By Lynnette Khalfani-Cox, The Money Coach.
In these tough economic times, we all need to think about how to save more, or earn more from our hard-earned dollars.
Granted, it’s not always easy to save — especially if you’ve never been taught how to do so. It can also be difficult to sock away money for the future when you’re concerned with paying this month’s bills. Still, everyone can benefit from stashing away a little extra cash. Here are 10 tips on how to do just that — painlessly and without needing to have an MBA in finance.
Tip#1: Just Ask
I’m always amazed at how readily people automatically whip out their wallets – or their credit cards – to get a product or service they want, without thinking at all about whether they can get want they want cheaper, or maybe even free. To make saving money a way of life, remember the phrase: “Just Ask!” For starters, ask yourself three questions:
- Can I get it free?
- Can I get it for less?
- Can I get it in exchange for something else?
Believe it or not, we’re quickly moving toward a free nation: free music downloads, free news and information, free offers for everything from cosmetics and luxury goods to legal aid and complimentary meals.
If something you want isn’t available free, that doesn’t mean you can’t get it for less than the full asking price. Just be prepared to negotiate – in a nice way, of course. Most people think the price tag they see advertised is “written in stone.” The truth is that you can negotiate nearly everything – from clothes in a department store to medical bills. Ask for a discount if you pay cash. Always ask “is that the best price you can offer?” And don’t be afraid to let retailers know that you’re looking for a deal. There’s no shame in asking: “Will this item be going on sale soon?" If the answer is “Yes,” wait to buy it until the sale occurs.
Can’t find a freebie or a discount? Then it might be time to barter. Instead of paying for goods and services, offer to exchange your talent (maybe it’s cooking, dentistry, braiding hair, teaching piano or whatever) to others. Even if you can’t offer a service, you may have something of value to barter. That’s the whole idea behind the increasingly popular home exchange services, for instance, where you get to swap homes with someone in a far-flung country (free of charge), in exchange for letting them temporarily reside at your place.
Tip #2: Embrace (Don’t Hate!) Being on a Budget
Thanks to the recession, more Americans are finally getting back to the financial basics – including doing something that most individuals dread: budgeting. If you don’t yet have a budget, or if your current budget is constantly out of whack, take heart in knowing that you’re not alone. In fact, 70% of all Americans don’t have a working budget. Perhaps that’s not so surprising considering most of us didn’t learn how to budget at home or in school. Be honest: When you think about being “on a budget” do you inwardly loathe the idea, wishing instead you had so much money that you could spend on anything you want? Or do you automatically assume that having a budget means drastically changing your lifestyle, because there will be a lot of things you can’t buy, do, or have? If so, you must banish those negative thoughts and misconceptions. First of all, even millionaires have budgets.
Realize also that creating a budget – and living with it – doesn’t have to be so restrictive. Nor does it mean a complete end to all spending or having fun. In fact, a well-prepared budget will have certain “treats” built into it. And it’s precisely these “treats” – certain rewards that you give yourself every month – that will help you stick to your budget. Think about a budget as your own personal “Spending Plan”. With a “Spending Plan,” you establish priorities about what to do with your money – and what not to do with it. In other words, with a “Spending Plan” you’ll no longer be making an endless series of impulse purchases (both large and small). Instead, you’ll finally control your money, instead of letting your money control you.
Besides giving you power and control over your finances, and helping you save money, a skillfully crafted budget:
- Keeps you from living paycheck to paycheck
- Allows you to save for future goals and dreams
- Helps you avoid going into debt
- Reduces the stress and worry about paying for bills
When you look at these benefits of having a budget, or a “Spending Plan,” it’s clear that you should embrace the concept, not fret over it.
Tip #3: Boost Your Credit – and Earn $1 Million
In one of my books, The Money Coach’s Guide to Your First Million, I explained how having great credit can help you save or earn over $1 million in your lifetime. How so? People with perfect credit get the best interest rates and terms on everything from business loans and student loans to credit cards and mortgages. They also land better-paying jobs and more frequent promotions. Moreover, they save money on a host of financial products that are tied to your credit score – such as life insurance and auto insurance.
Anyone living in today’s society knows that it can be a drag to be turned down for credit – or even denied a job just because you have bad credit. So what should you do? Learn how to boost your credit standing by knowing the ins and outs of how your score is determined by Fair Isaac Corp., the company that calculates your FICO credit score.
(Get your FICO score at www.myfico.com). FICO credit scores range from 300 to 850 points; the higher your score the better. You’ve got “Perfect Credit” if your score is is 760 or higher. Under Fair Isaac’s credit scoring model, your FICO credit score is based on five primary factors:
- 35% of your score is based on your payment history
- 30% of your score is based on the amount of credit you have used
- 15% of your score is based on the length of your credit history
- 10% of your score is based on your mix of credit; and
- 10% of your score is based on inquiries and the new credit you’ve taken on
Knowing these facts, here are some guidelines to help you maximize your credit score.
