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How Inflation Rates Cost You: The Effects of Inflation

10/26/2014

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How much are the effects of inflation costing you? Typical tax information.
Consider your tax situation before cashing out your bonds.
The effects of inflation are enormous, but few people know just how much inflation costs them over a lifetime. Money is not just the number that you see when you check your account balance. It’s purchasing power, or how much that amount can get you.

Inflation is a menace to your purchasing power. It destroys the value of your money.

You can use the rule of 72 to figure out how long it will take for an investment to double when the annual rate of return is known. If you invest $1,000 and want it to double at an 8% return, calculate 72/8 = 9. In this example, it would take approximately 9 years for your $1,000 to double.

The same rule can be applied to inflation. From 1913 to 2013, the average annual inflation has been 3.22%. To conservative, let’s round up. 4% inflation divided into 72 is 18 years. This means that if you’re retiring at age 65, you will have to double your income by age 83 to maintain your current standard of living.

This is pretty scary. Of course the stock market’s long-term return beats inflation, but when you’re approaching retirement age, you want to dial down your risk. Bonds are safer than stocks, but bonds get killed by inflation.

The U.S. Treasury offers a specific type of bond that will protect you from losing your buying power well into retirement. It’s called the I-bond.  

I-bonds have two parts. The first part is the fixed rate that’s in effect when you purchase the bond. If this rate is 1%, this is the amount you will receive on top of inflation and it will stay the same for the life of the bond. The second part is the variable inflation-adjustment rate that’s recalculated twice a year. This rate is based on inflation and measured by the Consumer Price Index. If your real rate on the bond is 1% and inflation is 3%, you’ll earn 4% on the bond. Since the Treasury adds the inflation rate on top of the fixed rate, your before-tax return will be higher than inflation.

I-bonds haven’t been much of a fighter recently, because the Treasury set their fixed rate to zero. However, your purchasing power will still be protected, ensuring that your standard of living won’t have to be cut in half in your eighties. The only drawback is that you’re taxed on both the fixed rate and the inflation rate of your yield, meaning that if you’re in a higher tax bracket you may end up with less purchasing power. This is why I bonds are tax-deferred for up to 30 years. You could wait until you’re retired and in a lower tax bracket. 

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7 Major Causes of Failure In Life - What Napoleon Hill Taught Me About Success

10/24/2014

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One of the most thought-provoking pieces of literature I've ever read is Napoleon Hill’s Think and Grow Rich. Even though this book was published in 1937, the principles it outlines for a life of success still hold true today.

My favorite part of the book was the section, “30 Major Causes of Failure”. The title is self-explanatory and it blew my mind at how well these reasons were chosen, organized and articulated. Out of those thirty, here are the seven that I personally believe are most damaging.

1)      Lack of a well-defined purpose in life. It’s like Lewis Carroll said – “If you don't know where you're going, any road will get you there.” Napoleon Hill said that 98% of people will go through life as failure. 98% of the people he analyzed had no central purpose or definite aim. This is probably the most difficult trait to acquire, although some have it almost naturally. He also says your purpose cannot be to make the most money or any other vague and superficial goal. It has to be specific and well-defined.

2)      Lack of ambition to aim above mediocrity. This is definitely a dream killer. People believe that if they didn't go to college, they can't get a good job. They believe that if they grew up in poverty, they're destined to remain there or at least lower middle class. Not true! Many of today’s millionaire’s are self-made. They had a well-defined purpose in life and stopped at nothing until they achieved their goal.

3)      Insufficient education. If you don’t know about what you want to do, you won’t succeed in it. Period. Education does not stop when you leave high-school/college/grad school – it is a lifelong process! Derek Bok says, “If you think education is expensive, try ignorance.” Stay current in your industry, develop specialized knowledge and apply it. Remember that men are not paid for what they know, but what they do with what they know.

4)      Lack of persistence. Too many people start projects without finishing them. They give up at the first sign of defeat and live life never knowing how close they were to succeeding. It’s critical to understand that many men’s biggest success came right after their biggest failure. There is absolutely no substitute for persistence. If you are not willing to persevere in your endeavors, Old Man Failure will win. If you are persistent, Old Man Failure eventually becomes tired and leaves. Failure CANNOT cope with persistence.

5)      Lack of concentration of effort. One of the greatest business lessons entrepreneurs must learn is that they can’t do everything. The “jack-of-all-trades” is seldom good at any. In order to truly take your financial life to the next level, you must focus chiefly on the things that make you money. This ties into “lack of a well-defined purpose” but it deserves its separate spot because it highlights many people’s inability to focus on a particular task. Imagine this – Contractor A does everything from bathrooms to kitchens. Contractor B specializes ONLY in kitchen remodels. You need an updated kitchen – who are you going to call? Who makes more money? Yup, Contractor B. 

