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Financial Faux Pas




"I'm barely an adult, how can anyone expect me to make these financial decisions."




Are you confident about your financial situation? Like really confident? Are you sure you're making the best decisions with your money to maximize every penny you might need in the coming months? Some of you might say yes and just use the post to compare notes. For a majority of the country though this is a struggle dealt with every waking hour. From the overdue card balances. "Which card should I pay off first?" "Should I save and buy my house outright?" "To simply, would this new monthly payment be worth it in the overall picture?"

Unfortunately, I can't give you exact answers to all of these situations, but I can point you in the right direction to making the best and most crucial decisions with your money, possibly saving you thousands of dollars a year in missed opportunities. The main portions of this discussion tackled today will be:

  • Cutting cost on everyday purchases. - Should I really buy that drink pack even though I just want one?
  • Paying down debt. - Does the interest really cost me that much?

A lot of this article will stress planning ahead and getting in front of the ball on your typical spending habits. The changes needed to make this work for you are surprisingly small and easily manageable as long as you take the time to work on you. The hardest part for most people to understand is they're basically taking multiple dollar per hour pay cuts just on their spending habits alone.

Everyone is about getting their fix now. A latte now to make it to work on time($5 a day, $25-30 a week). A quick burger for lunch to skip the hassle of bringing food($8 a day, $30 a week). The big point of this is that all of these little purchases over time add up to huge expenses later, turning a $300/m food budget into $500/m or a late night without toilet paper into a $15 up charge on a basic household product that could've gone into your new savings goal, a set of crayons for the kids at school, or a piece of candy on the way home from the soccer game. Whatever the reason, making the most of your money should be top of the priority list especially when a new home, car purchase or debt remediation plan could be on the horizon. 

Cutting cost on everyday Purchases

A little back story on what all of this means and why you should take action today to get a grip on your finances: 


When I was younger my parents would buy our household supplies as needed. One day we'd run out of laundry soap and a couple days later a new item would pop up in its place. Same with cleaning supplies, toilet paper, hair soap and other seemingly non essential items that come up from time to time. I began to notice a reoccurring pattern of items that were always by my side and were always construed as "overpriced" or a "rip off" even with a price tag of 2-3 dollars which baffled me to hear in the same conversation. As I got older, got my own job, my own place, my own supplies, it became apparent where this attitude stems from. One or two tubes of toothpaste may only be 5-10 dollars at face value, but these are items that we will always need in our lives. 5-10 dollars 6 times a year easily comes out to be $60-$80 without a thought. Now multiple that over every little bottle floating around your bathroom and you're sitting on a gold mine!

That's where the savings comes in. One day you roll through the toothpaste aisle and see your favorite toothpaste on sale or a coupon clipped to the shelve, "Save $3 each". You mumble under your breath, "alright, steal". You know you don't need toothpaste, but you decide to pickup an extra tube just for the satisfaction of finally not being shafted on your pearly whites for the first time. Now wait, something beautiful just happened. Without a gimmick, without working an extra day at the office, without writing silly surveys online for that sketchy company that shouldn't be around, you just made money. Exactly $3 to be precise. $3 dollars may not seem like much, but amplified across all of the inefficient purchases made that month it comes back as a large chunk going directly into savings. That extra money for your trip you've always wanted, or to help knock down that big debt. It's right at your fingertips! Now this is where the numbers really come into pay and where you'll be bringing home the bacon.

Back to the example with the toothpaste. $3 could mean great things for your wallet if you take the time to figure up the savings you'll be accruing off stocking up at the right time.

$8(Original price) - $3(Savings) x 6(Months) = $30($50 savings per year or $4 per month, half the cost of Netflix)

On a grand scale including your laundry, soaps, moisturizers, clothes, candy, food, and toys the savings really starts to add up leaving you with an extra couple hundred dollars a month easily to set you up for whatever might come your way!


Paying down Debt VS Putting money into Savings

Debt has long been a misunderstood concept with a lot of flack coming from both sides for good debt, bad debt and everything in between. Today we're going to stick strictly to the discussion of why we shouldn't maintain unnecessary debt. First we need to understand what classifies as "unnecessary" when it comes to debt. The way I personally define this is holding a negative balance on a card while having ample savings to bring the account to good standings. Some may think this sounds silly, but it's a very real problem that I run into in about 2/3 of the people I talk to about finances. I recently had a lengthy conversation with a co-worker about maintaining debt while also trying to fund a savings program offering a fairly high yield of 10% APY. A screenshot of numbers used for this discussion are listed here:



This is a quick excel doc I tossed together to get the point across. The argument made was that with the extra money made by the savings program combined with the availability of the money it would help knock down more of the debt and provide less stress when issues come up. With the numbers all written out above you can clearly see that doesn't work. I laid this out over a couple month period and as you can see above the typical interest rate on a credit card defeats the small accrument of the boisterous savings plan offered. That 10% rate isn't even typical for a savings account these days, which is where most of the confusion comes from. For example my money market account runs around 1.6% which tops the charts at the moment only really beaten out by certain CDs.

Lets get to the nitty gritty. The far right two columns down the page shows the earnings from the savings account compared to the interest paid on a standing balance. In each situation where the debt is held you can see it's always a net loss. This is due to the obvious fact that no bank will ever give you more money than they take from you. Most people should entertain going with the forth option above and obviously the 5 option is maxing out the account with minimal outstanding balances. As you can see the 4th option seems to be the laziest option with the smallest numbers, the least amount of interest accrued and basically seems pointless, BUT, it's the only option where you come out ahead. 

If you're curious about your specific situation, the numbers are quite simple to run after going through them a few times. Interest is generally applied monthly and broken down based on the yearly rate. In this case I believe I used 25% for the credit card account meaning in each starter cell the calculation comes out to (Starting balance)*(Interest Rate)/(months in a year) or $7000*25%/12=$145 per month in interest. All in all, even if you have $7000 available in debt I recommend never going near that amount without plans to pay it back very quickly, plus you should never go over 30% of the available balance on a single card. If you find yourself in a situation approaching that level I recommend applying for a personal loan which typically comes with a MUCH lower interest rate, but usually requires a piece of collateral for the bank such as a car or a house. Taking advantage of an option like that would save you thousands in interest. 

Conclusion


The biggest thing you should take away from this document is that every single person can benefit from sitting down and taking a more in depth look at their current situation and how to make it better. Obviously every situation is going to be a little different and people hold different debt for different reasons, but that doesn't mean you should hold excessive debt with outrage rates when a better way exists. A great example of this is my credit journey which will be coming at a later date. I currently hold $2000 on a personal loan with 12% interest and I invest the rest of my money in the savings plan. This basically puts me at breaking even, but the reason behind holding the loan is strictly to build a better credit foundation for myself. Breaking even looks really good right now to me as I needed the loan to round out my still up and coming credit history and this was a great vantage point to not take a hit on the interest rate of a useless loan. Just to reiterate, every situation is different and hopefully this will open your eyes to opportunities at your fingertips that could change your day to day money situation. If you found this post helpful at all please share and comment below. If you have any questions feel free to shoot me a message and criticism is always welcome!

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