- Pay Your Bills on Time
Even if you can only make minimum payments, that’s better than being late with a bill because late payments of 30 days or more can drop your FICO score by 50 points or more.
- Don’t Max Out Your Credit Cards
In general, try to keep your balances to no more than 30% of your available credit limit. For instance, if you have a card with a $10,000 credit line, make sure you don’t carry a balance of more than $3,000 on that card. If you can pay off your credit cards each month, that’s even better. But if you can’t, it’s better to spread out debt over a few cards, to maintain lower balances, rather than max out any one card.
- Keep Older, Established Accounts Open
It feels good to pay off a credit card and finally get that statement showing a zero balance. However, if you pay off a creditor, don’t make the mistake of closing that account because 15% of your FICO score is based on the length of your credit history. The longer a credit history you have, the better it is for your score.
- Avoid “Bad” Forms of Credit
I’m sure you’ve walked into a department store and been offered 10% off - or some other discount - just for opening up a credit card with that retailer, right? Did you take the bait? If so, realize that you might have hurt your credit score. Here’s why. The FICO scoring model rates some forms of credit more favorably than others. For instance, the presence of a mortgage on your credit report will help your score, but too many consumer finance cards (i.e., the cards issued by department stores and retailers) can hurt it. For this reason, do yourself a favor and say “No” to those credit card offers from stores you patronize. Just use a major credit card - like a Visa, MasterCard, American Express, or Discover Card - if you need to use credit to make your purchases.
- Only Apply for Credit When You Truly Need It
Just because you get a pre-approved offer in the mail, or some telemarketer calls you to solicit for a credit card, doesn’t mean you should accept it. You should only seek out credit when you absolutely need it because taking on too much new credit - or even just applying for it - will lower your credit score. Each time you apply for a loan - whether a credit card, an auto loan, a mortgage, or a student loan - the lender pulls your credit report and generates an “inquiry” on your credit file. That inquiry remains there for two years.
And a single inquiry can lower your FICO score by up as much as 35 points.
Tip #4: Go Ahead and Shop – Just Don’t Forget To Take These Three Things
People who are watching their wallets should always go shopping with three things: a budget, a buddy, and a stopwatch. The budget is your pre-determined amount of how much you can afford to spend in cash. If you do use credit, set a maximum that you can pay off in two or three month’s time maximum. Your buddy’s job is to keep you accountable. She’s the girlfriend who’s going to go with you – to that boutique you love, to the mall, or wherever – and remind you not to overspend and go into debt. It’s also her role to get you out of the stores once you’ve hit your limit. And here’s where the last “must take” shopping item comes into play.
You can do a lot of damage to your wallet and to your credit cards by spending hours upon hours in the mall or shopping all day long. Instead, trying setting a time limit on your shopping excursions. A good way to do it is to use a ticking stop watch - or any kind of device with a bell, timer, beeper, or ring tone - that you can set for a fixed, brief period of time. A good time limit is 1 hour; 2 hours maximum. You can set your stop watch so that it “rings” in one hour, and then you have a verbal/auditory reminder that it’s time to put and end to the shopping for the day.
Tip #5: Turbo-Charge Your Savings
You’ve probably heard of employers that offer a matching contribution when you put money into a 401(l) retirement savings plan at work. Well, a 401(k) isn’t the only way to turbo-charge your savings. You can also get a matching contribution for your savings by opening an Individual Development Account, or IDA.
People who are low to moderate income earners are eligible to sock away money in an IDA, which is a savings account designed to help people develop fiscal discipline and reach goals, like saving for college, buying a home, starting a business, or paying for retirement. (And don’t be fooled by that term “low income.” Millions of individuals and families - even white collar workers -- will be considered “low income” because they recently lost a job, took a pay cut or have had their work hours reduced).
These IDAs also turbo-charge your savings, because with an IDA, for every dollar you save, you get a $2 or $3 matching contribution. That’s like getting a 200% or 300% return on your money - risk free! What’s the catch? With most IDAs you have to agree to save for a set period of time, at least 1-year. Some require 5 years of savings or more. But let’s say you can afford to sock away $200 a month. At the end of the year, that’s $2,400. With an IDA that has a $2 to $1 match, you’ll get an additional $4,800 put into your account. The money comes - no strings attached - from corporations, government agencies, and non-profits. You can locate an IDA in your area by visiting: www.idanetwork.org.
