Archive for the 'Saving and Investing' Category
My credit card balance is $41,654.02.
I charge everything that I can to it.
I make the minimum monthly payments.
This behavior has resulted in at least $600 in profit to me over the last year — just in interest payments alone.
Confused? Let me start over. Last year, ScrapperMom and I decided to open a 529 plan for our daughter. We knew that we would not be able to contribute much to the plan from our monthly spending plan, so we went looking for a rewards credit card that would allow us to earn cash to fund this account. We decided on the Chase Freedom card which gives us at least 1% cash back for everything that we buy. In addition to the interest earnings, we have earned $750 dollars (and we’re closing in on $1000) from the cash bank bonus on the card.
I applied for the card, and it arrived with a fantastic offer: 0% interest on balance transfers and purchases for one full year. Perfect, I thought, what better way to make even more money. We started using the card to buy everything that we could: groceries, fuel for the cars, dog food, insurance payments, DirecTV, Netflix, and anything else that was in our spending plan and accepted credit. Each month when the bill came due, I would make the minimum payment, and transfer the difference in the balance to our high interest earning money market account with Everbank.
Little by little the balance rose and as it did, the interest payment at the end of the month got larger and larger. The unfortunate part is that interest rates fell pretty steadily all year, so the larger and larger balance each month ended up netting about the same amount in interest every month.
When we started this arbitrage experiment, I felt that we were ready to get our feet wet on the right side of the Credit Card Continuum. We had been through the other phases already: in debt up to our eyeballs, swearing off credit cards as evil and unnecessary, slow digging out and becoming disciplined, and now it was time to get a little back from the credit card companies. So for the past year, each month we have simply borrowed a little more money from the credit card company at no cost, and put that money to work for us collecting interest.
Interestingly, about halfway through the year we were pushing up against our credit limit on the card. So after having made nothing but minimum payments for 6 months and approaching our credit limit, I simply asked through the webpage for an increase in our credit limit and got one large enough to cover us for the rest of the year. Aren’t credit card companies great? On top of that, I got a letter a few weeks ago indicating that Chase is switching our account to one that has no pre-set spending limit. I’ll talk more about that in a future article…
Next month the free ride comes to an end and we will have to set up the largest online billpay total we have made. It’s a little disappointing to have to see this balance get wiped out all at once. I have investigated the possibility of rolling the balance to another 0% offer somewhere to keep the arbitrage going, but I have been unable to cobble together enough credit to do so. So we’ll reset the counter, and possibly even apply for another Freedom card in ScrapperMom’s name. We’re rookies at credit card arbitrage, so maybe by next year we’ll be in a better position.
What do you think? Do you practice credit card arbitrage? Do you think it’s risky, smart, or does it simply depend on the person?
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In the time-is-money category, I have discovered that Google Reader works quite nicely on my mobile phone. After going away for 4 days in June, I found that I was very far behind on my RSS feeds from other blogs. I tried the reader on my phone and sure enough it works great. Now when I’m taking the dogs out, waiting in line, waiting for this or that, I can fire up Google Reader Mobile and catch up on my feeds.
With that in mind, you may notice that I have installed a few new plug-ins here at Don’t Feed the Alligators.
- The first new plug-in is one that renders the blog into a format suitable for mobile devices. This plug-in should even automatically detect that you are using a mobile device and render the articles appropriately.
- I have also added a “Related Links” section to the bottom of each article so that if you like what you read, you can see what else I have written that’s similar.
- Lastly, I have added a plug-in that prevents links that I put into my articles that point to other articles that I have written from creating trackbacks. This has mostly an administrative use, but prevents it from looking like my blog has lots of comments when mostly it has very few (hint, hint…).
Here’s a sampling of some of the other articles and conversations that I have enjoyed over the last couple of weeks:
- Nickel exposes the safest online banks. Clearly this list is not all inclusive since the bank we use, EverBank, is not in this list, but is an online bank and scores a solid 3. But the point here is to make your way over to Bankrate.com (again…) and check out the rating for your bank. This was how I found out that my former bank, NetBank, was about to fail.
- Nickel also makes an excellent point about making sure to keep up with maintenance items before they end up costing you even more.
- Jeremy writes about the fears that many investors have when the market goes into a slump. He cautions about keeping things in perspective and making sure that you don’t miss the inevitable upswing. I personally like to watch the growth in the number of shares that I own, rather than their worth, because the worth of a stock only matters when you sell it.
- JD has a great article on the difference between a career and a job. I bounced through a string of seemingly disconnected “jobs” early in my “career” and then hit on my current job which relies a great deal on the skills that I acquired collectively at each of those disconnected jobs.
