Category Archives: Spending

Spend More To Invest More?

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How do you redeem your credit card points?

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[You may select more than one option]

Our last foray into the world of credit cards pulled up an array of options around using the points generated; for example, Mike  says that he:

Usually pockets the cash back but flying in the A380 Suites are always nice.

And, Investor Junkie uses the points to generate extra cash to invest:

Instead of Best Buy cards, it deposits directly into my Fidelity account.

A popular option, I’m sure, would be to ‘fly them off’ (as I do). On the other hand, Costco gives cash rebates (which we also enjoy). But, I would be interested to see how our readers currently redeem their credit card reward points?

Since you probably have multiple cards, I’ve allowed multiple options on this Reader poll, but just choose the one or two that you mostly figure on using?

Once you have made your selection/s, please read on ….

I wonder, though, where the best bag for buck (almost literally) comes from? I mean, each rewards program must have some sort of formula as to how they convert every dollar that you spend into points, then a more complicated formula (with different weightings, I’m guessing) to convert those points into the cash and/or airline miles and/or other stuff that they need to ‘buy’ to give to you.

But, I’m guessing that those weightings are NOT equal; so what is a more ‘efficient’ (or is that ‘effective’?) use for your points, for the credit cards that you have signed up for?

Using your points for:

1. Cash? Whether you direct it to your investing account, or just spend it.

2. More Stuff? Like Best Buy cards … I used to give the rewards to my employees (anything from bicycles to trips for 2, all paid for by redeemed rewards vouchers) in recognition for ‘above and beyond’ performance.

3. Airline Miles? I’m told that this is the best $$-for-point conversion that you can get … and, that redeeming your points for international flights outweighs domestic travel in terms of the ‘free value’ that you receive.

Since I fly a lot (esp. internationally), generally at my cost, this last option seems the best for me …

Logically, we should aim to get the most Usable Cash Value from our credit card points i.e. either cash, or something that we would convert into cash by using the points INSTEAD of using our own cash on something that we WOULD have spent cash on, anyway.

If it’s something that you would NOT have normally bought for yourself, then the Usable Cash Value is actually low [AJC: under my definition!].

Although, I am contradicting myself a little because I just ‘blew’ a whole heap of points on that First Class airline seat that I would never have bought for myself!

On the other hand, I am at the ‘other end’ of my financial journey, so what the hey 😉

The Real Value of Money?

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Aside from the interesting New Zealand accent (only a hop, step and a jump away from my own Aussie accent) – and, the fact that the Porsche Cayenne costs NZ$260k (or a little over USD$189,000) making them ridiculously expensive in the Land Of The Long White Cloud – I think this video is misnamed.

So you forgo the car and invest the money (as you probably should, while you are trying to work towards your Number) and get back $1.8 million after 20 years … what do you do then?

Well, isn’t the Real Value of Money based for spending? Am I missing something here?!

What you spend it on is up to you: you could give it all away or you could go out and buy yourself a Porsche Cayenne.

And, if you’re going to buy a Porsche Cayenne then, why not buy it now (if you have reached your Number and/or can afford it within the 5% Spending Rule)? 😉

Still, the message is clear: don’t go out and waste your money on ‘stuff’ if you are still trying to work towards your Number!

The case FOR credit cards …

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I think, by now, we all agree:

Credit Cards = BAD

I mean, that’s pretty much Personal Finance Kindergarten, right?

Why pay 19%+ interest for something that just goes down in value (like that 3D TV)?

But, why do I pay all my bills – both work and personal – by credit card.

I’m sure the answer’s pretty obvious to all and sundry: it’s for the points, man!

Yes, even millionaires like to get free stuff …

…. and, Sugardaddy outlines on NetworthIQ exactly how he does it:

1) Assuming that you pay your bills on time, most of the time, put all routine expenses on your credit card…utilities, groceries, etc.

2) Set up an automatic bill payment plan from your checking account for the card online.