6)      Intentional dishonesty. If you wish to obtain wealth, NEVER be intentionally dishonest. Sooner or later your deeds WILL catch up with you and you will pay for them. This is especially true if you run a service business, because your reputation will be destroyed. People will not wish to associate with you, so you can kiss your network goodbye. Napoleon Hill states “there is NO HOPE for the person who is dishonest by choice.”

7)      Guessing instead of thinking. Don’t be too lazy to get the facts behind your endeavors! This applies to all businesses and life in general. Don’t just guess that a certain stock is a good pick – do your research! What’s the P/E, EPS and dividend yield? Many people prefer to act on their opinions instead of facts. The crazy thing is that people often waste more effort fixing their mistakes than what it would’ve taken to avoid them in the first place. Put forth the effort and make sound decisions.

What other causes of failure do you believe are damaging? Leave them in the comments below! 


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What Does My Credit Score Mean?

10/20/2014

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What does my credit score mean? How does a credit score work?
What does a credit score mean? How does a credit score work? These are all questions more people should ask. Here's what your credit score means...

There are a few numbers that pretty much determine your life. For instance, an SAT score is boasted as an objective and valid predictor of academic success. Another number with huge weight in your life is your credit score.

Lenders use this number as an objective and valid predictor of debt repayment. A good FICO score will definitely help you out. Here’s how:

You'll qualify for loans more easily and get better terms on your mortgage. In fact, the high/low credit score difference on a 30-year fixed mortgage is about $300 per month. That's $100,000 over the life of the loan. Utility accounts such as electricity and cable may also check your credit report to determine your rates.

If you’re renting, it will be much more difficult to secure a lease with bad credit. Prospective landlords may see blemishes and require a larger deposit or just turn you down.

Auto loan rates are influenced by your credit score. If you have a high credit score (like 750 and up) you can usually get great terms on a car loan, but if you have a low score you will have high rates even if you’re approved. When you go to get car insurance, your credit matters there too. Over 90% of auto insurance companies use credit data to calculate your insurance risk score.

A good credit score leads to more credit. If you apply for more credit, companies will check to see if you qualify and what terms you should receive. Your offers and rate options will depend on your credit. With good credit, you can usually get rewards cards with low APRs and other perks. If you’ve got a bad score, you’ll have to stick with secured and prepaid cards.

So what is a “good” credit score?

According to MyFICO.com, the average credit score is 689. You can compare yourself along this metric, but the scale breaks down to these grade ranges.

Excellent: 750 and up

Good: 700 – 749

Fair (650 – 699)

Poor (600 – 649)

Bad (below 599)

Don’t get below 599! What’s the big secret? Always pay your credit cards in full every month and pay your other bills on time. That’s it! It’s that simple – if you can’t afford one of your “wants” then don’t use credit or an instant loan. If you can’t afford it, have the discipline to postpone gratification and save up. Who knows? By the time you save the money, you might not even want it anymore.

Even though this sounds very easy, fate can deal hefty blows. If you lose your job or have other extenuating circumstances, you may not have a choice but to take credit just to survive. If you are in a situation where you can build and maintain good credit, be thankful. The benefits are plenty!



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How Much Does The Average Wedding Cost? Put Your Wedding on a Budget!

10/18/2014

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Wedding Cost Estimator
How much does a wedding cost? You don't need to have a cheap wedding, you just need a wedding budget to handle the costs.I do... need more money.
The average cost of a wedding is $26,444, making a wedding budget a must-have. 
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Shows like “Say Yes to the Dress” and “Four Weddings” have sensationalized the big day. Brides (and grooms) plan, sweat and dream of the huge event where they tie the knot.

But will it tie a knot in your wallet?

TV shows give viewers a twisted representation of wealth, with some brides spending upwards of $34,000 on a dress. This makes others on the show who spend even $3,000 on a dress seem poor. The average American wedding costs around $30,000, with most money going towards venues, catering and rentals. Having a responsible wedding budget involves a fresh dose of reality - to put things in perspective, the average American wedding dress runs $1,000. 

A good rule of thumb is to budget $100 for every wedding guest - $50 for catering and $50 for everything else. You should start off by using a wedding budget planner to figure out the basics, such as venue rental and arrangements. While going through this planner, you’ll figure out which items are more important to you. You may not want to rescind on having the best photographer in town, but you’ll be happy with a bargain dress. Likewise, if you’re having a small wedding, catering won’t eat up a huge percentage. You’ll readjust as you discover your priorities.

