Why You Should Take the Change in Your Tip Jar.

Working a job where you make tips is one of the most satisfying thing I have ever experienced.  Even if it’s just a few cents or a dollar every purchase, it quickly adds up.  When I first started making tips as a barista, I would always ignore the change at the bottom of the jar unless it evened out to a full dollar. This small daily habit could have ended up making me lose out on a considerable amount of money if I hadn’t noticed.

Below I have a chart showing how much money you could save in a year just by grabbing the leftover change at the bottom of the jar.

Days/week Cents Total in a Year
4 $0.40 $83.20
4 $0.25 $52.00
5 $0.25 $65.00
5 $0.40 $104.00

Although this may not seem like a lot of money compared to how much you make in dollars, you have to calculate the marginal cost/benefit.  Marginal cost is how much it burdens you to do something.  Marginal cost can include money, time, and stress. In this case, the marginal cost is small, because it’s money you have already earned.  One inconvenience is getting the change into your bank account or into a more liquid form. But this can easily solved with Coinstar, or finding a bank with a coin machine. Just get a large jar in your house to keep your change in and convert it to cash once a year.  The marginal benefit can be substantial, depending on the number of days you work.

Here’s the formula you can use to calculate how much you could earn:

Tips in a year=(Days working)*(52)*(Average change)

Do you grab the change in your tip jar? How much could you earn?

The Gas Method of Building Credit

It can be hard not to reach for your credit card when you see a shiny pair of shoes or drive by that expensive sushi place down the block before your next paycheck, but keeping your purchases consistent is the best way to track your credit.  We’ve all put purchases on our credit card that we’ve forgotten about until we check our statement at the end of the month.  These small inconsistencies can be prevented if you use the Gas Method.

What is the Gas Method?

The Gas Method means that you use your credit card only for purchasing gas.  This method works because, for most people, gas is a purchase you have to make once or twice a month and is small enough to not use up too much credit, but large enough that you’ll remember to pay it off.

Did you make it?

No.  I’m just giving it a capitalized name to make it sound more attractive.

What are the benefits?

Because most people use a set amount of gas each month, you are much less likely to be swayed by rewards programs or deals.  Unlike with spending money on groceries or shopping, buying extra gas on your credit card is much less attractive.  It is also easy to budget, because although gas prices and the amount you use may change, it is often within an easy to predict range.

Why gas? What if I don’t drive?

There are many other things you could use to get the same results.  In fact, some people might prefer putting a subscription service on their credit card such as Netflix.  That way, you know exactly how much you’ll be charged each  month.

 

What purchases do you usually make on your credit card? How do you stick to your credit card budget?

Compound Interest: When Less is More

Did you know that you can invest less money, but still end up with more money saved for retirement? Because interest is compounding, money you invest grows larger the longer it is invested.

Here’s a helpful chart to help you understand:

chart

This chart shows $100 growing at 8% annually over 30 years. Compound interest means that the 8% interest rate keeps growing off the interest you earned in all the years prior.  By year 10, your $100 is worth $200!  With simple interest however, you gain $8 per year every year.

Compound interest is the reason why you can invest less money earlier, and get huge gains in the long term.

Take the example of Chloe and Zack.  Chloe invests $2,000 each year from age 20 to 30.  Zack invests $5,000 each year from age 35 to 49.  Zack is investing more money, but Chloe has her money invested for a longer amount of time.  Here’s how their worth compares:

chart (1)

Although Chloe invests $22,000 dollars total, while Zack invests $75,000, she still ends up with slightly more money.  That’s because Chloe’s investment had more time to benefit from the compounding interest. (Interest rate here is 8%.)  Had Zack invested 5,000 for a couple extra years, or started investing a few years earlier, he could have caught up with Chloe, but at a much higher cost.

Not everyone is capable of beginning to invest as early as 20, but everyone should be aware of the benefits of compounding interest.  Retirement is not about being rich, it’s about being money aware.

First Credit Card Mistakes To Avoid

Getting your first credit card can be a scary experience. Credit card debt can grow exponentially if you’re not careful and can affect your ability to buy a car, a house, or even get a job. Ideally, spending money you don’t own is never a good idea, but it’s not always practical.  Whether for building credit, or making end of month payments, here’s the most common credit card mistakes new credit card users make.

1.) Carrying a balance month to month.

I’m not sure what started this myth, but it is NOT TRUE. Carrying a small balance from one month to the next does not help increase your credit score.  For the best results, pay off each balance in full at the end of the month.

