The Amateur Financier

Alright, we’re two-thirds of the way through January, which means that about two-thirds of people who made resolutions for the new year have given up on improving themselves this year. I hope that you’re not among them; the year has barely started, you can’t already be willing to give up on improving yourself. Still, I know that it can be tough to keep up with resolutions, which is why I’m here once again to share some advice on how to stick with your resolutions and achieve your goals for 2012. This week, we’re looking at one of the most important things you can do to improve your financial situation, namely

Saving More Money

Alright, there are several different ways to approach this particular goal. You can attempt to cut down your spending, a goal that my Frugal Friday posts can help you achieve. On the other side of the coin, you can attempt to boost your salary in a number of ways, from improving how hard much you work at each elemental of your job to how much you are able to earn by working in alternative jobs and earning more money as a result. Better yet, use a combination of the two, earning at least enough each month to cover you expenses and have some money left over. (Remember last week and creating a budget? Probably good to check it out again and make sure you include some money to put towards your savings)

Probably not the best to mix your budget money with your card playing

Once you have a budget that allows you to put some money aside, here are some suggestions to help you save money for the future:

1. Make It Automatic: One of the best ways to ensure that you build up savings for the future is to take advantage of the automatic transfers that most modern banks allow you to do. Figure out how much you can set aside each month (a goal to shoot for when you first start to save is five to ten percent of you income; that’s a small enough amount that it shouldn’t affect your money situation too much, but large enough that you’ll make some progress with your spending soon enough), and set up an automatic transfer from your main checking account. Where should you go with the money; well, that’s the next question…

2. Set Up a Separate Savings Account: Let’s be honest, if you try to keep your savings in the same place, as say, the account you use to pay your monthly bills, you savings will end up be spent; it’s natural when you have such an account like that to use it in that way. What you need to do is create an account that you will use purely for saving. You might want to open up said account in an entirely new company on a new website (a good site for such savings accounts is SmartyPig, which focuses on automated savings accounts); that way, the chance that you feel tempted to use your savings for random spending is limited.

3. Have a Goal for Your Savings: It’s important that you know what you are shooting for; whether you are aiming for $5000 or $50,000 in savings will have a lot of impact on everything from the best methods to use to how hard you’ll have to work to meet your goals. (The smaller an amount you need, the easier it should be to find extra money in your monthly expense account and put it into a fresh account.) There’s quite a bit of debate about how much you should try to save, from $1000 to twelve months’ worth of expenses, but it’s probably best to keep putting money aside until you can cover at least three to six months’ worth of your typical expenses. Speaking of which…

4. Resist the Urge to Spend Your Savings: As you build up your savings account, it will become increasingly tempting to spend the money. Don’t. Alright, a bit more advice than that: part of the reason we want to keep our savings in a separate account from our regular checking account is to avoid the temptation to spend the money. If that alone isn’t enough to keep you from you breaking into your savings, you’ll have to find other ways to keep your savings safe. Things like CDs can provide you with a means of increasing how much interest you earn with your savings, while helping to prevent you from withdrawing the money on a whim (or at least, slowing up the process).

5. Keep Updating Your Goals: As you go through life, the amount of money you need to set aside to keep yourself safe and secure will change; the amount that could supply you for months as a recent graduate might barely cover two weeks by the time you are in your mid-fifties, married, and with a future graduate or two of your own. While this is more of a long-term goal than simply a one-year resolution, it is good to double-check your saving needs every few months, or at least every year, to make sure you still have enough set aside to meet your goals.

There you go, a guide to building up those old savings. It will take some time and some effort, but if you stay devoted to your goal, you should have no problem setting aside plenty of money for a rainy day (or any other purpose). Good luck, and happy resolution completion!

(Once again, I have the opportunity to share a well-written guest post here on the Amateur Financier.  This week, we’re looking at a lesson that everyone needs to know, but many people have trouble getting: how to save.  It’s not the sexiest of financial topics; you won’t compete with the talk of hot stocks or daring options investments at the next cocktail party, but you will have a better personal finance life if you get your saving habits down pat.)

Making the most of your savings is a combination of good habits and established savings accounts. In these tough economic times you may not think you have the resources to put back as much money as you would like, but now is the time to do exactly that.

Perhaps you don’t have your grandfather’s natural financial savvy. That’s okay. Solid habits can be developed in as little as a month if you’re consistent.

First of all, evaluate your current savings plan. If you don’t already have one, click here to research your options.

You probably already have a basic savings account with your bank or credit union. It may not have an adequate balance, but that’s okay. You can start to build it now that you’re getting serious about saving.
Make sure that your savings account offers a competitive interest rate. Do this by researching local banks and credit unions to find out what rates they offer. You want the best rate so you make free money, no matter how little that free money may be.