- JD also writes about the reasons to invest in index funds. This is not an uncommon topic in Personal Finance Blog circles, but certainly bears repeating again.
"Some people complain that an index fund dooms you to mediocre
investment returns. “Absolutely not,” Bernstein replies. “It virtually
guarantees you superior performance. Over the typical ten-year period,
most money managers would kill for index-matching returns.”"
- Lastly, Madison posts her reply to a request from a friend to figure out how to get out of debt. See the top 7 answers from her readers here.
Hope you had a nice weekend!
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Just about a year ago, ScrapperMom and I decided that we had reached the right end of the Credit Card Contiuum and that it was time to start earning some rewards for buying all of the things that we buy or pay for on a monthly or yearly basis anyway. We went in search of a rewards credit card.
Rewards credit cards come in many different flavors. There are air miles cards, new car purchase cards, free gas cards, free coffee cards, cash back cards, and even dedicated 529 earnings cards. ScrapperMom and I decided that since we could not afford to contribute anything specifically to our daughter’s 529 plan that we would look for a card that would allow us to earn money for her account.
One might think that since we wanted rewards to fund a 529 account, that we would choose one of the 529 rewards credit cards that are available. Unfortunately, the few 529 rewards cards out there have terms that are worse than those available from some other cards. For example, one card we looked at has a limit of $300 in earnings per year. Our goal was to put as many of our purchases as possible on the card, and knew that we would easily exceed the $300 limit. Another card we looked at was linked to a specific 529 plan that did not fit our criteria for such a plan.
Instead, it made more sense for us to apply for a cash back credit card. There are a lot of cash back cards on the market, and they all have different terms. Using the credit card finder at Bankrate.com, we looked through many different cards. Some, like the American Express Blue card have different rates for different spending amounts. You have to spend a lot of money before the rates rise to a level on par with many of the other cards. Most of these cards offer around 1% cash back on all purchases and 3%-5% on certain types of purchases, like fuel, groceries, and fast food.
Ultimately, we chose the Chase Freedom Card. This card offers 1% cash back on all purchases as well as 3% cash back on things like groceries, fast food, and fuel purchases. You can redeem your cash whenever you accumulate $50 worth, but if you are patient then you can collect $200 and trade that for a $250 return (which brings the cash back bonus to about 1.25%). We can’t use this card for most of our big bills like our mortgage, car, and student loans, unfortunately, but we can use it on a lot of the small stuff like cell phones, satellite TV, Netflix, periodic insurance payments, etc.
In the past year, we have earned over $750 in rewards that we have applied to our daughter’s college savings. In a typical month, we earn about 75% of our points at the 1% level and the remainder at the 3% level. Since it only takes about 4 months to accumulate $200 worth of rewards, it’s worth our while to wait until that point to cash out the extra $50, since that’s a much better return than putting $50 per month into almost any investment.
Obviously the key to this whole plan hinges on spending within our spending plan. We pay this card off every month with money from our checking account. Again, we don’t use the card to spend on things that we would not otherwise have purchased. One splurge purchase can wipe out a year’s worth of rewards in no time at all.
Many people have difficulty handling credit cards, and I understand that. However, many others have aquired the self-discipline to be able to handle credit cards without breaking the budget. I believe that not using a rewards credit card for things that we are going to buy anyway is just leaving free money on the table. I have spent years giving the credit card companies my hard earned money, and now it’s time to redeem some of it.
Do you use a rewards credit card? What kind of rewards do you get? Do you find it worth it?
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Our daughter was born in early 2007. Knowing what I know about the power of compounding interest, I knew it was important to start a college savings fund early with something, even if it wasn’t much. We definitely subscribe to the belief that saving for retirement and debt reduction come first in the savings plan and that college savings has to take a back seat to these higher priority expenses. Still, it’s difficult to be a parent and not try to put something away for your kids.
With that in mind, we opened a 529 savings account for our daughter when she was almost a year old. A 529 plan is very much like a Roth IRA — except it’s for kids and their family and friends who are saving for their future college expenses. Money put into a 529 plan grows tax free, and withdrawals are tax free as well. 529 plans are administered by individual states, and some states also offer an income tax exemption on contributions made to your home state’s 529 plan. It’s interesting to note that many states now offer more than one plan.
With so many plans available, opening a 529 plan can be a daunting task. Luckily the folks over at SavingforCollege.com have made the task a bit more manageable with a search function to find the characteristics of a 529 plan that you want. We started with this list of wants:
- low fees — no point in having high fees eat up a large portion of the gains
- a variety of investment options — age based, index funds, etc.
