To Save or To Pay?

A lot of personal finance "experts" insist that you start saving for retirement right now so that interest you earn will be compounded until you actually reach retirement age. This makes sense when you look at the magical properties of compound interest over the course of a lifetime. It doesn't make sense, however, if you currently have debt with higher interest than your investments.

Should I do both?

Not really. If you have credit card, loan consolidation, automobile, or any other debt with higher interest rates than your investments you should stop saving until you get that debt paid off.

What about the money I've already saved?

I'd recommend you keep enough in savings to take care of any emergencies ($1000 - $1500) and use the rest to pay down your debt. It just doesn't make sense to have money sitting in the bank earning 3, 4, even 5% interest if you have debt that's costing you higher. Pay off the debt. It's costing you.

Find the Best Savings Rates

There are several online tools available that you can use to find the best checking and savings interest rates online or in your area. Tools like BankRate.com, MSN Money, and Interest.com all offer up essentially the same information, so it shouldn't matter which one you use, right? Wrong. Today I'm going to outline the key features of each of these tools to help you decide which one is right for you.

BankRate.com has a nice and simple user interface. Pick the type of account you're looking for (checking or savings) and answer three simple questions (state, city, initial deposit) and you're taken directly to the results sorted by annual percentage rate (APY).

The results listing offers plenty of useful information including introductory rates, compounding methods, minimum balances, and fees. The results also include how high a balance you need to keep to avoid fees altogether.

The flashy advertising and "Web 2.0" features make some of the pages load a little slow.

MSN Money is the easiest to use of the three options, but unfortunately it is also the least useful. Once you select the type of account from checking, savings, CDs, and money market you're taken directly to the results page.

The results appear to be a selection of banks that advertise with MSN. You don't have the option of choosing your state, city, or zip code, so you can't narrow the search to banks in your area. The only information given is the APY, minimum balance, and contact information (in case you're somehow moved to immediate action).

I'm not sure why, but I expected a lot better from MSN. Maybe because some of the other tools and articles on MSN Money are really excellent. It just makes me wonder who put this mess together.

Interest.com gives you essentially the same tools as BankRate.com. There are options to select state, city, and the type of account you're shopping for. The information summary gives you most of the same key pieces of data as well. The thing I like most about the site is their lack of flashy advertising. It makes the pages load faster, and only shows me information I need, making the page seem less cluttered.

I'm going to declare Interest.com the winner for their superior range of selection and information summary. BankRate.com comes in a close second, but MSN Money isn't even worth bothering with for tools in this category (I won't even waste another link on them).

Do you have any online financial tools that you couldn't live without? Leave a comment for me and my readers.

The $7 Scam

I've seen a lot of bloggers recently promoting something called The $7 Secret Report (non-referral link). Don't click any links on that site or send any money to anyone until you come back here to read why it's a scam. Back already? Good. Read on.

The site is promoting a report that claims to show you how you can make thousands of dollars a month by selling information reports on your Web site or blog. The author of the report will share his money-making secrets with you if you send him $7 via Paypal.

This reminds me of an old newspaper want-ad scam that's so old that your grandparents might remember it. I place an ad in the paper claiming that I know how to get rich, and I'll share my secret with you if you send $1 and a SASE (self-addressed, stamped envelope, for those of you born in the electronic age) to my P.O. box (Post Office box, as in snail mail). When you send me a dollar, I send you a letter instructing you to place an ad in the newspaper, just like I did, because lots of suckers will send you a dollar just like the one you sent to me.

If anyone is still unsure of how the $7 Secret scam works, just send $6 via Paypal to dproberts.blog@gmail.com. I'll explain the whole thing in detail.

Cut Your Monthly Food Bill

A recent Fortune magazine article revealed that "fast-food patrons have upped their monthly visits from 14 in 1999 to 17 [in 2006]" on average, nationwide.

Want to hear a quick way to cut your monthly food bill? (Not to mention your waistline, cholesterol, and risk of heart attack. But this is a financial blog, not a health blog.) Learn how to cook!

I went down to a local drive-thru to do a little "research". Here are the numbers:

17 visits per month * $4.50 (average) cost per value meal = $76.50 per person per month

That's a lot of money to be tossing down the hatch. Cut that down to twice-weekly visits and you could save $49.50 per person per month. Almost $200.00 for a family of four. You could almost feed that same family of four for the entire month on the savings alone.