Look into high interest savings accounts. These accounts are set up so that, as your money is saved in the account, competitive interest grows. Online banks are great sources for this type of high interest savings plan.

A money market is another account you may want to consider. Money market accounts are offered by your bank and work much like regular savings, although you will be limited in how many withdrawals you can make a month.

A CD, or certificate of deposit, is another smart option and perfect for first-time investors. This is because the money you put into a CD is off-limits for the predetermined amount of time. You basically have to put it in and forget it.

Once the CD matures, you’re free to withdraw the money or invest it in a new CD. It’s simple moneymaking.

Keep more money in your pocket (or account) by avoiding late and unnecessary fees. If your bank charges you for every transaction at the ATM, forego the ATM altogether.

Set up your bills to be automatically deducted from your bank account each month. Let’s be honest. It’s not easy to keep all those due dates straight. Setting up automatic payments saves you money in potential late fees.

Avoid banks that charge you for things you should be enjoying for free, like debit cards or checking accounts. You may be able to avoid certain fees by having your paycheck set up to automatically deposit in your account each month.

You’ve heard the saying that time is money and that’s certainly true in investing. The longer you allow your money to grow in an account, the more money it will make. This means leaving savings and retirement accounts alone for quite a while, so don’t be tempted to withdraw money if you have a long-term savings goal in mind.

Those that want to get aggressive with investments, such as take advantage of stocks and foreign investments need to spread their money around to cut down on risks. This is called diversifying your portfolio.

No matter the savings or investment plan you choose, evaluate your savings at least once a year to determine the next course of action. You can decide if it’s time to switch to a different savings account, put more money in each month, or up the ante a little for some more aggressive investments.

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Friday has come again, which during most weeks would mean that I’d provide my Frugal Friday posts, giving you plenty of ways to save.  But since this week I’m trying something a little different, I thought that today should be no exception.  So, rather than focusing on one area of spending and showing how it can be cut, let’s look at some of the biggest areas where you can cut down on your spending:

1. Food - Everyone needs to eat (although, I’m sure there’s more than a few supermodels who’d care to argue that point).  There are plenty of ways you can keep your food bills to a minimum, while not starving or trying to survive on Ramen.  Eat at home most of the time, buy nonperishable food items in bulk, and prepare lists when you go shopping to ensure that you don’t fall prey to supermarket advertisements and other come-ons.  If you can manage to keep your food bills at a minimum, you’ll find it that much easier to eat, drink, and be merry.

You can also find savings on food by taking advantage of farmer's markets and other alternative selling arrangements

2. Pets - I love pets, particularly my cute little puppy Toby, but he can be a bit expensive, as is the case with many pets.  A major key to keeping pet spending under control is remembering to not spoil your pet too much.  It’s tempting to buy the most expensive food, the most wonderful toys, and their own multi-level homes complete with elevators.  While that is all impressive, you’re going to have a tough time keeping your money under control if you spoil your pet too much.  Just remember that as long as you give them plenty of love and meet their basic needs, most pets will be thrilled (much the same can be said about children, while we’re on the subject).

3. Automobiles - I’ll be the first to admit that cars can be a huge drain on your finances.  From the cost of buying them (which can be kept to a minimum with some good car buying tips) to the fuel, oil, and parts that they need to keep running, automobiles can end up draining a large portion of your financial assets.  There are ways to keep the cost  of cars under control, from buying a gently used car and driving it until it stops running to buying the lowest octane gas possible.  Of course, if your living and commuting conditions allow it, you can always consider not having a car and biking, walking, or traveling by public transit to get where you need to go.

4. House Maintenance - If you own your own home, one of your major expenses is going to be keeping it in livable condition.  (If you rent, the cost will be rolled into your rent payments, so you’re not completely out of the woods that way, either.)  While there are many maintenance tasks that you should leave to the professionals (anything to do with the electrical system I don’t even try to touch, for example), being able to do basic maintenance on your own can greatly cut down your costs and leave you with nice sense of satisfaction, to boot.  Just make sure that you are sure you know what you are doing, as it’s easy to make things worse with most maintenance projects.  You can also find ways to cut down your utility bills (or at least make them more predictable), by taking advantage of budget helper programs, like balanced billing of your utilities.

5. Finances - Fitting for a personal finance blog, there are certainly plenty of ways you can cut your financial costs, while still putting your money to work for you.  Using index funds for (most of) your investing will keep the costs of putting your money to work for you to a minimum, for example.  Carefully watch the cost of your investments, banking accounts, and insurance; it’s sadly common for financial companies to nickel and dime you, charging small fees that add up over time (or providing you with sub-par returns and pocketing the difference).

