Category Archives: Saving Money

Debit Card vs. Credit Card

Two common ways of paying for items now a days are your debit and credit cards.  Rarely is cash used to purchase items.  Plastic cards are much easier and accessible and you dont have to worry about carrying change or bills.

So which is better to use?  I will explain the benefits and drawbacks of the two:

Debit Card

Your Debit Card is basically an extension of your bank account and has taken the place of writing checks.  The Debit Card allows you to withdrawal cash from an ATM and the money is immediately withdrawan from you bank account.  You do not have to pay a bill at the end of the month.

Postives:  A debit card allows you easy access to purchase items without having cash.  You can withdrawal cash from an ATM if needed.

Negatives:  You do not get any rewards for using your debit card.  There are no perks when you use it.  And now, even some banks are charging you a monthly fee to use your debit card (Around $5/month)

Credit Card

A Credit Card allows you to pay for items with the promise of paying it back in the future.  You can afford to buy things in the present without having the full amount of money in your account. It is basically a loan of money that you must payback in the future.

A Credit Card is great if you pay your entire bill off at the END OF EVERY MONTH. If you pay your card off every month, your credit card basically becomes a debit card.  If you do not pay your entire amount off at the end of the month, the credit card company charges you interest and a lot of it.  They typical interest rate charge for Credit Cards is between 12-20%.

Any balance you have remaining will be charged an interest of 12-20% depending on your card.  This is why it is very important to pay off your credit card.  If you have a credit card debt of $1,000, you could end up paying twice as much if the card is not paid off quickly.  If you pay off the $1,000 at the end of the month it was used, you will only pay $1,000.

Also, Credit Cards offer rewards.  Different companies offer different rewards, but a lot of them give you points for every purchase you make.  These points never expire and can be used for things from flights, hotels, trips, and gifts.

If you are smart with your credit card and pay off your balance every month, Credit Cards are much better to use than your debit cards.

If you are disciplined with your money and paying off your bills, a smart thing you could do is never use your debit card except at an ATM to get cash and instead always use your credit card for every day purchases.  Your points will grow into free trips.

IMPORTANT NOTE:  ONLY DO THIS IF YOU PAY OFF YOUR BILL EVERY MONTH IN ENTIRETY.  YOU SHOULD HAVE A ZERO BALANCE EVERY MONTH.

Here is a link to top reated credit cards:

http://www.creditcards.com/reward.php?a_aid=1004&a_cid=1015&a_did=111937&adused=12765414180&gclid=CO_ptY-5kLECFQFx4AodDnFBeA

What is your current Net Worth?

I stumbled upon a web page with an Easy way to calculate your Net Worth.  What is Net WorthNet Worth is your Assets – Liabilities.  This calculation will help you get an idea of where you are financially.

Here is the link to the Net Worth Calculator:

http://www.emeraldtools.com/EContent/index.cfm?fuseaction=co.displayContentView&contact_ID=3612891&item_instance_ID=16831661&content_ID=738

If your calculation is negative, set goals for yourself to get on the positive side (by yourself or with the help of a financial adviser).  If your number is negative, that means too much spending is the problem.  Try to find areas you can cut down on.

If your calculation is positive but low, set goals to build it up through saving and investing. Put an emphasis on the amount you save and minimize the amount you spend.

If your calculation is high, continue to build on this success.  Having a high net worth will allow you the ability to make decisions for you and do things you want to do without having to worry about your financial situation.

Hope this helps.  Thanks for reading.

Battling Inflation

A key reason to invest your money is to battle against inflation.  If you are not investing your money, then Inflation is causing the value of your money to decrease over time.  Inflation is the increase in prices of goods or services over time. Here is an example dealing with the price of gasoline:

Lets say you go to fill up your car with gas and you have $50 on you.  This allows you to get 10 gallons at $5.00 a gallon.   One year later, you go to the same gas station with $50 and now gas is costing $5.25.  Now, you can only purchase 9.52 gallons of gas.  Your $50 is not as valuable as it was a year ago.  This is inflation.  The above example is a 5% inflation increase.

