CD, you can break up the portfolio into 12 equal parts of $2,500, and invest in a new CD each month. Each chunk can be invested in a 12 month CD, and you do so at regular monthly intervals.

Over the course of one year, you will have built a CD ladder 12 CDs of $2,500 each, with one maturing and one renewing each month of the year. When a CD matures, you will have the option to either roll it over into another CD, or take the cash for an unrelated purpose.

This can be a perfect strategy if you are an active investor with an ongoing need for cash. And at the same time, it’s a way to add safety and predictability to an otherwise high risk portfolio.

If the stock market is starting to give you a nose bleeds, look in to CDs – and CD ladders in particular. They’re a great place to be when the stock market starts tossing and turning.

Debt Consolidation Loans – Proceed With Caution

Make A Plan To Get Out Of Debt

Make A Plan To Get Out Of Debt

If you have more debt than you are comfortable carrying, debt consolidation loans can seem like an oasis in the desert. It’s a way of taking a large number of smaller debts – each with its own annoying monthly payment – and rolling them into a single loan, with one lower monthly payment than the collection of payments you’re making on your various debts.

But as good as the theory of debt consolidation loans seems to be, proceed with caution. Debt consolidation loans don’t always do what you hope they will, and sometimes they can even make your situation a good deal worse.

How Debt Consolidation Loans Can Go Wrong

When people consider taking out a debt consolidation loan, they seldom give serious thought to the potential pitfalls that they have. There are number of ways that debt consolidation loans can go wrong, and here are just a few:

  1. Though they usually lower your overall monthly payments, they don’t reduce the amount of money that you owe
  2. By reducing your overall monthly payment, they often pave the way for you to take on additional debt
  3. If you don’t stop borrowing after you take a debt consolidation loan, the consolidation will have been absolutely pointless
  4. Debt consolidation loans can make debt easier to live with, and that does not create the kind of budget discipline that leads to an improved overall financial situation
  5. Debt consolidation can become a revolving arrangement, in which you do a consolidation loan, that’s followed by an even larger one, a larger ones still, in a process that often has no end

In short, debt consolidation loans can lead you on a one way road to ever higher amounts of debt.

The Cycle of Perpetual Debt

Point #4 above warrants special consideration, since it lies at the root of the cycle of perpetual debt a lot of people find themselves in. Many debtors look for ways to make their loans easier to live with. This may reduce budgetary stress in the household, but it doesn’t actually make your debts go away. In fact, if you become too efficient at debt consolidation, you run the very real risk of turning short-term debt into permanent debt.

How does that happen?

As debt consolidation loans become larger, they tend to carry longer repayment terms at higher monthly payments. At the extreme, debt consolidation eventually morphs into either a home equity line of credit or a cash-out refinance of your primary mortgage. At that point your debt consolidation become something close to a permanent obligation.

Once short-term debt has been converted to permanent debt, secured by your home, you’re debt slate is once again wiped clean. This can be an excellent strategy to get out of debt if you are fully committed to avoiding all forms of debt in the future. But for many people who do the ultimate form of debt consolidation – a mortgage on their homes – the path is simply cleared to accumulate more debt.

This entire arrangement – and it is not an uncommon one – puts you squarely on a path of perpetual debt.

How to Make Debt Consolidation Loans Work For You

Debt consolidation can actually work! By lowering your monthly payments, it does free-up your budget, and give you a host of options that you didn’t have before. But none of that will do any good unless your realize that getting out of debt requires sacrifice.

What kind of sacrifices are we talking about? Here are just a few examples:

1) Recognize that rearranging debt is not the same thing as paying it off
A huge part of the success or failure of any debt consolidation loan is the way that you view it from the very start. You may need to change your thinking! If your primary purpose is simply to lower your monthly payments, the consolidation loan will probably only lead you deeper into debt. But if you see it as a more efficient way to payoff your debt it could be the very tool you need to help you get out of debt forever.

2) Eliminate the level of spending that got you into debt in the first place
One of the biggest negatives with debt consolidation loans is that people who take them convince themselves that they don’t have to change their spending habits. That thinking is completely wrong, and a recipe for disaster. The entire reason that you go into debt in the first place is because you spend more money than you earn. That arrangement will have to change – you’ll have to learn to live beneath your means. That’s where the sacrifice come into play, but there is no way that you can be successful with a debt consolidation loan without it.

3) Swear off borrowing at least until the debt consolidation loan is paid off completely
If you borrow more money shortly after taking a debt consolidation loan, you’re defeating the entire purpose of having the loan in the first place. Adding more debt on top of the debt you already have with a consolidation loan, will simply put you deeper into debt. Once you take a debt consolidation loan, you must avoid taking any new loans, at least until the debt consolidation loan is paid off in full.

4) Become a committed saver
Probably the best way to avoid debt in the future is by becoming a saver. If you have money in the bank, you’ll be less likely to borrow money, particularly using credit cards. If you can start saving money while you are paying your debt consolidation loan, you’ll be able to really accelerate the process once the loan is paid in full. You can then direct what used to be the monthly debt consolidation payment into your savings.

In order for a debt consolidation loan to be completely effective, you have to view it as the first step in a very long-term process. The whole purpose of the debt consolidation loan is to clear the decks of your old debt, so that you will be able to go forward with a clean slate, and to develop an entirely new and more effective financial strategy.