How far should you drive to buy gas?

The short answer? Not very far.

With the price of a gallon of gasoline reaching an all time high recently, a lot of people are using online services like gasbuddy.com to find the cheapest price in their area. The question is, how far out of your way should you drive to save a few cents per gallon? Figuring this out is really quite simple, considering there are only a few variables involved.

For starters, let's consider how many gallons of gas you actually buy when you go to the pump. Typically, I buy around twelve gallons in my economy-sized car. (This may seem quite low to those of you driving SUVs, but if you're driving one of those gas-guzzlers you probably stopped reading this already.) If I can drive across town to save $0.10 per gallon, I'm only saving $1.20. Considering that the distance across town is about 10 miles, my car gets about 30 miles per gallon, and a gallon of gas is hovering around $3.40 per gallon, I'm really not saving anything at all. Once you factor in the time it takes to drive across town and back, It's really not worth the effort.

So, here are the two formulas you need. One is used to calculate your savings and the other is used to calculate your cost.

Savings = (Regular Price/gallon - Discount Price/gallon) * gallons purchased

Cost = Discount Price/gallon * (miles travelled / MPG)

where MPG is your car's estimated fuel efficiency (miles per gallon).

After you use these two formulas subtract the Cost from the Savings. If the difference isn't negative this is your real savings. You decide if this amount is worth your time.

My advice? Fill up on the way to work. Driving even a mile or two out of your way to save pennies per gallon isn't worth your time or effort.

5 Tips for saving $$$ at the gas pump.

Lower octane. Higher octane fuels don't do a thing for your fuel economy. Don't get fished in by oil companies' insistence that you get better performance with higher octane fuels, either. The performance gains are slight. Besides, are you driving to work or trying to lap Kurt Busch?

Check your tires. Under-inflated tires make more surface contact with the road, and so offer more resistance to your engine. Driving around on under-inflated tires can impact your fuel efficiency by as much as 15%. Carry a tire gauge in your glove box and check your tire pressure about once a month.

Replace your air-filter. Your car's air-filter gets clogged with road dirt, dust, and bugs. Sucking air through that mess makes your engine work harder. You can save a few bucks on labor if you buy the filter at an auto parts store and replace the filter yourself.

Regular maintenance. Your engine won't seize up if you go over 3,000 miles without an oil change, but your fuel efficiency will certainly start to degrade. I recommend you get to know how to change your own oil. It only takes about 15 minutes and you can save up to $100/year on labor.

Slow down! The simplest advice is usually the best advice. You might have heard that those studies on fuel economy done in the 1970's (that led to the national 55 MPH speed limit) don't apply to today's cars. Well, they do. No amount of German engineering can overcome the law of conservation of energy. Your car weighs a ton or more. It takes a certain amount of energy to propel your car 60 MPH. It takes more energy to propel your car faster.


2 bonus ways to save.

Carpool. The benefits of carpooling are often overlooked. Check with your employer's HR department to find out if they can set you up with a group in your neighborhood.

Buy a scooter. Motorcycles and hybrid vehicles certainly save on gas, but they're expensive. The point isn't just to save gas, but to save money. You can add a scooter to your family fleet for under $1000 (visit www.halfpricescooters.com for details). If you have a short commute and don't mind looking a little nerdy, consider the 100 MPG benefit of scooter travel. The downside? I wouldn't even consider driving one of these on the highway.


Have I overlooked any great ways to save at the pump? Leave a comment and let us know.

Credit Arbitrage

Put those 0%-interest credit card offers to work for you.

For the past couple of years I've been "financing" my college tuition and books with a series of 0% credit card offers. Once the 0% introductory rate runs out I transfer the balance to my next financier. All along I paid as much as I could afford each month to keep the principal low. Using this method I've gotten through a four year program without accruing much debt and without paying any interest. More importantly, since I've kept up with payments, my credit score has gotten very high (around 740) and I've built up a lot of unused credit. Now that I've graduated it's time to put some of that credit to work.

What is arbitrage?

Arbitrage is practice of taking advantage of price differences in different markets by simultaneously buying and selling commodities in the two markets. In layman's terms, arbitrage is buying low and selling high at the same time. It can be done with literally anything, but the term is typically associated with currencies, stocks, commodity goods, and interest rates.