3.) Ignoring your credit utilization rate.

Even if you pay off every cent each month, you may still be hurting your credit score.  Credit companies also like to track that you are not using too much of your available credit.  Although this has less of an impact on your score compared to other things, lenders want to see that although you have credit available, you are not in a position to be using too much too often. If your credit utilization is above 30%, call your bank and ask for a raise in your available credit. This way, you can keep your spending the same and reduce your credit utilization. However, raising your available credit may result in a hard inquiry.

4.) Too many hard inquiries.

If you apply for a new credit card, increase your available credit, or apply for a loan, you will likely have a hard inquiry reported on your credit report.  A hard inquiry negatively affects your score because it shows that you are gaining too much credit too fast.  Don’t worry, because a hard inquiry is only reported for about 2 years.  Checking your credit score for non-lending purposes (like if you are using an app such as CreditKarma), is a soft inquiry and will not affect your credit score.

5.) Not tracking your credit.

In this day and age, there is absolutely no excuse for not knowing your credit score. Tracking your credit score is the best way for you to learn how changes in your spending affect your credit.  It is also important because the credit bureau might make a mistake in your credit that could go undetected until you need to take out an important loan.  You can dispute errors on your credit card, but only if you find them.

6.) Overvaluing the rewards.

Almost every credit card company offers rewards based on how much or where you decide to spend your money.  Any program that encourages you to spend money in order to make money should make you very nervous. Credit card companies offer rewards because they know it encourages most consumers to spend more money than they initially would.  A 3% cash back rewards may sound like a lot, but often times you will spend more than 3% in anticipation of rewards.

 

What’s been your biggest credit card mistake? What helps you stay on track of your credit?

How Inflation Affects Your Savings

What is Inflation?

The money you have today is most likely going to be worth less than that same amount of money tomorrow.  That is why saving for retirement is not just about squirreling money into a savings account, it’s about investing.

Have you recently gone into the grocery store to buy a can of soda and thought “Man, soda’s more expensive than I remember when I was a kid.”  If you have you have just noticed inflation.
The average rate of inflation is about 2% per year.  That means that 1 dollar this year will be worth .98 cents next year.  Similarly 100 dollar this year will be worth $81.71 in 10 years.  Here’s a chart for how the value of money decreases over time:

chart

As you can see, in 40 years the value of your money will almost half.  A savings account will generate some interest, but usually less than a percentage point.  In order to combat inflation, your money needs to grow more than 2% a year.

Why do we have inflation?

This is a highly debated topic for economists.  The current prevailing opinion is in support of inflation targeting.  Inflation targeting is the idea that economies do better under slight inflationary circumstances.  The argument states that inflation causes people to see increases in their salary (although they might not notice the raising costs) and also stimulates the economy by encouraging people to use their money instead of letting it sit in a bank account where it will lose value.

The Federal Reserve has a target rate of inflation of about 2% annually.  This is considered small enough to decrease volatility in the economy that come from high inflation and large enough to effect decision making in the general public.

How Do I Prevent Inflation From Affecting My Retirement?

In  order to stop inflation from chipping away at your retirement savings, you need to make sure your retirement money is earning interest at a rate greater than 2% a year.  Investing in the stock market is the most common way people grow their money; although, you do have to be careful with how you invest it.

Exchange Traded Fund (ETF)

Exchange Traded Funds are pools of investments that match the stock market.  ETF’s are not managed daily meaning you don’t have to pay the same fees as you would for a mutual fund.  ETF’s are a great tool for long term investment, because the low fees mean a smaller marginal cost which over time can save you loads of money.  For beating inflation, ETF’s historically average 10% returns per year, although that is a long term percentage.

Mutual Funds

Mutual Funds are very similar to ETF’s in that buying a mutual fund gives you access to many stocks at once.  Mutual funds, however, are usually run by hedge funds that try to beat the market.  Because they are providing a service by trying to get greater returns than the market, there is a larger fee for a mutual fund than an ETF.  Mutual Funds can also be a great addition to a portfolio.  Mutual funds also make about 10% a year.

Individual Stocks

Buying individual stocks CAN give you amazing returns on your investment, or you could lose it all.  Although this all or nothing mentality can seem attractive to some, it’s not a guaranteed way to stay above inflation.  If you really support a company and it’s product then go ahead and invest a small portion of your portfolio, but I wouldn’t bank on every stock beating inflation in the long or short run.