Now let’s run the numbers. The average marriage age is 27 years old. In 2011, 27 year-olds were more likely to be earning less than $15,000 than $40,000 or more. In fact, 80% of the 27ers earned less than $40,000 per year. This means that on average, their wedding will cost them AT LEAST 75% of their annual income. Suddenly that must-have floral arrangement isn’t so life-or-death, is it?

Consider yourself very lucky if your family can afford to pitch in, because a wedding’s cost is like strapping down another education loan for these 20-somethings.

Here are just a few tips to help cut costs

1. Negotiate!

You’d be amazed at how quickly your savings add up if you negotiate all aspects of your big day. From catering to limo rentals, shaving off 10% here and there can mean big bucks.

2. Pick a different season.
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The most popular (and expensive) season to get married is summer, so if you get married in the off-season you can save 20-30%. Also remember to pick in-season flowers to get the best deals. Tulips are more expensive in the summer because that’s their off-season and roses are just insanely expensive in February.

3. Serve lunch, not dinner.

Having lunch or brunch at your reception can save you 30% or more. Nix the chicken or steak for cake and light hors d’oeuvres. 

If nothing else, you can always get the “Hound Dog” wedding package in Vegas. Elvis sings three songs and will walk the bride down the aisle, all for just $275. 

If you want to learn more about saving money on your wedding, check out Meg Keene and her book about having a practical wedding. It's the wedding planning Bible for the budget-conscious and money-savvy bride. 



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3 Things You Should Stop Doing (To Help You Save More Money)

10/17/2014

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Making your coffee at home is a great money saving idea.Making your own coffee could save you over a thousand dollars per year.
1) Making purchases being first-cost sensitive.

In his groundbreaking book, The Millionaire Mind, Thomas J. Stanley outlined that millionaires are not first-cost sensitive. Instead, they’re value oriented, focusing on the life-cycle cost of purchases.

For example, if you buy a $200 pair of shoes and wear them 400 times, each wear averages out to 50 cents. If you sprang for the more expensive, higher-quality shoes you would get more wears. If those shoes cost $300 but you wear them 700 times, it’s only 43 cents per wear. It’s a seemingly small difference but it adds up.

Stanley gives the example of Mr. Blue and Mr. Green. Mr. Blue buys a house without researching the public schools in the area. His house was cheaper than Mr. Green’s, but he quickly realized his children wouldn’t go to quality colleges given their poor education. Mr. Blue’s bargain home was quickly offset by private school tuition shock. Mr. Green doesn’t mind paying a little bit more up-front for a home with good public schools and because he avoids paying for private education, his life-cycle cost is much lower.

2) Going out for coffee or drinks.

Your little caramel macchiato is what gets you through the day! You can’t possibly give it up, can you? Well, here are the numbers. Starbucks customers have no problem shelling out $4 for a latte in the morning. If you buy one latte per day, it adds up to $1,460 per year. You don’t have to give up your morning coffee either – just buy the coffee beans and make it at home. 2.5 lbs. of French roast will run you about $20. Much better.

Skip the alcohol too! It’s overrated and quite harmful to your bank account. No one’s saying that you can’t have a little every now and then, but drinks at dinner can add over $10 per person and a night of bar-hopping can easily hit $50. If you’re feeling like being a good Samaritan, skip a drink and add it to your waitress/bartender’s tip.

Also, while we're discussing drinks, stop buying bottled water. Just get a filtered water bottle and fill it with tap water. I made this mistake for a long time I’d buy a 24 pack of bottled water for $5.00 and go through it in about a week. I spent $15 on a filtered water bottle (and $3 for a second filter) and so far it’s lasted five months. My $18 investment would’ve been $100 in bottled water.

3) Making minimum credit card payments or worse, not paying at all!

If you’re an adult, you should know how to responsibly manage credit. Barring any unfortunate disaster or medical emergency, you should be held accountable for what you charge. If you charge $1,000 to your credit card (with a 15% credit card rate and 4% minimum payment), it will take you over FIVE YEARS to pay it off with minimum payments. At the end of that time, $362 extra dollars will have been funneled away to the credit companies.

Another tip is to use auto transfers for your bills. I love auto-pay, because late fees are a huge waste. With automatic payments, you’re never late and if you pay your balance in full each month, you get to sit back and watch your credit score rise. 



Automatic bill payment is one of the best money saving ideas you can implement today.
Automatic bill payment. Use it.
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