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How to Screw Up the Biggest Purchases of Your Life

Posted By damien on September 12th, 2011

Cry Baby

The amount of time you spend researching a purchase should be directly proportional to the price of the item. In other words, as the cost of an item goes up, you should spend more time researching the purchase.

If a book costs $20 and a smartphone costs $300, which purchase should you spend more time researching? The phone, duh. An hour spent finding the best deal on the book might save you $3 when that same hour could save you $50 on the phone.

Too often we get it the other way around.  We spend hours comparing cheap everyday items between Walmart, Costco, etc. and then buy a new car the next weekend after visiting two dealerships. We focus on the chump change when, in reality, it’s all about the Benjamins.

Let’s look at some examples of what to do and not to do when buying big ticket items.

Buying a Car

Do not get the new car bug on a whim and decide you absolutely need one this weekend. Do not show the salesman how emotionally attached you are to the car. Don’t even become emotionally attached to the car. These things make a recipe for an uninformed, overpriced purchase.

Do lots of research online, comparing models, prices, etc. Cargurus.com is one of my favorite sites for this. Arm yourself for the negotiation by learning the salesman’s techniques. Carbuyingtips.com has a great section on this. This is likely the second biggest purchase of your life, so spend time on it!

Buying a House

Do not use your cousin Vito who sells real estate on the weekends as your realtor. Do not make the decision to buy after one weekend of looking at houses.

Do find a realtor who eats, drinks, and sleeps real estate. You want real estate pumping through your agent’s blood. You want an expert. Do spend lots of time online looking at neighborhoods where you want to live. This is probably the single biggest purchase of your life, so spend lots of time researching it!

Cool It, Cry Baby

Patience is the name of the game. Keep a cool head, don’t become emotionally attached (or at least don’t show it), and work through the fatigue of the research process. A few minutes more of work could save you hundreds!

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Why are Poor People Poor?

Posted By damien on September 5th, 2011

Payday lenders will keep you poor

We’ve got too much month left at the end of our money.

Paycheck to paycheck is a way of life for our family.

The little man can’t get ahead.

Have you ever heard people say things like this? (Maybe even yourself?) These are mantras poor people tell themselves to deal with their situation and bask in their hopelessness.

Some very few poor people are that way because of circumstances outside of their control, including real oppression (not very common here in the US) or illness whether mental or physical. These reasons are legitimate and not the focus of this post.

I want to talk about the self-made poor. Those who are poor because of their own decisions. I’ll be so bold as to say that most of the lower-middle class in America are of this sort.

Why are poor people poor & what keeps them that way?

The number one reason is that they engage in poor people behavior. If you want to be rich, do what rich people do. If you want to be poor, then learn this one rule:

Poor people are impulsive and do not think about the future, whether it be what to eat this week or how they’ll live during retirement.

  1. Poor people don’t plan their meals, so driving home from work exhausted, they stop at McDonalds instead of having a pre-made meal ready in the fridge.
  2. Poor people do not plan their spending, so they use debt (especially payday lenders) to finance their consumption. Since they have not planned, they put themselves in situations where they are at the mercy of scummy bottom-feeders like payday lenders.
  3. Poor people care more about having things now to impress their friends than about how they will live during retirement. So they sink (borrowed) money into cars and toys that go down in value. Then they turn 65 and have to keep working just to avoid eating dog food until they die.

These are just a few of the manifestations of poor people behavior. The underlying cause of these symptoms is poor planning. So if you find yourself engaging in poor people actions, climb out of your pit of laziness and fear and DO SOMETHING!

There is hope. Start doing what rich people do and you are on your way to financial security. In the next post we’ll look at what rich people do that makes them that way.

If this post makes you mad, I’m okay with that. My purpose is not to offend, but to wake you up and show you how to live a better life.

Posted in Building Wealth, Dumping Debt
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Don’t Carry Cash in Your Wallet or Purse or Murse

Posted By damien on August 22nd, 2011

Vending Machine will eat your monies

Do not carry cash. You will spend it. Bada-bing bada-boom. Simple as that.

I know some financial gurus say to carry cash and use it because it “hurts more” than spending with plastic, but that has not been my experience.

When I’ve got a few bucks in my pocket and my stomach is grumbling, guess what, it doesn’t hurt at all to walk over to the vending machine and buy some brown sugar and cinnamon pop tarts. (The best kind, by the way.)

Here’s the thing: you think you have control over your behavior. Guess what, your environment has a lot more control over your behavior than you do. If you’ve got a few dollars in your wallet, they’re easy to burn on an impulse purchase.

So, to combat impulse spending, set up some barriers for yourself:

  1. Do not carry cash around.
  2. If you must carry cash around, carry large bills (at least $20′s) because you’ll be less apt to want to break them on small purchases. (And don’t worry about getting mugged and your cash getting stolen, thieves don’t expect people to carry cash nowadays.)
  3. Use debit cards (especially rewards cards) for purchases. Only the most hi-tech vending machines accept cards as payment.