Result:

1) you get a 30-day free loan.
2) you get free credit card points that are worth real money.
3) you increase your credit score.
4) you consolidate all your bills in one payment
5) You will never have a late fee and the APR will never concern you.
6) You will always watch your checking account balance like a hawk as failure to have enough in the account IS NOT AN OPTION.

I have done this for 10 years and it works like a charm…I get all my video games for “free” from Best Buy, and beat the banks at their own game.

Life does not get any better than that.

But, there’s always a catch in Life, Sugardaddy 😉

The one, here, is that the credit card companies HOPE that you forget to pay your bill on time, then you get to pay interest from the date of purchase.

[AJC: actually, they’ve already made their $$$$ from the Merchant Fee – believe me, I understand this side of the business VERY well – but, that 19% they get from you is just sweeeetttttt]

So, I add a few more steps to this otherwise inspired plan:

7 ) See 6)
8 ) See 6)
9 ) See 6)
10) See 6)

Point made?

Great, because I, too, have been doing this for years.

My assistant puts all ‘work’ expenses through my personal credit card (needless to say I have a LARGE credit limit), and my wife does the same with our home expenses.

Both ensure payment in full each and EVERY month.

Having done that, later this year I’m traveling ’round the world first class [AJC: I’m told that First Class on the new A380 entitles me to my own/private room on the ‘plane!] … fully ‘paid’ by points.

Sweet 🙂

Why aren’t CEO’s rich?

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Why aren’t CEO’s rich?

Now, that’s an example of an attention-getting headline 😉

You see, CEO’s are rich!

At least, some of them: for example, Fortune Magazine lists the 10 most highly paid executives in the USA, listing salaries ranging from a low (!) of $48 million to a high of $71.4 million per year!

[AJC: This was published in 2005, so I am sure that it has dropped by $10 or $20 million each, per year; poor babies!]

Even when you ‘sink’ to the top US companies – in 2009, 200 such companies were surveyed for the Wall Street Journal, each with greater than $4 billion in annual revenue – CEO salaries are still a respectible $7.5 million per year (made up of: Base Pay $1,030,000 + Annual Incentives $1,523,701 + Long-Term Incentives $5,007,556).

This is in 2009, during the Global Financial Crisis; hard times, hard times ….

Clearly, you would have to define ‘rich’ very differently to most to say that these guys (and gals) are not rich!

But, we’re talking about the absolute top echelon in the field here; the top few hundred US companies (out of the 24 million+ businesses in the USA) … the same could be said of the top performers in any field: sports, medicine, entertainment, gambling, etc., etc.

We’re not at all concerned about them …

So, let’s look instead at the CEO’s of more ‘typical’ companies, as reported by Salary.com who surveyed 1,800 companies with 500 or fewer employees across 50 industries to find that these CEO’s (including Partners and Owners salaries) only earned [AJC: a debatable term]  $290,000 (including: Base Salary $233,600 + Cash Bonuses $67,300) plus whatever fringe benefits they could eke out of the system.

Interestingly – according to a blog devoted solely to the salaries of doctors [AJC: now, that’s specialization] – in 2009, the average pay for a ‘hospitalist’ (apparently, the hot new term for Internists and hospital physicians) was $226k per year.

Now, is $226k per year rich?

Before I sold my businesses I took a salary of $250k – but, my cars were provided by the company, and my house was already paid off yet there was never very much left over at the end of the month …

… nothing left over to provide an emergency fund or to provide for retirement. So, I guess I was rich, as long as I could keep drawing the salary.

Except, that I already had $7 million in net assets, ‘just in case’ I got sick or my business went under. I wonder how many of these other ceo’s do?

So, I guess a ceo’s salary is ‘rich’ … but risky 😉

The pyschology of saving …

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Thanks to Ill Liquidity for sharing this video – and, many others – on our sister site: Share Your Number … it’s interesting to see This Clever Guy talk about the psychology of Paying Yourself First, and the Envelope System.

What do you think of these Making Money 101 techniques? Do you have any others to share?

Rent Wealthy?