6. Relaxation -We all need some down time; the human brain (to say nothing of the human body) has a hard time working constantly, and trying to do so is more likely to leave your brain fried and your body exhausted than allow you to cross more items off your To Do List.  Luckily, there’s plenty of options you have to relax, most of which don’t cost very much.  From choosing less expensive options for your weekly nights on the town to finding ways to cut down on your travel expenses to choosing less expensive options for your daily down time (going to the library for books rather than the local book store), there are plenty of ways you can have your fun and your funds, too.

There you go, six important area to look at when you try to cut your spending.  It’s far from a comprehensive list (I’ve managed to keep my Frugal Friday posts going for a quite a while and barely scratched the surface of ways to cut down your expenses), but if you follow the advice listed here, you should be able to save quite a bit.

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Time for a quick quiz.  Tell me what cell phone company will charge the least amount to use their services.  You have one minute…and go!

*Waits patiently for one minute*

Time’s up!  What did you come up with?  Assuming you gave this some serious thought, you probably realized that coming up with an answer depends on a lot of information I didn’t share with you.  How many people on the plan, how often they talk, when they make most of their calls (during business hours or outside normal business times), and where in the world the other people you usually call are located; any or all of these things could impact which plan would be the cheapest.

Even knowing all those factors, however, is no guarantee that you will find the most cost effective choice for cell phone service.  That’s because cell phone companies, realizing that few people, if any, can tell the difference in cell phone service well enough to make a choice based on the service provided, have taken the tactic of trying to confuse costumers on the price in order to stay in business.  If they didn’t, the price of cell phone service would drop to the cost of providing it, and all but the biggest company (perhaps two or three) would be forced out of the market (that’s economies of scale at work).

Sadly, this is the most accurate book about the future I've ever read

Instead, cell phone companies have effectively created their own ‘confusopolies‘.  I wish I could claim credit for creating that term, but it was first coined by Scott Adams, the creator of Dilbert, in the 1998 book The Dilbert Future.  Here’s how he described the confusopoly of the future:

“A group of companies with similar products who intentionally confuse costumers instead of competing on price.”

Basically, any group of companies that produce a product indistinguishable to the average user (because it has no taste, odor, texture, or other easily measurable attributes) could form a confusopoly.  Cell phone service is one obvious example; unless your company is constantly dropping your calls or otherwise making the service unusable, it’s hard to distinguish between the average, the good, and the great.

Other companies that provide near identical service, particularly information and financial companies, can also form confusopolies.  Internet service, online banking, and investing firms are all services that are hard to distinguish based purely on the quality of service; you can execute stock purchases just as easily with eTrade, Sharebuilder, or Charles Schwab.  Rather than competing to the ‘best’, they instead focus on confusing the consumer, or taking a divide and conquer approach by focusing primarily on different segments of the market.  (So Sharebuilder focuses on mutual fund-style investing, eTrade touts themselves to active traders, and Charles Schwab provides access to a stock broker, for example)

Defend Yourself From the Confusopolies

With confusion becoming a more popular method of gaining and keeping costumers and more types of types of businesses that form natural confusopolies coming into existence, how can you protect yourself?  Here’s a few hints to get the most out of the companies you use:

1) Know yourself and your needs: As mentioned, one common tactic for confusopolies is to focus on subsets of the population, and competing on one or two issues that appeal most to that group (as opposed to everyone who needs the service in some form).  When choosing a cell phone company, for example, try to take advantage of plans that will benefit you the most.  If you (or someone in your family) texts constantly, a plan that allows unlimited texts could be the best option for you, while if you only talk on your phone (a novel idea, I know) a completely different plan would be the least expensive.

2) Take Advantage of the Competition: Many companies in fields where confusopolies are rampant provide bonuses to encourage people to use their services.  (Frequently the goal is to get you to sign on due to the low rates and keep paying when the rate eventually shoots up due to mental initial.)  As a result, if you keep on top of your plans and switch when your rates are about to shoot up (or when you are about to run out of free stock trades, or whatever introductory specials are being offered), you can take advantage of their generosity and keep your costs low.  (Provided, of course, that the transaction costs of switching are low; swapping mortgage providers every few years is unlikely to save you any money unless the differences in rates offered is substantial.)

3) Don’t Panic: It’s good advice in general, but in this case it’s especially appropriate.  While you shouldn’t just rest on your laurels, the endless pursuit of the absolute lowest priced service is only going to eat up time and possibly drive you insane.  If you have a cell phone provider, stock broker, and internet company that provide good service for a reasonable rate, you don’t need to switch constantly to save a few dollars.  Just relax, enjoy the service, and keep an eye out for better offers, but don’t feel the need to spend every weekend combing through offers for the services you need.

There you have it, three simple steps to keep confusopolies from taking advantage of you (and allowing you to take advantage instead).  Keep an eye out, as they’re only going to increase in number as a result of ever lowering barriers to entry.  Have fun trying to out confuse the confusopolies!

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