- low startup costs — we wanted to be able to contribute small amounts at irregular intervals
- state tax exemption — your gains only get better if you can deduct the contributions on your state taxes
Another great resource at the time we set up the account was Nickel who did a lot of the homework for us. My search did seem to concur with his assessment. We got 3 out of 4 of our wishes in this search. Unfortunately our state does not have any kind of income tax exemption for contributions made to 529 plans.
We decided on the Ohio College Advantage Plan to get started. This plan offers very low contribution amounts at $15 per contribution. It offers a range of investment options including portfolio blends, index funds, CDs, age based funds, etc. Most of the fees for these options are low. The Vanguard options, for example, start with an expense ratio of 0.23%, and there are no other management fees of any kind.
One nice feature of 529 plans, however, is that you can generally switch from one plan to another with little trouble (the one great exception being after you just got a state tax exemption…). So it’s not only possible, but probably quite likely, that you may pick a plan today but change to a different plan at sometime in the future.
It took until nearly her first birthday, but we finally managed to open an account with $1,100 that we had saved over the course of her first year. Most of this was her money in the form of gifts that she had received. We have since made a couple of additional contributions. Our plan for the near term is to use the cash back from our Chase Freedom Card, as well as any additional birthday, Christmas, or any other kinds of gifts she receives (at least until she’s old enough to understand money…) to fund this account. We don’t expect it to grow like gangbusters, but we expect that every little bit that we are able to save will help. If we get to a point where we are saving 20% or more of our income for our retirement, then we will consider contributing more towards this 529 plan as a savings plan item.
For Part II of this article, we’ll look at Pre-Paid Tuition plans.
The cost of education is already scary, and it feels good to be contributing something to help our daughter’s future, even if it eventually amounts to just a drop in the bucket. Are you saving for your kids’ education(s)? How are you doing with it?
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The other day I got an email from our cell phone provider indicating that our latest bill was available for viewing online. I logged into our account and found that we were actually a month behind on our payment and now owed two months’ worth. Not a big deal, I thought — until I saw the late fee. My lack of attention to this bill cost us $5. Not a big deal in the grand scheme of things, but $5 here and $5 there can start to add up pretty quickly, especially when you consider what we might otherwise be doing with that money.
How did this happen? Every month I get an email from the cell phone provider reminding me that our bill is due soon. This is a great first step in making sure that bills get paid on time, and I applaud the cell phone provider for offering this service — especially when the upside of a late payment is an additional fee for them. I get similar reminders from a number of our other creditors, such as our mortgage company. Somehow, though, last month’s cell phone bill slipped through the cracks. And it’s not the first time that this has happened.
Most of our bills are paid via automatic billpay through our bank. This works great for bills that have the same payment due every month. However, for the last year we have been paying for everything that we can (that’s in our spending plan of course) on our Chase Freedom cash rewards card. This card offers 1% cash back on all purchases as well as 3% cash back on things like groceries, fast food, and fuel purchases. We can’t use this card for most of our big bills like our mortgage, car, and student loans, unfortunately, but we can use it on a lot of the small stuff like cell phones, satellite TV, Netflix, periodic insurance payments, etc.
Make it Automatic. David Bach’s book The Automatic Millionaire outlines the case for automating your finances as much as possible. We generally subscribe to this philosophy, but there are a few loose ends. While paying this overdue bill, I noticed an option to set up an automatic payment. For bills that have irregular payments due each month, I generally don’t like to have them get paid automatically because I like to review the bill to make sure that all the charges are correct. However, if the choice is between reviewing something that is correct the vast majority of the time for the cost of a $5 late fee, or paying on time, I’ll choose the on time option. Besides, I still have the option of reviewing the bill and clearing things up after the fact. So I went ahead and set up an automatic payment for this bill. I have done the same for many of my other accounts, such as satellite TV and Netflix.
The great part about all of this is that I also have an e-bill for my Freedom card through my bank’s billpay function. With the e-bill, I also have three options for automatically paying my credit card bill each month:
- A fixed monthly payment — useful for paying down a large balance to get out of debt
- A minimum monthly payment — useful when you are paying down other, higher interest credit cards while getting out of debt, or for exploiting a 0% interest on purchases offer (more on that in a future article…)
- A payment in full — useful for most people, most of the time
With these options, I can be sure that no matter what our cell phone bill is next month, the bill will get paid on time by our Freedom card, and the Freedom card bill will get paid on time via my bank’s e-bill feature in billpay. Voila! No more late fees.
Have you automated your finances yet? What techniques do you use to be sure that your bills are paid on time?
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photo figure credit: Brooke Novak