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It’s only a couple of weeks since I told you about a new way to measure wealth, and here is an article on a respected blog telling you how to go about renting ‘stuff’ that you might need, so that you can appear wealthy!

Now it might surprise you, unless you’ve read my original post, that I think the best ‘bang for buck’ way to be wealthy is to be Rent Wealthy …

… this is where, instead of owning that villa in France, you rent it. Instead of owning that luxury yacht, you charter it (with crew and caviar, of course. After all, you are wealthy!). And, instead of owning that expensive personal jet, you call up Warren Buffett’s company, Net Jets, and charter one (no maintenance or holding costs, either!).

And, the Get Rich Slowly article says that you can now:

… rent designer bags, sunglasses, and jewelry. Yep, companies like Avelle, Bling Yourself, and Wear Today, Gone Tomorrow will rent merchandise by the likes of Chanel, Hermès, Louis Vuitton, Prada, Chloé, Herve Leger, and more. For a monthly fee, you can carry the “it” bag.

One site, for example, will rent a vintage Birkin bag for $600 per week. The cost to buy a vintage Birkin is about $17,000 (I’ll give you a moment to stop choking…mmkay, better now?). A Coach bag that retails for $350 can be rented for about $30 a week, or $20 per week if you keep it for a month.

As the author points out, you can actually own the Coach bag in 4-and-a-half months, so renting would seem pretty stupid when you can just save up for one or two nice handbags and use those throughout the next year or so.

But that’s not the point: renting, financing, or even buying this sort of consumer item with cash is likely to be sudden death for your personal financial well-being (remember The 5% Rule for your personal possessions, including your car?!) …

… unless, of course, you are already rich!

And, that’s where I disagree with the author: I am not comparing the cost of purchasing the $350 Coach bag against renting it … I’m comparing owning, say, 12 of them (after all, what rich person can get by on just two changes of purse in a year? Ask Paris Hilton … ) against renting 12 to 24 of them – one or two per month!

And, you don’t have to worry about them taking up space in your closet – collecting dust – after you have already been seen in public with them …

Clearly, renting is a ‘no brainer’ 🙂

That’s why I like being Rent Wealthy; I can have pretty much whatever I want [AJC: within reason, and remembering my 10-1-1-1-1 spending thresholds to make sure it’s something I really want or need] without any albatrosses around my neck.

Once you reach your Number, and if you are rich enough, try being Rent Wealthy for a while … I think you’ll like it 😉

Be rich? Or, appear rich?

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overspendingTrent at A Simple Dollar poses an equally simple question: Do You Want to Appear Rich? Or Do You Want to Be Rich?

Now, if this were a frugal-living blog, I think you know what my answer would be, but – like Trent – I have some personal experience of living beyond your means to keep up with appearances:  I grew up in a house where my family clearly lived beyond its means.

But, my father confided our true financial position to me – and, only to me – so, I became financially self-sufficient at a very young age. Others saw this as me having a strong sense of responsibility; however, if they knew my dark financial secret, they would see it as merely as the early manifestation of a strong survival instinct.

Whatever the fiscal lessons that I learned at a young age, they have clearly been to my long-term financial benefit …

Having said that, by nature, I like the good things in life … being rich suits me 🙂

However, even before I made $7 million in 7 years, I knew how to appear rich by being clever with the money that I had.

For example, when my friends were buying new Australian or Japanese cars (hence riding the depreciation roller-coaster to the tune of 15% to 30% per year), I bought a ten year old 911 Porsche.

Not only did I have a ton of fun racing it – and, rolling it on and off tow trucks whenever it had mechanical problems 😉 – I made money when I sold it.

Clearly, buying used is one way to appear rich (and, enjoying some of the fruits of your labor now) without actually holding yourself back from becoming rich by overspending.

Another way is to avoid the fiscal habits of either the Debt Wealthy or the Buy Wealthy: don’t buy or borrow-to-buy ‘stuff’ i.e. depreciating assets like cars, boats, and vacation homes.