Bottom line: carrying small amounts of cash around results in impulse purchases and wasted cash. If you think your “will power” will protect you from nickel-and-diming away your future, you are mistaken. Your environment sends you cues about what to buy and if your cash is handy, you’re a goner.

And it’s called a “laptop case”, not a murse.

Posted in Building Wealth
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The Secret “Automate Your Finances” Love Child!

Posted By damien on May 5th, 2011

Intro after long hiatus inaugurated by Dr. Dre:

Ya’ll know me still the same ol’ G
But I been low key
Hated on by most these bloggers
With no cheese, no deals and no Gs

Yeah, so, I’ve been absent from Bite Size Idea for awhile. The drive to write ebbs and flows.

While, now it’s ebbing.

Or perhaps flowing.

I probably shouldn’t use sayings that I don’t understand. Anyways, I’m in the mood to write.

Automate Your Finances!

One thing that’s been on my mind is all this talk about “automating your finances”. Automating your finances has become a buzzword (rather, buzzphrase) much like “synergy” or “networking” or “belieber“.

In a nutshell, automating your finances means setting up your various financial accounts (checking, savings, investing, etc) to automatically move money from one account to the other on a scheduled basis.

For example, one way to automate your finances is by setting up your IRA account to debit your checking account for a given amount the day after your paycheck hits the checking account.

One of my favorite personal finance bloggers, Ramit Sethi, has an epic post about financial automation, complete with a video! (Try not to get lost in his eyebrows, that’s just the way he is. Look past them and to the message he’s trying to deliver.)

Ramit is a big proponent of automating all of your finances. And he’s got some great reasons:

(INSERT REASONS HERE)

  1. Emotions and behavior have a huge impact on financial decisions. Most of our tendencies have negative consequences for our finances. By automating, you get out of your money’s way and let it go where it needs to.
  2. We’re lazy. When we have to manually write a check or authorize a transaction for our IRA, the chances of it actually getting done are about as good as Mariah Carey’s acting abilities.

Unautomate Your Finances!

Then, on the other end of the spectrum is another writer I admire, Baker, at Man vs Debt. He has an ebook called Unautomate Your Finances (not an affiliate link).

For 100% honesty, I must say that I haven’t read Baker’s ebook, but I’m familiar with the theories.

(INSERT THEORIES HERE)

  1. The big problem with automation is that you don’t know how much you end up spending on stuff. If your cell phone bill is set to auto-debit your checking account or credit card, you could be running up fees and overages, then paying for them and have no idea.
  2. The providers to whom you’ve given your auto-payment info could use it for evil. I listen to a consumer advocate’s (Clark Howard) radio show occasionally and he gets calls all the time from people complaining that one of their service providers has used their credit card info improperly.

With Our Powers Combined…

So who’s right? Both. Who’s wrong? Why does someone have to be wrong? Can’t we all just get along? A melding of the two approaches will give us optimal results.

What would it look like if Ramit and Baker had a love child? Probably something like this. How can we combine their powers for ultimate financial domination?

Here’s the short answer:

AUTOMATE YOUR SAVING AND INVESTING

AND UN-AUTOMATE YOUR BILLS

This approach gives us the best of both worlds: we trick ourselves into saving by taking choice out of the equation, since the money has moved to our savings/investing accounts before we could put our hands on it.

And we give due attention to bills because paying them is a manual process.

Just so you know, we practice what we preach in our family. Our IRAs and savings are set up to auto-debit from our checking accounts each month. Our internet, cell phone, utility, etc bills we pay manually each month.

How have you automated your finances? What has worked for you?

Posted in Building Wealth
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Turkey Day Thanks: The Best Free Tools for Financial Freedom

Posted By damien on November 25th, 2010

Thanksgiving turkey

Happy Thanksgiving! On this day of gratitude, I’m thankful for so many things. Health, family, faith, and freedom, among others. Today I want to focus on financial freedom.

I am thankful to be free from debt. I am thankful to have an emergency fund, which allows us to be free from fear of living on the street. I am thankful to be able to do work I love, instead of being a “wage slave”.

This freedom came with a price. Natalya and I have made sacrifices and taken many small steps to get to where we are now. There have been many tools that helped us (and still do) along the way.

This Thanksgiving, I want to share some of the free tools we’ve used to get out of debt, get control of our money, and achieve financial freedom.

The Ultimate Debt Snowball Spreadsheet

I recently explained the debt snowball to a relative of mine, and thought a spreadsheet would help her out. So, I set to work creating a debt snowball spreadsheet in excel.

After half an hour of writing formulas, I decided to see if there were any available online for free. And I came across this awesome debt reduction calculator. Download it for free, enter your debts, and prepare to be flooded with information.

It will estimate your payoff date for each debt, the best order in which to pay them off, and the total interest you’ll pay for each debt. This spreadsheet will motivate you to pay off your debts and release yourself from bondage.

