Everybody Loves Your Money

I stumbled on to Mint’s infographic about all the pitfalls of credit cards. I especially like how they compare it to falling down a very deep ravine until you hit fire at the bottom.

If you haven’t seen it, it’s worth checking out:
http://www.mint.com/blog/finance-core/the-descent-into-credit-card-debt/

Sorry for the lack of posts over the last week or so. I just got back from a business trip in Southern California. I spent a week down there working 11 hour days locked up in a conference room. The days were long but rewarding. As it happened, the conference room we were using all week was the executive board room. I’m far from an executive so it was interesting to see how things go there. The seats were incredibly comfortable. Plump and leather would be a good way to describe them. There was a break room with a refrigerator crammed full of soda, waters etc. They had their own professional grade coffee machines and every kind of tea on the planet.

On top of the nice conference room, I happened to be staying in the Huntington Beach area. My hotel was directly across the street from the beach and was very nice. Luckily my company had negotiated a ridiculously cheap rate. My only regret was that I didn’t have more time to enjoy the area. Every morning there was a mass of surfers swimming out in to the surf to catch the amazing waves that crashed against the shore 24 hours a day. No wonder this is such a popular surfing destination. At night the beach was full of people enjoying bonfires all along the beach. I sat out on my balcony with a cocktail trying to relax after the long days and kept finding myself wondering what all these people did for a living……… (Had they just worked all day too?)

I did manage to get out a bit in the evenings. On one night, a friend of mine and I drove down to Newport Beach to drool at some of the high end car dealerships there. We’re both car nuts so it was a fun trip to make. I couldn’t help but notice how wealthy the area seemed to be. I think that BMW’s were considered the economy car around there. I was absolutely amazed at how many there were. I can’t even count how many Bentleys, Mercedes and even exotic cars like Ferraris, Aston Martins and others there were. Either everyone down there is rich, or there is a TON of debt in that town. My friend and I were talking about how incredibly wealthy it seemed to be there and he said, “There must be a ton of millionaires around here”. I thought about it for a second and said, “Yeah, either that or there are a ton of debtonaires around here”. My guess is that it’s a bit of both.

On Tuesday night the main street was crammed with booths for a street party. Again, I wondered, “What do all of these people do for a living?” I mean, rent down there has to be incredibly high. Modest houses were upwards of $1M. I suppose if you drive far enough inland the prices probably come down enough that middle class families can afford them. If you live in Southern California near the water, I’d be very interested to get your input on the local economies there. It could be that I just happened to be in one of the wealthier areas of Southern California during that week.

I will say that if I had a choice and could afford it, I would live there. The waves were mesmerizing and the climate is exactly what I like. Unfortunately I don’t think I’ll ever be able to afford that lifestyle. As aggressive as we are being at saving, I don’t think we’ll ever amass enough money to live in that area.

These days it seems like everything costs “Just $10 a month”. You can have a subscription to just about anything these days. While $10 a month doesn’t seem like much, over time it really adds up. When you add up all the little costs each month and then multiply that times 12, it can be significant.

I don’t think a lot of people realize how much they bleed each month. Sure, the services that they are receiving are giving them a reward, but sometimes I think things end up on autopilot and you forget you are even using the product or service that you are paying monthly for.

Here are a few of our “little monthly costs”

Tivo: $6.95 a month
Netflix: $8.99 a month
Milk delivery: $20.00 a month (double the price of store bought so $10 premium)
Health club: $10 a month (have had this forever so I have a low rate)

Individually none of them are significant. Add them up and all of a sudden I can see where over $400 a year goes. I think our house is somewhat unusual in that we don’t have a lot of small expenses like this because we watch it so closely.

A typical household might have:

Tivo/DVR: $12 (regular rate)
Netflix/Blockbuster: $16.99 (3 movies at a time)
Health club: $40 a month (fairly typical)
Cel phone texting: $20 per month (family plan)
Cel phone data plan: $30 per month
Lawn service: $60 per month
Cleaning service: $150 a month
Caller ID: $6.50
Call Waiting: $5

I’m sure there are a ton more services that people subscribe to on a monthly basis. Most of these are convenience type expenses that make life just a little bit better. In the example above, which I don’t think is a-typical, a family would be shelling out nearly $4000 a year in what I would term convenience fees. It’s obviously up for debate what is really a convenience and what is “needed” but that’s a very personal decision. What’s even more interesting to me is that pretty much every expense I list above didn’t even exist 100 years ago. That means a typical household today is spending upwards of $4000 on things that no one ever even had the option to buy 100 years ago. That tells me that it’s much more in the “want” department than the “need” department.

I guess the reason that I’m thinking so much about these kinds of convenience fees is because I made the decision to buy an Iphone awhile back. I haven’t bought it yet because I have been waiting for the new Iphone 3G S to come out. That happens next Friday. I’m still planning on buying it but I do find myself dreading signing up for another monthly cost that really isn’t a necessity. I will be increasing my cellular phone bill by around $30 a month, or $360 a year. My hope is that once I have the Iphone for awhile, it will feel like the best money I’ve ever spent. If it doesn’t, I’ll be paying the penalty for two years………..

A few years ago (at least 5) I set up four accounts at my credit union. One account is my main checking account, one is a debit card account and two of the accounts are savings accounts. One savings account is tied to our main checking account and one is tied to our debit account. You may be wondering why we have separate checking and debit accounts when most people just have one account for both. The reason we do this is because I’ve read one too many articles about people’s debit card number getting stolen and their account being emptied. Once their account was emptied they spent a chunk of time working with the bank to get the funds restored and dealt with bounced checks and all the fees that go along with them.

We try to keep $500 in our debit account at all times and the savings account that backs it up only has about $1000 in it. The majority of our money is kept in our main checking and savings accounts. By doing this, we feel safer against potential debit card number theft and never have too much money at risk. We also don’t have any other transactions happening in our debit account so even if the balance is stolen from the account, we won’t have to deal with bounced checks etc.

The one risk to this strategy is that you really need to keep an eye on the account balance in the debit account. This hasn’t been a problem since we created these accounts but we finally got caught with our pants down this weekend when my wife used the debit card for a large shopping trip. The account balance had gotten down to $270 or so and my wife had one transaction for $298. OVERDRAWN. Luckily my credit union doesn’t charge any sort of fee to transfer money from our savings account to cover the discrepancy.

There were a couple reasons that this happened. First of all, I hadn’t checked the account balance in a few days and didn’t notice that we were down to $270 in the debit account. Normally that wouldn’t even be a problem because we don’t use the debit account for major purchases. The strategy for any larger purchases is to use our Costco American Express or our Visa that we pay off at the end of the month. By doing this, we reduce the need to monitor our accounts as much and we also get cash back each year from Costco. Unfortunately my wife wasn’t paying attention and used the debit card instead of the credit card.

The good news is that it was a lesson learned and didn’t cost us any fees. Yet another reason that I’m much happier with my credit union than a commercial bank.