Category — Saving Money

First, I know many people will point out sites like The Pirate Bay as a source of “cheap” music, but this post is for those of us that don’t mind paying for music. I have been downloading music for the past few years (legally of course!), but nothing beats the quality of a CD.

One of the worst places to buy music is through the iTunes music store. At 99 cents a piece, music can get really expensive quickly. One example, about a year ago I purchased the John Mellencamp iTunes essentials for about $25, which was 25 of his top hits. One year later I decided to purchase the ‘Words and Music” greatest hits collection on sale from the BMG music service, for only $8, which included shipping fees. This album has 35 tracks, which included almost all of the iTunes essentials and then some. On top of that, I now have a CD quality copy of the music, as well as the liner notes and the physical backup CD. My CD is also free of the DRM restrictions of the iTunes version.

Obviously BMG is a place I like to buy CD’s from. The initial deal is pretty good, allowing you to get 12 CD’s for about $50, working out to under $5 a CD. BMG has a great selection of music if you like older stuff. Most of the new music are considered “premium titles” and don’t qualify for sales. The DVD Talk forums have a thread that posts the newest sales codes, so if you are a BMG member that is the place to go for deals. About once a month you can find either a buy 1 get 4 free sale code or a buy 5 and get 55% off and free shipping code. Either of those are a great way to get CD’s on the cheap.

A recent sale at BMG had box sets for under $10 for most sets. I picked up the John Coltrane Quartet’s complete recordings, and 8 CD set, for only $12. That also included free shipping. Another code, courtesy of DVD talk, added four free CD’s with free shipping. So if you are smart about your purchases and timing, you can get some great deals.

Another place I like to look for albums is the local music store, which sells used CD’s. Almost all CD’s are under $10, which is what you’d pay at the iTunes music store. Again, the difference is that now you have a CD quality copy versus the iTunes version, which typically comes with low bit-rate and DRM protection. A few months ago I found the Godzilla soundtrack, which has one of my favorite Rage Against The Machine songs (No Shelter), for only $1.99. It also has songs from bands like Ben Folds Five and The Wallflowers. The biggest downside to buying used is trying to find what you’re looking for. You have to be willing to look around if what you want is not very popular, and be willing to wait if it’s not available. Newer CD’s can be difficult to find, but not impossible. Many people buy new albums and decide they don’t like them, so they sell it back before the resale value goes down.

Those are the two main ways I get new music. I have been considering buying used albums off Amazon, but unlike the local record store I can’t physically inspect the disc for scratches before I buy. Supposedly the Amazon mp3 download service is good too, and is free of DRM restrictions. But I have yet to try it since I can usually find higher quality CD’s for the same price or less. The big upside of download services such as iTunes and Amazon is their huge library, as well as being able to download a single song versus having to buy the entire album. There are many more places to get music that I haven’t tried, but if I ever find more good ones I’ll be sure to add them here. If anyone has any suggestions, please feel free to leave a comment!

This post is part of the financial basics series.

How often do you see advertisements saying $19.95 a month? How often have you thought to yourself that you could “afford” a new car since the lease payments are only $299 a month? Did you eye that new Macbook Air and think it could be yours for only $100 a month? If so you’re not alone. According to Bankrate.com, the average credit card debt is $8400 per person. On top of that, PBS estimates that there are roughly 641 million credit cards in circulation. That’s a lot of plastic.

Buying on credit is a dangerous game, especially when you start thinking in terms of monthly payments. What happens if you can’t make the payments one month? What would you do if you lost your job and couldn’t make the payments anymore?

How do you break out of that cycle?

What if instead of paying $100 a month to finance a new laptop computer, or $300 a month for a new car, you managed to break the credit cycle, and instead started saving for the things you wanted? What if instead of paying interest, you could begin to earn interest? If you could do this, you would be able to start affording a lot more stuff. It will take some time, yes. And discipline. But I promise the results will be worth it.

Setup sub-accounts with ING Direct

There are many online banks that offer higher interest rates than ING Direct, but I have never used any of them. I have been a customer of ING since March of 2004, and have had nothing but great customer service from them. I don’t have any experience with other online banks, so I don’t know if they have similar features. But if you’re looking for an online bank I can highly recommend ING Direct as a safe, FDIC-insured option.

One of my favorite features of ING is the ability to create sub-accounts. A sub-account is basically a separate savings account, each with its own account number, underneath your customer number. Using sub-accounts is a great way to budget and visually separate your money to more easily reach your goals. Every time you log in to your ING account, the main page will list all of your accounts for easy maintenance.

To open a new sub-account, simply log into your account, and click on the open new account button on the left-side menu. Choose to open a new Orange Savings account (click on the Open Now button), enter the account nickname, choose your existing savings account, put a few dollars in your new account, and then hit continue. Confirm that everything is correct, and then click “Open Account.” The whole process only takes a few minutes and shouldn’t present any problems.