If you must have some of these things, then take a leaf out of the book of the Rent Wealthy: rent whenever you can afford to, otherwise go without.

For example, it’s been said that you can charter a boat that is one size larger than you could afford to buy five times a year for about the cost of owning that smaller dinghy that you were about to buy. Similar logic applies to vacation homes, etc.

Use this rule of thumb (i.e. at least 5 weekends a year – every year – of use) to help you decide when you should buy or rent … assuming that you could afford to buy according to the 5% rule 😉

The time of your life?

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time-price-I’ve been spending the last few days reacquainting myself with Millionaire Mommy’s excellent blog, but I do see some differences in perspective – even though we are both millionaires …

…. but, I suspect that the differences come from degree: she describes herself as a ‘self made millionaire’ … and me a ‘self made multi-millionaire’.

IF this is the case, then I suspect that my point of view and that of, say, Felix Dennis (who is worth hundreds of millions) will equally vary from time to time. Which leads me to my first Rule of Advice:

Only seek financial advice from those who have made at least 10 times what you have already achieved, doing exactly what it is that you are attempting to do.

A long winded-way of saying: only listen to somebody who’s already been-there-done-that …

…. but, more than that: when you get to, say, $3 million or $4 million of your own, you should probably stop reading this blog, as my ideas and your may become self-reinforcing – hence self-limiting.

At that point, it will be time to move on and find some new mentors (maybe even Felix Dennis, himself?!).

The flip-side is that if you are still working towards your first million (say, $100k or networth or less) you probably should be reading Millionaire Mommy’s blog as well as (dare I say, instead of?!) mine; to help you decide which is right for you, let me give an example from a recent Millionaire Mommy post:

Today, I’m sharing a trick that can completely revolutionize your spending habits by changing the way you see the cost of the goodies that merchants want to sell to you.

Here’s the trick: Translate the number of dollars you see printed on a price tag into the number of hours the purchase will require you to work for it. By doing so, you’ll make well-informed decisions regarding what you’re willing to pay for with your irreplaceable life energy.

You should read her post thoroughly to understand it properly – and it’s another excellent “hold back your spending” technique to go along with others such as the Power of 10-1-1-1-1.

But, I wouldn’t use it …

… now.

I may have – if I knew of it – before … but, not now.

You see, when I was concentrating mainly on MM101 (getting my financial house in order), this time value of money approach would make perfect sense, but now that I am transitioning from focusing mainly on MM201 (income and wealth acceleration) and MM301 (protecting my wealth) I think the idea doesn’t make great sense:

Picture 2

I ‘pay myself’ a notional salary of $250,000 a year – this is really a budget for now, as we get our financial house in order after a transition from business to retirement and from the USA to Australia – and have few, if any, ‘business expenses’.

But, for the sake of the calculator, I said that I worked about 20 hours a week on ‘work’ (business/investment projects), and probably spend another 5 hours a week in social activities related to this ‘work’.

Given all of that, the calculator says that my time is worth about $105 an hour … poppycock!

The test is: would I take a job, consulting activity, etc. that paid me $105 per hour? Of course not!

Would I spend time on an activity that could produce me $105 per hour passively? Probably … but, then I wouldn’t be working 20 hours a week to get it, so the calculator doesn’t work.

In other words: I ‘work’ 20 hours a week for (a) fun and (b) a potential future payback in the millions. So the calculator doesn’t work.

Secondly, if I work 40 hours (i.e. 2 weeks), I can afford $4k worth of goodies …. even I don’t buy $4k worth of consumer cr*p every 2 weeks, and on this calculation, I only have to ‘work’ for 30 weeks to buy a Ferrari … cool! Yet, right now, I don’t think I can really afford one 🙁

Thirdly, and this is for everybody, the calculator only takes into account work-related expenses; it should really also take into account your living expenses, as well … in other words how many hours of work WILL you have to put into saving up enough to pay for that thing that you are considering buying?

If none of this makes sense, here’s some more white noise for you 🙂

I hate budgeting … so, I’ve only ever tracked my expenses once!