Tip #6: Don’t Invest In the Stock Market Prematurely
At my financial workshops, or via email, I sometimes get people questions from people wanting to know where they should invest $5,000 or some other chunk of money they have burning a hole in their pocket. All too often, these people haven’t even taken care of the financial basics: like paying off credit card debt, establishing at least a 3-month cash cushion, purchasing life insurance and disability protection, and drawing up a will. Until you’ve handled these five financial basics, you’re not yet ready to risk money on Wall Street. Let’s say your buy $1,000 worth of stock and then three months later your have a financial emergency of some sort. With no “rainy day” fund, you’ll be forced to sell your stocks to raise cash. Under this scenario, you’ll be paying higher taxes, since you owned the stock for less than one year, and depending on the stock’s performance, you might also have to sell at a loss.
Tip #7: Focus on the Process of Investing – not Products
If you’ve ever read a financial magazine, you’ve undoubtedly seen headlines like “The Best Mutual Funds You Can Buy” or “The 10 Stocks You Must Own Now!” These kinds of stories cause many to focus on the wrong thing when it comes to investing. To become a successful investor, don’t obsess over products – i.e. which is the so-called best stock, bond or mutual fund. Instead focus on the process of investing. You’ll reap your riches in due time if you can master the five-phase process of investing:
- Strategizing to meet your own personal goals and needs
- Buying the right investments for the right reason at the right price
- Holding and monitoring the investments in your portfolio
- Selling investments at the right time, for the right reason, in a tax-efficient way; and
- Picking proper financial advisors for help
Tip #8: Avoid Get Rich Quick Schemes and Fads
When you are ready to invest, do yourself a favor and stick to tried and true investments, like stocks, bonds or mutual funds. Save money by not wasting it on get-rich quick schemes and fads. Even steer clear of constantly playing the lottery as so many people do – with dreams of getting a big payout.
Consider the story of Jack Whittaker, a West Virginia businessman who became famous when, on Christmas Day 2002, he won $315 million in the multi-state Powerball lottery. At the time, it was the largest jackpot ever won by a single winning ticket in U.S. history. Sadly, Whittaker’s life has taken a major downturn since his big “win.” He has had numerous legal problems and family tragedies, and much of his fortune is gone. Among his family woes: his only granddaughter, Brandi, was found dead of a drug overdose at age 17. She had reportedly been receiving $2,100 a week allowance from her grandfather. Also, in May 2005, Whittaker’s wife, Jewel, filed for divorce after more than 40 years of marriage. She said winning the lottery was “the worst thing that ever happened” to the couple. The lesson: don’t rely on the lottery or other such schemes as your pathway to wealth.
Tip #9: Don’t Bet the Farm
Overconfidence can be the death knell to your investment strategy. No matter whether you’re investing in the stock market, or in a new business venture, it’s always a bad idea to put all your eggs in one basket and to risk everything. Smart entrepreneurs and smart investors don’t “roll the dice” and risk everything. They take risks - but they’re calculated risks. Don’t gamble it all: 100% of your savings, your credit, putting your home up, etc. in the hopes that you’ll create a successful business or that one investment will pay off in spades. Instead, be willing to invest in your business, or in a company that you’ve researched, but don’t do so foolishly, at the expense of everything else.
Tip #10: Select a Good Financial Team
Unfortunately, the recent rash of financial scams reminds us all that you can do practically everything right – including working hard, saving and investing your whole life – and still wind up penniless if you don’t have trustworthy financial advisors in your corner. Consider what happened to the victims of Bernard Madoff – who created the largest Ponzi scheme in U.S. history and was recently sentenced to 150 years in prison for his misdeeds. As an investor, you’ve got to do your homework to stay away from the “ins” and the “uns”
- the inexperienced
- the incompetent
- the unprofessional
- the unskilled
- the unscrupulous
To find a reputable investment advisor, start by using the BrokerCheck service of FINRA, the consumer protection agency also known as the Financial Industry Regulatory Authority. Reach FINRA at www.finra.org or by calling 800-289-9999. They’ll give you background information on any broker or brokerage firm you’re thinking about doing business with. FINRA can even tell you if a broker or investment advisor has ever been sanctioned or fined by securities regulators. These are obvious red flags. Also get references and check them, and insist on getting Parts 1 and 2 of your advisor’s ADV form. An ADV form will disclose whether an investment advisor went to school, how much professional experience they have, and whether they’ve had an negative disciplinary history from state or federal regulators. In addition to a broker or investment advisor, having a qualified accountant and a good certified financial planner, can help you reach your financial goals.
Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller “Zero Debt: The Ultimate Guide to Financial Freedom”. She has appeared on such national TV programs as “The Oprah Winfrey Show”, “Dr. Phil”, “The Tyra Banks Show” and “Good Morning America”. She has been featured in the “Washington Post”, “USA Today”, and the “New York Times”, and can frequently be seen as a guest commentator on CNN and FOX Business Network.
For more information about Lynnette, or to sign up for her free personal finance newsletter, visit her website and blog at: www.TheMoneyCoach.net. Lynnette is also on numerous social networking sites, including Twitter, Facebook, and LinkedIn.