Category Archives: Saving

Out of Sight is Out of Mind

Out of sight is out of mind.  Sometimes this is a bad thing (like when you misplace the Mother’s Day card you bought and forget to mail it until Memorial Day).  Sometimes this is a good thing (like when you don’t have any junk food in the house and you are forced to eat carrots instead).

Knowing that out of sight is out of mind can be a useful tool.  For example, at the beginning of each semester many students receive a large refund of student loan money to use for living expenses for the whole semester.  Getting that money out of your normal cash flow will make it easier to make it last the whole semester.  One option some students use is to immediately pay rent ahead through the end of the year.  Another option (and the one I prefer) is to build a monthly budget (taking into account the amount of money you have) and only allow yourself to use that much each month.  Put most of it into a savings account.  Preferably a savings account for which you don’t have an ATM card and transferring funds takes a couple of days—making it harder to cheat and withdraw funds early.

You should set up a designated “pay day” when your month’s funds transfer to your more accessible checking account so you have money for rent, food, laundry, and other living expenses.  The key to this working is simple:  DO NOT PAY YOURSELF EARLY!  If you do, you may find yourself subsisting on Ramen and hot dogs during finals.  Because money is a finite thing.  Unexpected windfalls rarely happen.  If you run out of funds and don’t have more coming for several weeks, you’ll be uncomfortable for a while.

Out of sight is out of mind.  So put your case books in plain view and stash your money away where it’s harder to get to.

 

Time Really Is Money

As some of you already know, I’ve been taking classes through Penn State’s World Campus to lead me (hopefully) to become a Certified Financial Planner.  My goal is two-fold.  First, I think this education will help me to better help my student population.  Second, I think this will lead me to a nice side-gig that I can pursue for a bit of extra income after I retire from Penn State.  This semester I’m taking a class in Corporate Finance.  At first I had my doubts about how practical this class would be for me.  But it turns out I really enjoy it.

Last week we started learning about something I’ve been preaching about for years:  the time value of money.  A dollar today has a different value than that same dollar a year from now.  If you put in into a savings account with a 2.0% interest rate that dollar is worth $1.02 in a year.  If that dollar was borrowed from a Grad PLUS Loan with a 7.6% interest rate, the use of the dollar is costing you an additional $0.076 for the privilege of using it for the year.  Whether you are saving or borrowing (I know…borrowing is much more likely at this stage in your life) it is important to understand the power of compounding interest.

There is a reason you’ll always hear someone telling you to start saving for retirement at the very beginning of your career.  The earlier you start, the longer your money has to grow.  The older the dollar, the more time it has to age.  That dollar that was worth $1.02 after one year is worth $1.48 after 20 years—and that’s at 2% interest.  With a more typical 10% retirement investment return that dollar is worth $6.73 after 20 years.  $17.45 after 30 years.  $45.26(!) after 40 years.  The longer the money has to grow, the more exponentially it is able to grow.

Much like you want your interest to compound for as long as possible when you are saving, you want it to compound for as short a time possible when you are borrowing.  Because student loan numbers can be scary, let’s look at a car loan.  Let’s assume you are borrowing $15,000 to buy a used car.  Your interest rate is 4%, regardless of the repayment term.  If you take 7 years to pay it off you will pay $205.03 per month and you’ll pay a total of $2,223 in interest.  If you shorten that to 6 years, you will pay $234.68 per month and you’ll pay a total of $1,897 in interest.  Shorten it to 5 years, and the payment is $276.25 and the total interest is only $1,575.  The shorter the term, the less interest you pay.  The same rules apply to your student loans and someday your home mortgage.  The shorter the time you take to repay it, the less you will pay in interest.

Next time you make a deposit to your savings account or borrow a little extra loan money, take a moment to think about the time value of money.  Every dollar is worth more (or less) than you think!

What If: A Month Without Pay

The government has reopened!  But my heart goes out to the many people who went more than a month without pay.  Yes…they are going to be paid now, even if they were furloughed during the partial shutdown.  But that doesn’t take the sting out of not having the money when expected.

I, like so many, live paycheck to paycheck.  I have a tiny bit of savings, a really tiny stock portfolio, and a retirement fund.  I do not have the recommended three-to-six months of expenses tucked away in an emergency fund.  If I were to have to go without pay for a month I would be up the proverbial creek without the requisite paddle.  I suppose it could be worse.  My parents would probably be able to float me a loan.  Or I could borrow against my retirement savings.  I have credit cards I could use.  But none of these ideas appeals to me.  I’m 51 years old.  I’m supposed to have a strong understanding of money.  Yet here I am without emergency savings.  I’m flying without a safety net, mostly because I never thought about the fact that I might someday fall.

The government shutdown has really brought the importance of a contingency plan to the forefront.  What would you do if you found yourself without anticipated income for a month.  Would you be able to keep yourself afloat?  Do you have somewhere to turn for short-term help?  It’s always good to have a backup plan in place.  We never want to think about the worst case scenario.  But it could happen.  And you should prepare for it just in case.