Making use of your new sub-accounts

Now that you know how to open a sub-account, you need to know what to do with them. First, think of the things you would like to begin saving for, the typical things people put on credit cards or go into debt over. A few examples might be a new computer, vacations, clothing, or even Christmas gifts. Don’t forget big purchases like a car. Imagine if you bought all of these on credit. You would have a car loan and a credit card that you bought your computer with. You might have another credit card that you use to buy your clothes and gifts with, and yet another card that you used to go on a trip to Hawaii. Opening a few savings accounts that are all available in one place doesn’t seem so bad now, does it?

Consider again the things you would seriously like to save for, and open an account for each one. If you plan on buying a new computer every two years, open a computer savings account for example. Combing goals is also an option. For instance I only go clothes shopping once or twice a year, and I only buy Christmas gifts once a year. So I created one account, and named it Clothing and Gifts. Think of these accounts as your new debt payments, only now you’re the lender and you’re in control.

Once these accounts are open, you need to start thinking about how much you’re going to need total, and from that figure out how much you will need to contribute monthly. Let’s look at the new computer fund. Suppose you want to buy a new laptop computer every three years, along with a few accessories like a new external hard drive or new software. First factor in the actual cost of the laptop, say $2000. On top of the $2k you want to get a protection plan and upgraded ram. This might add another $500, bringing your total to $2500. Don’t forget to add sales tax! Including tax and the software you think you might buy, suppose your total number comes out to $3,000. So over the course of 3 years you will need to save roughly $83.33 a month to meet this goal. By the time you save that much money, you will actually have more than $3k, since you will be earning interest on the money while it sits in your account. I will talk about how you can use this to your advantage in another post, but for now just think of it as compensation for your hard work (but try not to spend it!)

One trick I like to use, when naming your account, put the amount of money you would like to save next to the name. So the computer fund for example, would have the nickname “Computer Fund 3000.” I know that sounds like the name of a bad science fiction movie, but seeing that goal every month, and seeing the balance get a little bit closer to that goal every month, will provide you with the motivation to keep saving for that goal.

Don’t forget to start an emergency fund!

The number one sub-account you absolutely need is an emergency fund. This is going to be your shelter from the storm, your rudder keeping you steady when the water gets rough. This account will be used for emergency expenses, like unexpected car maintenance costs or medical bills, sos you don’t have to pull out the credit card. Buying a new shirt to impress your date Friday night is not an emergency, so be careful not to use the account frivolously.

Final thoughts

Using the sub-account feature is a great way for you to budget for your goals, and to budget for annual expenses like Christmas or your kid’s birthday. But when you’re just starting out, don’t over do it. Building up a small emergency fund should always be first on your list. After that it’s important for you to pay off all of your current debt before you start trying to save a major amount of money. It wouldn’t make much sense to save for a new car when you haven’t even paid off your current one.

Using ING you can set up an automatic withdrawal every month or every paycheck, giving you an easy way for you to fund your accounts. Don’t forget to budget those withdrawals, or you might spend that money and get hit with overdrafts. Now go open those accounts!

Have you ever noticed that when you look back on products you once thought were awesome, many of them seem not that great anymore? Often times something you covet (or something you bought) is replaced by something better. It’s not that what was there before is bad, it’s just that by comparison it’s not as great. Computers are a prime example, computing power becomes much cheaper every year. But this is true for many things. For cars, a new model with drastically different features or a redesigned engine with more power can quickly change your opinion of the car you recently loved.

I really started to consider this comparison effect today while reading the tech news. I have been thinking about buying a new digital camera for a few months now, and am slowly saving up enough to purchase a fancy new dSLR. I had been eyeing the Nikon D40, Nikon’s entry level dSLR camera which has steadily been coming down in price. But today I read that Nikon would be releasing the D60 as the new entry level camera. This should be great news for anyone looking to buy a D40, as the price will likely come down. But now I find myself thinking about buying the new, and likely more expensive, D60 instead. It’s not that I don’t like the D40 anymore, the D60 just seems to have enough features to justify its higher price.

But this reasoning can quickly and easily lead to an escalation of costs. The next camera in the lineup is only a few hundred higher and has useful features too, so why not buy that one instead? But what stop there when I could spend just a little bit more and get the much better Nikon D200? Or the D300? Many people can see the faulty line of reasoning here, since you simply set a budget and buy what fits. But when you have a huge credit line, it’s easy for that budget line to creep higher and higher.

This is where savings and buying with cash come in. By saving the money to buy the camera I will buy only as much as I can actually afford, instead of justifying a bigger purchase with credit. This is almost always a good plan for buying anything, from a new car (or a used car) to electronics to clothes.

So how do you manage purchasing new tech gadgets? Is it always cheaper to stay one upgrade cycle behind? Or is it ever worth buying the latest and greatest? And how often is it appropriate to upgrade to something better?

This post is part of the financial basics series.

