Imagine you want to buy a pair of $100 jeans and all of a sudden, just like in the cartoons, the angel and devil appear on your right and left shoulders. The devil is the bank and the Angel is your financial guardian, who wants to beat the banks.
You explain to both shoulders that you want to buy this pair of $100 jeans. The devil approves, reaffirming that you need these jeans. They’ll make you look great and will be the final touch to your wardrobe once and for all. You can put them on your credit card and worry about it later.
Then you look to the angel, who asks you “do you know what $100 will be worth in 40 years if invested responsibly?” You reply, “Maybe $200?” The angel shakes it’s head in disapproval and says, “$1,082.85.” Yes, in 40 years $100 can be worth $1082.85. That is at 6% interest compounded quarterly.
They say that if the USA’s wealth was split up evenly, every citizen in the world would have $700,000. It is a great idea, but would only be possible if everyone made better purchasing decisions. Not spending your money is the key to accumulating it and to be honest, most people are shortsighted in terms of saving. In the end, if you want to beat the banks, start with limiting what you buy.
What NOT to Buy
Everyday starts with breakfast and that needs to happen at your house. Instead of buying that $5 coffee at Starbucks, buy yourself a cappuccino machine for $400. If you’re going out for your cappuccino every day, this machine will start saving you cash within 15 weeks. The same applies to lunch.
If you can change your breakfast and lunch habits you could easily save $20 per day, no problem. That adds up to over $5k per year if we are only talking about work days.
Go through your monthly expenses and see what you spend your paycheck on. Your first goal would be to spend less than you earn. Once you achieve that, look to reduce it by 18% and put that money into savings. If you want to beat the bank, this is the first step to take.
Don’t Ever Leave Money in Your Checking Account.
It is slightly more complicated than this, but when you put money in your bank account the bank will turn around and loan that money to other people in a form of a mortgage. In return, they pay you little to no interest. Some banks will even charge you to hold your money! For any investor, leaving any significant money in your checking account is a bad decision. Get your money working for you.
A balance of equities (stocks), bonds and mutual funds normally does the trick. If you don’t understand the stock market then stick to mutual funds or read a book. Your employer hopefully offers a 401k in which you should be contributing the maximum amount that they will match.
If your employer doesn’t offer benefits, open up an IRA or Roth IRA. These are very simple things that everyone should be doing to save for retirement. If you don’t have enough money to do this now then get a second job. There are endless excuses why you can’t save now. If you are listening to those excuses the bank will ALWAYS win.
Even if you can only manage to invest $100 a month, but at 6% interest compounded semi-annually you’ll have close to $200,000 in 40 years. Do the same thing with $500 a month and you’ll have pennies shy of a million dollars.
Bottom line, don’t let money sit dormant in your bank account. Invest it with a certified financial advisor that can meet your investment goals. Don’t wait until next month or year either. The key to accumulating wealth is for it to compound over time.
Credit Cards are for Earning Points. Period.
Banks invented winning. Some banks may have lost recently (2008), but if you examine the history of banks it was a drop in the bucket for them.
Credit cards are their crowning achievement. Value Penguin reports that 38% of American households have credit card debt (referred to as revolving debt) and the grand total as of 3/2016 is just shy of a trillion dollars. That means that banks are making over a billion dollars a month from credit card interest.
If you don’t want to be part of that statistic you have two options:
A- Don’t play the game. Cut up all your credit cards after paying them off. In this scenario you don’t win, but you are not part of the problem.
B- Leverage the bank. Pay your credit card off before the end of your billing cycle and start collecting points.
In either scenario, stop buying unnecessary things and pay off your credit cards ASAP because they compound interest by the second. If you are paying the minimum balance, then the majority of your payment goes towards interest. If you are going with option A then pay them off and call your bank to cancel your account. Congratulations on being free of credit card debt!
If you are going with B then you have a chance to beat the banks at their own game. Look at your card terms, as many don’t start accruing interest until charges are carried over to the next billing cycle. When is that? Your credit card will indicate “minimum balance due by MM/DD/YY”. Forget about minimum, pay the total balance before that date.
Earn rewards with a zero balance
The key is not carrying a balance, which means not buying things you can’t afford. If you are responsible and pay your card off before the end of the billing cycle you should look into different rewards credit cards, like a 1% cashback on everything you buy. Some offer even more.
If you buy only the things you need with your rewards credit card, like food, water, telephone and utilities you are positioned to win. Let’s say your household spends $15,000 per year on these things. If your rewards card offers you 1% cash back you are looking at the banks paying you $150 in cash back. It may not sound like a ton of money, but you went from paying the banks to them paying you. Sounds like a win to me!
Just remember the “cash back” ploy is a marketing campaign to feed on the irresponsible. Don’t go and sign up for a rewards card until you can stick to paying off your balance on time a few months in a row.
Buying a House! Congratulations…
Buying a house is great, but what you can afford is a very ambiguous phrase. Really what you should be asked is, “How much do you want to spend per month?” Once you establish that you should consider how much interest you want to pay the bank over the course of the loan.
I’ll have to explain with my own personal example. When we first started looking for homes, our budget was a maximum of $350,000. Then we found an amazing fixer-upper in an amazing neighborhood for over $100,000 less. If we bought our max budget house we would have to get a 30-year mortgage to afford the payments and would pay a higher interest rate. Since we decided on a less expensive house we got a much better rate which will save us over $100,000 over the course of the loan.
The monthly payments for a 15-year mortgage are higher in total, but you will spend less on interest. The difference between a 15-year and 30-year mortgage could be 3% to 4% interest respectively. Why? Time (duration) is a negative risk factor for banks and if your loan has a longer duration the bank will want compensation for that additional risk. That tiny 1% difference is where the bank will win and could easily mean $100k more out of pocket over the life of your loan.
This is why when defining how much you can “afford” per month, buying a less expensive house to get a shorter term mortgage is a better choice.
Consider shorter term loans
We also scraped together a 20% down payment after saving for a few years and didn’t have to pay PMI which is normally .5%. This removed 1.5% from our interest rates. If the angel and devil appeared back on my shoulders the devil would shrug and say, “who argues over 1.5%?”
Then the angel would raise his hand and say, “I do.” If you buy a $250,000 home at 3.36% interest over 15 years you’ll pay about $307,000. Same $250,000 house over 30 years at 4.86% will cost you $458,000. Over $150,000 for 1.5%.
This is not to say that you should cripple yourself with high payments. Every situation is different, but consider delaying the dream house for a house that can become a dream house until you can afford a dream house.
Many people go on a diet with a fitness goal like, “losing twenty pounds.” I am sure plenty of people achieve that goal, but what do you do after achieving it? Go back to your former diet? The best goals for a diet are changing your eating and lifestyle habits permanently.
Beat the Banks. Save Money.
Beating the banks, or let’s face it, saving money, is the same thing. If you have a goal of how much you want to save and only change your spending habits for that period, you will only go back to your former self after achieving it.
Saving money and accumulating wealth is a way of life. Many successful entrepreneurs who make enormous amounts of money still bring their lunch to work most days. This is because they got to where they are by bootstrapping and they are not going to risk being pushed back to the starting line.
If you’re reading this article, now is the time to commit to making better financial decisions. Decide what you can cut out and then calculate how much that amounts to in monthly savings. Set an auto-transfer on your bank account to your investment account each month. Once you do that, you can start to beat the banks and reap the rewards.