Interest rates? How do you buy and sell interest rates?

Interest rate arbitrage is when you borrow money at one (low) interest rate and invest the same money at a higher interest rate. Sound familiar? Banks do it all the time. Think about the rates you're paying on your home loan and compare them to the interest you're earning on your savings. Even if you've done your homework and gotten really great rates on both, odds are that there are a couple of percentage points between the two.

How do I do that?

All you need is a low interest loan and a high interest investment opportunity. The key here is that the interest rate of the investment only needs to be high in relation to the interest rate of loan. If you're equipped with a mailbox, you've probably gotten at least one 0%-interest loan offer in the past week. You probably threw it in the trash. You might have even taken the extra step of shredding it first. If you can get a 0% loan, you can make a tidy profit from the interest on your savings or money market account.

What to look for.

You want the lowest rate loan over the longest period of time that you can find. Typically, credit card companies send out offers for 0% interest that are good for 6 months to a year. You don't want to pay a cash advance fee. Call your current credit card company to find out if they have balance transfer and cash advance fees.

You also need the highest rate, safest investment you can find. I recommend a savings or money market account from a local credit union. They typically offer slightly better rates than national banks, and have accounts with low or no fees. Ideally, you want an account with high interest, no fees, and free, automatic (or online) payments.

What to look out for.

You have to be careful which loan offers you choose. Some of them come with a cash advance fee, or in the case of "convenience" checks, a transfer rate of their own. Avoid these. If you have to pay a 3% transaction fee to use a convenience check from your bank or credit card company, shred the offer. The tiny profit you make on the investment won't be worth your time.

Even worse is the cash advance fee. Credit card companies often charge as much as 20% on cash advances. Needles to say, you can't use one of those cards. Find an offer with 0% balance transfer or 0% cash advance fee before you begin.

What to do.

• Once you've been approved for the loan or line of credit, deposit the amount of the loan into your savings account.


• If your bank has free automatic bill pay, set it up to automatically pay the minimum payment amount every month to your lender.


• If you can't make automatic payments, make yourself a schedule to make online payments. Stick to the schedule!


• Pay the loan back before the introductory interest rate is due to expire. If you wait until the interest rate of the loan spikes up to its normal rate, you could wipe out any profits you made on the deal.

What NOT to do.

• Don't deposit the full amount of the loan or line of credit. Particularly if the offer is from a credit card company. The penalty for accidentally going over the credit limit will more than wipe out any profits. I recommend staying well below (10% or $500, whichever is greater) the limit.


• Don't miss a payment. Again, the penalty will be severe. Use automatic payments if they're available.


• Don't miss the deadline. I know it's tempting to try and squeeze every last dollar of profit from your bank, but don't do it. Pay off the loan at least two weeks before the bank's deadline. Making one month's interest payment at their regular rates will seriously impact your profits.


• Don't spend a penny of the money you borrowed. It can be tempting to spend a little of the money sitting in your bank account. Don't. Not only will you miss out on the interest it would have earned, the funds won't be available to pay back the loan once the higher interest rates kick in.
  


• Don't invest borrowed money in the stock market. It can be tempting to risk someone else's money on a higher rate of return. Don't do it. You may get a higher rate of return, but you're trading away security. You also need to keep that money liquid enough to make the monthly payments, and to pay off the loan when it comes due.
  

When should you not borrow?

Like any financial advice you get for free, you have to apply a little common sense. You shouldn't borrow against your credit if you already have credit card debt. You can use balance transfers to help you pay off debt you already have (like I'm doing), but pay off debt first. It doesn't make any sense to earn 5.25% interest on a money market account while paying 18.99% on a credit card. Pay it off.

I also wouldn't advise charging up a large debt if you plan to make a major purchase soon. You want to give your credit score 3-6 months to recover before buying a house or a car (or even a computer or major appliance for your home).

Finding Offers.

Check your mail. If you haven't filed for bankruptcy recently you have plenty of offers to choose from. (If you have filed for bankruptcy recently, stop reading this and pretend you never heard of it.)

CardTrak keeps an up to date listing of low-rate, no-fee credit card offers. Make sure you read the fine print. Look for offers with no balance transfer or cash advance fee.

Your own local bank or credit union is your best bet for setting up an investment account. MSN Money has an online tool for finding good rates on savings and money market accounts in your local area.