Once you’ve created your spending plan, the next step is to start an emergency fund. At this point it doesn’t have to be huge. $1000 is a good goal for for most people, but you may want to adjust that amount upwards if you live in a high cost of living area such as New York or the San Francisco Bay Area like your truly.
Creating an emergency fund is important for a few reasons. Number one, it is important for peace of mind. Number two, it helps to keep you from charging up more debt. For most people living paycheck to paycheck, random unexpected expenses like emergency car repairs can break a budget like nothing else. This is where the emergency fund comes in. Not having to put expenses on a credit card is a great feeling. And peace of mind is a feeling that no material possession can truly replicate.

But where should I keep this money?

If you’re thinking about saving that money in an ordinary bank savings account, stop that thought right now. Most banks offer atrociously low interest rates to their savers. A much better solution is to keep the cash under your mattress. Just kidding. The best option for saving money that you need to remain both liquid and risk-free is to open an online savings account somewhere like ING Direct, Emigrant Direct, or HSBC online. The only online bank that I have used is ING Direct, and I highly recommend them for the ease of opening a new account and their reputation. The other banks do offer slightly higher interest rates, so they may be worth looking into as well.

One side note, many banks have incentives, ING Direct for instance has a referral program that gives you $25 if you open an account with $250 (although there’s no minimum if you don’t have $250). So if you know someone that banks with them, ask for a referral link to see if you can get some extra cash in your account for free.

Opening an online account has two large benefits. The first is the boost from the higher interest rate. Although rates are relatively lower now after the fed rate cut, when rates go back up the online banks are quick to increase the savings rate. The second benefit for many people is having an account that is one step removed from your checking account, meaning you will have to wait a few days before you can use the money. This should help to eliminate at least some of the impulse spending, and will make it harder for you to use it in a non emergency.

Funding

Once you have your spending plan created and online account funded, you need to fund it. Any extra money in your budget should go to funding this account while you make the minimum payments on any debt. Then you can proceed with debt payoff, which we will discuss sometime soon.

Creating an automatic withdrawal into your emergency fund is important. This automation is what will help you reach you financial goals. Two options are to either create an auto debit through the bank, or to have part of your paycheck deposited directly into your savings account. I prefer the later approach since it makes keeping a check register that much easier, since the money never actually goes into or out of my checking account. It is also nice because you don’t feel like you’re losing money every month, since you never see it come into your spending account.

Next Steps

Once you have reached your goal amount, it is time to pay off debt. There are differing opinions on whether you should continue to fund the account while you’re trying to pay debt off. Personally I think it’s worthwhile to keep the auto withdrawal going into your savings. Seeing your money grow is a great feeling.

Once you become debt free, the next step is to build up a true emergency fund. This fund is one that could see you through months of no job or cover you in a major financial crisis. A good rule of thumb is 3-6 months salary. This can take a long time, but it is an important step to become free from money. Once you know that you can sustain your living for half a year without a job, the burden of living paycheck to paycheck becomes smaller. If you want to pursue a new, higher paying job, the opportunity is out there.

So what are you waiting for? Opening an online savings account is the first step. Do it now! Then start making whatever contributions you can to it, and before you know if the money will be there.

Almost one year ago my Wife and I moved from San Diego to the Bay Area to be closer to our friends and family. While we were looking for a place to live we stayed with my Wife’s parents, who at the time didn’t have cable. For the two months we lived there we realized we didn’t miss watching television, so when we moved out and got a place of our own, we decided to skip getting cable. So now we are hitting the one-year mark without cable, and all is well.

There were a few tricks that helped us make the transition to a cable free world:

1. Netflix. Our Netflix.com subscription runs $15 a month and gets us 2 movies at a time. We can watch them over the weekend, return them on Monday, and get two new movies by the next weekend. This also saves us a ton of money versus renting movies at the local Hollywood Video, where movies run about $4 each. Netflix also introduced a new ‘watch now’ feature which allows you to play movies over your computer. I have my old PC hooked up to our television, so we can watch a few hours of movies a month that way as well. In addition to movies, Netflix also rents T.V. shows that have been released on DVD, as well as many documentaries shown on National Geographic or the History Channel. So that is another bonus

2. Major broadcast networks put there shows online. The best site by far is ABC, who has a handy viewer that even has HD quality shows. My wife often watches her favorite shows while I play video games, which of course is another way to fill some downtime.

3. Exercise. You get home from work, cook dinner, and sit down in front of the television to eat. After you’re done eating, getting up again to workout is now that much harder. So not having cable has helped us to exercise more, and of course getting out to exercise keeps us busy, so we don’t miss sitting in front of the T.V. every night.

In San Diego we paid about $35 a month for cable, so over the course of a year not paying for cable has saved us $420. It has also given us more reason to get out and exercise at night, more time to watch movies and documentaries, and we still are able to watch most of our favorite shows online. With all of those positives, I can’t see us signing up for cable again anytime soon.