The General Rule for Inflation is that it increases 2-3% a year.  So, if your money is just sitting in a bank account you are actually losing money or the value of your money.  This is one of many reasons it is important to invest your money.  You want to, at the minimum, keep up with inflation, but you really want to beat the inflation rate with your investment returns.

Hope this helps and thanks for reading.

Pay Yourself First

Growing up and to this day, my dad still ask me the same question, “When you receive your paycheck, what is the first bill you should pay?”  Having heard this question 100’s of times and obviously knowing the answer by now, he still ask me the question like it is his first time asking me.

A lot of common responses are Rent, Mortgage, Car payment, Insurance, Electric bill, and Cable Bill.  These are all necessary payments, but if you can discipline yourself to PAY YOURSELF FIRST, you will be amazed at the gains you can make.  As soon as you get your paycheck, train yourself to take a certain percent (a good number to start with is 10%; so if paycheck is $3,000, try to set aside $300) of your paycheck and set it aside into a separate savings, investment, or retirement account.  A lot of people live paycheck to paycheck and they get themselves into trouble by getting into debt.

A lot of banks and investment companies have automatic transfers where you can set a certain amount to be transferred to a savings account from your bank account on the same day every month.

There are many different places you can put your PAY YOURSELF FIRST money.  There are places that have greater growth potential if you are knowledgable about investing or are working with a financial advisor, but there are also safe places to store your money and let it grow over time.  I will discuss a few of these areas:

Savings Account:

Savings Accounts are a great way to learn discipline.  They are not going to make a lot of money for you, but they will make a little while you learn discipline and build up your cash flow, so that you can invest in better things in the future.  Here are current interest rates for Savings Accounts for popular banks in the United States.

Bank of America Savings Account:  0.05%  (This means if you invest $1,000 and leave it there for the whole year, you will have earned an extra 50 cents).  Like I said, Savings Accounts are not used to grow your money, they are used to learn discipline and are a great place to store your emergency fund.  Your regular bank account gives you no interest, but a savings account gives you a little and is a great place to store future investment money and to train yourself with saving.

Wells Fargo Savings Account: 0.01% (You will earn 10 cents for every $1,000 put into the account.  Like I said, you will not get rich from putting your money into savings accounts, but they are safe and you cannot lose money and it is a great way to discipline yourself on the concept of PAY YOURSELF FIRST).

This is a safe and great way with no risk to build good money habits.  You will not get rich from Savings Accounts as you can see, but if you stick to the discipline of saving you will be amazed at the results.

Certificates of Deposit (CD’s)  are another safe and great way to learn discipline  They will not make you a lot of money, but you will be guaranteed to make a little bit of money depending on the length of the CD.  A CD is an investment offered by financial companies and banks where you give them a certain amount of money for a specific period of time and you earn interest on that money.

For Example:  Robby’s Bank is offering a 12 month CD at 0.50%.  This means you would give Robby’s Bank $1,000, which the bank would keep for 12 months and they will pay an interest of 0.50% for the year.  This means at the end of the 12 months you will get your $1,000 investment back plus an extra $5.  This rate is better than the Savings Account, but it comes with more rules.  There is a penalty if you take your money out before the 12 months is over.  With a Savings Account, your money is free to come and go anytime.  This is why the interest on a CD is a little better than a Savings Account. With a CD,  you are agreeing to keep you money in the CD for the specified time period.  Note that most CD’s have a minimum amount you must invest.

Here are some current CD Rates:

6 Month CD at 0.50%

30 Month CD at 0.80%

60 month CD at 1.00%

***As you can see, the longer the CD, the better interest rate you get.  That is because your committing to a longer time frame to keep your money in the CD and not take it out.  Because you are keeping your money with the bank longer, they reward you with a slightly higher interest rate.

Once again I want to point out, Savings Accounts and CDs are not the best ways you can invest your money.  They are extremely safe and are great ways to build good financial habits and discipline.

