A Spin of Cost

This week’s spin is on, cost cutting. Thanks, Jen. I’m not sure I’m really qualified to say what I’m doing to cut costs, because my costs are relatively few to begin with. Yes, I have student loans, a truck payment (but only three more), and credit cards. But I don’t have kids to send to daycare; I don’t have to commute daily; I don’t run errands on a weekly basis (try more like every month to three weeks). We raise our own beef. The ranch raises its own hay. There are costs associated with maintaining my horses such as feed, vet bills, supplements, etc. This summer to late fall I hope to have my newly purchased chicks laying eggs for me. And I’ll be gardening for fresh tomatoes, cucumbers, peppers (japs, banana, green and red bell).

So instead of telling you how I cut costs, I’m going to go back to my former life. Ok. Maybe not a former life, but a life before I was blessed enough to train and ride horses full time. A life where I was a licensed stock broker, sold life insurance and assisted an investment advisor in preparing his plans for his clients. I’m going to give you some of the common mistakes I saw people make with their money and maybe that will be helpful.

1. If you have an emergency fund set aside- of $2500 or more, please make sure that’s in a money market account, as opposed to a savings account like those at your bank. The bank is going to pay about .5, or half a percentage/basis point. A money market account, even in todays market is going to pay about 2.7 percentage points.

2. If you have that emergency fund, why is your deductible on your car/homeowners insurance set at $500? After all- isn’t that what your emergency fund is for? If you raise your deductable I’ve seen it save people $600/year. That is $600 that you could put into your 401k (if it’s not maxed out already) or $600 you could put back into your emergency fund (you should have around 3 months salary put away if possible) or-

3. Make sure that your SAHM has life insurance. Have you ever thought about what it would cost to replace the services of your wife (or SAHD) whichever the case may be? I heard countless people tell me- my wife doesn’t need life insurance. She stays home with the kids. Well, now dad- does she clean house, cook, pick the kids up from school, run the kids to extra-curricular activities, do the errands, do the grocery shopping? Do you know how much it costs to replace her services? Do you really? Think about it for a minute.

4. Do not pay extra on your home mortgage. I know that lots of people tell you to do that. But what I’ve seen is that people will pay extra on their home mortgage, while maintaining a balance of 20k on a credit card that sits at 11.9% (or more interest). If you have extra money laying around, to pay extra on your mortgage that’s parked at 6.5% for 30 years, which do you think should be paid off first? I’m not going to do the math here, but you should always pay off the highest interest bills FIRST since those will cost you the most money in the long run.

5. If you have extra, you should certainly considering opening a Roth IRA. That money is tax free (completley) at retirement. You don’t get to write off your investment to it each year like you do to a 401k or IRA or even an HSA- Health Savings Account (which we should all have to help cut costs if possible). Many Roth IRAs are now set up to let you hold Gold. You don’t have to just hold mutual funds anymore.

6. HSA- I think there are a lot of employers opening these now, but I have read you can set them up through some banks as well. What a Health Savings Account does, is allows you to set aside, before tax money- to pay for your co-pay, prescription co-pay, cough medicine, toothpaste, otc medicines, etc. You put this money away either monthly or at the beginning of the year- max it out if you can. If you put in the single contribution for a year, which is believe is $2900 (the family contribution is more) on a salary of 60,000 you only pay taxes on $57,100.

7. I think I’ll end with this one- don’t stop investing in your 401k when the market tanks. Especially not if your employer matches you. It’s free money people. And as the market recovers, which it inevitably will, you’ll have bought more shares at a lower price, so as those grow in share price, so does your portfolio.