Gazelle Budget Lite

Dave Ramsey is the man when it comes to paying off debt and taking control of your money. Concerning budgets, he says:

A budget is you telling your money where to go at the beginning of the month instead of getting to the end of the month and wondering where it’s gone.

The Gazelle Budget Lite software is a free, quick, and easy way to create a first-draft budget. My favorite part is that he gives recommendations on what percentage of your income should be spent on each category.

Mint.com

This is a tool I use practically every day to track the health of our finances. In one place we track all of our financial accounts: checking, savings, credit (don’t have any), loans (none either), and investments.

We have also set up budgets here to track our spending. Every Sunday evening, we sit down with Mint.com and check the “budget meters” to see if we are on track for the month.

Mint.com is free (they make money by suggesting financial products based on your usage), your data is anonymous, and they use bank-level security.

Perkstreet.com

Perkstreet offers an innovative way to bank: They give you cash back on debit-card purchases! Since we don’t use credit cards, this is the best way for us to earn cash back on our spending.

Back in the good old days of high interest, we had a rewards checking account that earned 5% per year on the balance. We were living high!

Then came the economic crash. Interest rates on our checking account to date have dropped to 0.5%! Ouch.

So, in the current climate, 2% back on purchases is a much better way to earn money with our checking account.

We love perkstreet, but it’s not for everyone. Banking with perkstreet is best for people who prefer banking online and use debit cards for most of their purchases.

So there you have it: four awesome, free tools that have helped on our journey to financial freedom.

What tools do you use to dominate your money?

Posted in Building Wealth, Dumping Debt
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Is Investing in the Stock Market Gambling? An Answer from Tortoise and Hare

Posted By damien on August 30th, 2010

Stock Market Gambling

My first encounter with someone trying to time the stock market occurred when I was nine years old, at church, of all places. I was sitting in the foyer, waiting for my parents to finish socializing so that I could go home and jump on the trampoline.

While waiting as patiently as a nine-year-old could, I (naturally) eavesdropped on the conversation of two “old” guys standing next to me. (Old, when one is a child, is anyone over 30.) One guy was complaining to the other about his recent losses:

…so it climbs to $3.63 per share, and I think, “This is definitely the top!” So I sell all my shares.

By the end of the day, it closed at $3.96! If I’d only waited 4 more hours, I would have made $12,000 more…

The other guy just shrugged his shoulders and sighed, as if saying, “Well, that’s just how investing in the stock market goes…”

I shook my head in amazement that such fortunes could be made and lost so quickly. It seemed the Gods of the market were more fickle than my infant sister.

But I didn’t philosophize on the stock market for long, there was a 10-foot wide trampoline waiting at home for me.

Back to the Future

As I aged and thought more about that experience, I started to believe that stock market investing was nothing more than an elegant form of gambling. That the guys (and girls) who made money were the ones lucky enough to guess when to buy low and sell high. And the losers were the suckers on the other end.

But was I right?

Is investing in the stock market gambling?

The Answer

The answer, I would submit, is more nuanced than a simple yes or no. I believe that it is possible to invest in good businesses and it’s also possible to speculate (gamble) on stocks.

Let me show you the difference. There are two ways to determine whether you are gambling or investing: (1) time horizon and  (2) chosen instruments.

Let’s look at both.

You Gotta Know When to Hold ‘Em

The first distinction between gambling and investing has to do with how long you hold on to the stocks you buy–what the industry calls your “investment horizon”. The gambler (hare) will buy and sell stocks hourly, daily or weekly depending on the short-term rise or fall of the price of the stock.

The gambler cares not about the underlying company whose stock he buys and sells, only that the price goes up or down.

The investor (tortoise), on the other hand, is in it for the long haul. She chooses companies (or groups of companies) that she believes in and buys a part of that company for the future.

She is optimistic about the long-term outlook for the market/economy that she invests in and ignores the day-to-day fluctuations in prices.

In short, the gambler buys and sells stocks based on short-term performance. The investor buys part of a company based on its long-term prospects for growth.

Wrath of the Alphabet Soup

Another way to distinguish between stock investing and gambling is by the instruments one buys.

The gambler loves the latest and greatest newfangled type of exotic investment. MBSs, options, futures…the gambler (hare) loves to bet on stock prices.

Options are bets that the price of a stock will rise or fall to a certain price at a certain date. Futures are contracts to buy or sell an asset in the future at a price specified today. Betting on prices–a clear winner and loser.

MBSs (mortgage-backed securities) and its cousins form the alphabet soup of investment inventions too complicated for most people and even self-proclaimed financial experts to understand.

The investor takes a much simpler route: she buys stocks and stock (mutual) funds. Simple and easy to comprehend. She purchases a part of a company (or many companies) and her success rises or falls with the performance of that company and the overall market.

For the investor to win, there does not have to be a loser.

By now, you should know my investing philosophy. Be an investor (tortoise) not a gambler (hare). And pick up my free Minimalist Guide to Investing to learn how to start investing for your future.

Posted in Building Wealth
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