If you have any more questions about Savings Accounts or CD’s please feel free to email me.  Thanks.

The Magic of “Compound Intrest” and the Rule of 72

One of the best things you can do as an investor  is “START EARLY“.  The younger you start your investing the longer you have for compound interest to take place.

What is Compound Interest?

Compound interest is the interest you earn on interest with the money you invest.   Now you may be saying to yourself that definition uses the word interest a lot, what exactly is interest?

I will explain using an example:

Lets say you invest $1,000 into any security (mutual fund, stock, bond, savings account, etc.) and that security earns 5% interest each year.  That means if you invest $1,000 on January 1, 2012 you will have $1,050 at the end of the year without touching your money or investing anymore.  That is $50 earned through interest.  If you were to never add money again to this account and you were to earn 5% interest each year, the following year in December of 2013 you would have, $1,102.50.  That is $52.50 made through interest for that year.  Here is where compound interest comes into play.  You made $50 of interest on your initial investment, but you also made $2.50 on the interest from year one.  That extra $2.50 is from compound interest.

If you were to never add another dime to this account, after 10 years you would have a total of $1, 620.00 (+$620 without doing anything) and in 25 years you would have almost $3,400 (+$2,400).  This does not sound like a lot over this long period, but if you were to continue to invest money every month or year, or start with a larger initial investment this number would really add up through the use of compound interest.

THE RULE OF 72

The Rule of 72 is a great way to ESTIMATE how your investment will grow over time.   If you know your investments expected rate of return (could be anywhere from 2-10% depending on the type of investment), the Rule of 72 can tell you how long it will take for you investment to double in value.  Divide the number 72 by the expected rate of return (ignoring the % sign), so if your expected rate of return was 6% you would take 72/6 = 12.  With an annual interest rate of 6% your investment should double in 12 years.  So if you made an initial payment of $20,000 dollars in a mutual fund that is expected to earn 6% annually, your $20,000 would be expected to double in 12 years and turn into $40,000.  Now, this is without ever adding any money into your investment during these 12 years.  If you were to continue to add money during this time your return would be expected to be even higher.

Here is a link to a calculator for determining Compound Interest, http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Current Principal= Amount of an initial investment you would want to invest

Annual addition = amount of money you would be adding to your initial investment every year

Years to Grow = Amount of time until you would want the money

Interest Rate = Depends on what you invest in, but could be anywhere from (2-12%, I think a good average is 5%-8%)

Leave compound interest at 1 time annually and make additions at start.

Play around with the calculator and see what your investment of a certain amount can do over time.

IMPORTANT NOTE:

I will go into details on the different ways you can invest on my next post, but there are no guarantees on the amount of interest expected unless you were to invest in a Certificate of Deposit (CD) or Bond.  These have a set interest rate, that is generally very low, and they say you must hold the purchase until a specific date.  Again, I will go until detail on these types of investments in my next post.

In general, when investing in stocks , ETF’s, and Mutual Funds, the interest rate you receive will fluctuate.  There are times when you can lose money if a stock, ETF, or Mutual Fund goes down.  But, over the history of the stock market your investment will increase over time.  The Rule of 72 is a great rule of thumb to determine how your investment will perform in the long run.  Throughout the Rule of 72,  your investment will go up and down, but over the long haul your investment is expected to double following the Rule of 72.

To sum things up, one of the big keys to investing is to start early even if it is a very small amount.  Do not worry about the amount.  Start the process of investing and over time you will be amazed at the money that has been produced because of your early start.  Playing professional basketball is a great time to get an early start.  There are not many bills or taxes so it makes for extra cash to begin the investment process.

Thanks for reading Financial Hoops.

Pre-Investing Checklist

The First step before considering investing or working with a financial professional is to asses your financial picture.  You first priority should be to calculate what it cost for you to live for one month.  This includes things like, rent, food, insurance bills, house bills, having fun money, car payments, and any other bills you may have.  A great thing about playing basketball is that a lot of these “real life” expenses do not apply to us at the moment which makes it a great opportunity to begin to save money.