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No Budget BudgetThat’s why I was so  excited a number of years ago (very early on in my Financial Re-birthing Process] to come across John Burley’s ‘No Budget Budget’.

For those who don’t know him, John Burley is a financial spruiker (originally, on the subject of ‘wraps’ for real-estate … something that I have never tried myself, so something that I can’t really comment on); after hearing him speak, I tracked down one of his courses that covered basic financial improvement “in 31 Days” …

… I don’t think I ever got past Day 1 or Day 2, but I’m really glad that I tried his ‘no budget budget’. It’s the ONLY personal budget that I have ever tried (and, don’t even get me started on the subject of business budgeting!).

Basically, the process consists of writing down every single dime that you spend (cash, check, credit) for a month. That’s it!

When I was cleaning out the house for ‘our big move’ recently, I found the actual budget that I had put together … it spans all of 3 pages (part of page 1 is scanned and reproduced here); a small ‘price’ to pay for financial freedom 🙂

Here’s how it works:

1. Grab a blank sheet of paper and a pen (actually, a little pocket notepad and pencil is ideal … but I kept a folded sheet of paper in my pocket and my wife kept a little notebook and pencil in her purse and every night she would tear the page out that she used and give it to me to add to my sheet).

2. EVERY DAY FOR EXACTLY ONE MONTH [AJC: you don’t have to start on the first day of the month; any day – like TODAY – will do] I wrote on that sheet of paper:

– The Date (each day I started a new section on the piece of paper … when you try this, you should be able to fit a week or so on each sheet)

– What we bought (e.g. lunch; drink; bread; newspaper) … we did this for every single purchase!

– Who bought it (A for me; S for my wife; I guess we would also need to add Ad and Ta for our children if we were starting this No Budget Budget now)

– How much it cost (inc. taxes etc)

– How we paid …. we used a simple system eg Cash, Visa, Check

That’s it; one month …

Also, we added a new ‘last day’ of the month, so that we could write in 1/12 of any annual expenses (eg insurance) whether paid for in that month or not.

You can see that we did this in Australia 9 years ago [AJC: the date 1st Feb, 2000 is written as 1.2.00 in Australia]

You can also see that we were mainly a ‘cash society’ back then as only the haircut (mine) was paid by Visa [AJC: at $28 back then, I must have had WAY more hair than I do now] …

So, we simply kept a log of all of our spending for each day, in exactly the same way that we did for Feb 1 for the whole month … of course, Feb is a dumb month to choose, because it’s the shortest.

I can’t find the summary page, but I recall it being something like $1,000 a month that we were spending then.

That tells you what you’re spending … now, compare that to what you’re earning (after tax):

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
Charles Dickens, David Copperfield, 1849
English novelist (1812 – 1870)

This worked for us, and we never bothered doing it again; didn’t see the need … now, tell me about your experiences with Budgets (or No Budgets) 🙂

The Power of 10-10-10

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10-10-10Suzy Welch, in her new book of the same name, calls 10-10-10 “a life-transforming idea” …

… I don’t know about ‘life-transforming’ but, it’s definitely a simple-yet-powerful decision-making process.

Suzy says:

I call it 10-10-10.

Here’s how it works. Every time I find myself in a situation where there appears to be no solution that will make everyone happy, I ask myself three questions:

What are the consequences of my decision in 10 minutes?

In 10 months?

And in 10 years?

The answers usually tell me what I need to know not only to make the most reasoned move but to explain my choice to the family members, friends, or coworkers who will feel its impact.

I can definitely see how these questions could apply to personal finance: before you make your next major financial decision, take some time out to ask yourself how that decision to [insert financial decision of choice: buy, sell, finance, change, etc.] could affect your life in 10 minutes / 10 months / 10 years.

Chances are that you will change your mind 🙂

Tomorrow, I’ll show you an even more powerful idea that will go hand-in-hand with 10-10-10 to “totally transform” your personal spending habits …