Once you have made this calculation and hopefully you have a positive number remanding, your next priority should be to pay off your credit card bill  (If you have one).  Having good credit plays a big part in making big life purchases (house, car, or loan) which I will talk about in a later post.  The quicker you can pay off your credit card the better.  Credit Cards have a lot of pluses, but when they are not paid off at the end of the month they can become a big big problem.  I will also discuss benefits of credit cards in another post.

The next step I would recommend would be to begin putting a little money away for an emergency fund.  They say you should have 3-6 months of income set aside for your emergency fund.  The emergency fund is a way to set money aside every month in a location (Savings Account preferably or separate bank account) where when something unexpected happens you have money already set aside waiting to be used that does not affect your normal income stream.  Otherwise, you would be forced to use your creidit card which could lead to more debt and financial troubles if it is not paid off on time.

A number of things could arise where you would want an emergency fund:

Car Repair

Lose your job and need cash while you look for a new one

Medical Payment

Dentist Visit

New Washer/Dryer

Dog/Pet gets sick

It could be anything that is totally unexpected where it is nice to have cash already set aside for this type of occasion.

The best place to store this money is in a Savings Account. Any bank should have a place where you can set this up.  You want it to be separate from your banking account because your banking is being used all the time for other daily purchases.  You want your emergency fund to be in a place where you have quick, easy access to it, but not in a place where you may be tempted to use the money from it for non-emergency purchases.  This is where you would use your Bank/Debit Card.

Once you are set in these two areas (credit card and emergency fund) you can begin investing for short-term and long-term financial goals.

Don’t worry if this leaves you with only a little cash to get started with.  Saving and Investing a little now is way better than not investing or saving at all.

Here is a simple formula for the above text:

Total Monthly Income   Monthly Living Expenses Credit Card Debt (But really a plus) Emergency Fund Money =

Amount of money you should be looking to invest for your financial goals.

Best Way to Send Money Home from Overseas

My first few years playing in Holland, The team would directly wire my money from their account to my bank account in America.  I would give them my routing number and bank information and my money would be there on payday.  This process continued for my first two years.  I began to realize that the bank was not my friend.  Their exchange rate was way less than the actual exchange rate and they were charging me a fee for the wire transfer.  I had no idea this was going on because my bank statement would just show the final total of the transfer.  I thought there had to be a better way, but I had not found it yet.

During my third year overseas, a teammate of mine explained a better way to send money home.  The company is called Custom House, http://www.customhouse.com/ , and it is operated by Western Union.  They basically act as the middle man.  Wherever you are playing, you send them the money you make in Europe and then they send that money to your bank account in America for no fee.  Here is how they make their money, They give you a little less than the actual conversion rate, but it is way better than the rate the bank gives you.

Here is a Chart to help illustrate my above comments:

As an example, I will use a transfer of 5,000 Euros to Dollars.  I will use the information I received from my bank, Bank of America,after just talking with them.  The current exchange rate at the time of this post is  1 Euro = 1.33114 US Dollars

                                                       Custom House                                  Bank of America

Amount of Euros                               5,000                                                          5,000

Fee Amount                                       $0                                                                 $16

Exchange Rate                                  1.3070                                                          1.2851

Total money Deposited               $6,535                                                      $6,409.50

                                                                               Difference:  $125.50

As you can see in this example, you would be able to save $125.50 by using Custom House to send your money home.   This would vary depending on the amount of money you send home, but if you are sending money home every month this really adds up over a 9-10 month season.  I would encourage you to call your current US Bank and ask them the following questions:

1. What is the current actual exchange rate for (Whatever your currency) to dollars?

2.  What is the banks exchange rate?

3.  Is there a wire transfer fee?

If you are interested in using Custom House and are having trouble with the process, please email me at robby.bostain@gmail.com and I will help you through the process.  The first time you use Custom House it involves some paperwork and it can be a little confusing, so please contact me if you are interested in knowing more.

Thanks and I hope this helps you save a few dollars.