My last blog post was a disaster. In an attempt to gain some breathing room I accepted my first guest post without proper vetting. An astute reader quickly realized the guest was promoting a debt consolidation service. I should have known better.
My reasoning was sound; execution needed work. Tax season is getting long in the tooth and I am exhausted from the long hours. Hoping to divert some time from writing to tax work, I allowed the enemy behind the lines. My promise to you, kind readers, is to up my game. I like the idea of guest posts, but I think it would be best if I invited bloggers I know and trust to do the writing.
That said, I have no intentions of reducing my writing output. You come here to listen to my stories and glean my words for valuable advice you can take back home.
Success is a poor educator. When things are going good—and life has been very good to me—I/we start to believe we are smarter than we really are. It takes a solid kick to the crotch to focus attention. As bad as the last post was, a lesson was to be learned you are not aware of: my traffic was rather good! For a terrible guest post I had a high level of traffic. I take that to mean people were attracted to the title: frugality. I decided I should write the guest post intended for you.
Today I am going to share some frugal habits I have. A word of caution. Don’t try to emulate what I do. Rather, use my frugal lifestyle as a starting point to reduce spending in your life without sacrificing quality. Also, many things I talk about are ideas only. For example, I am considering an auto purchase and I will share my thinking as I go through the process. It is very different from what I did only a few years ago.
Before we start I want to point out debt consolidation is not always a bad thing. Depending where you are financially, refinancing can make sense. Moving a student loan to SoFi could be a smart money move for you. If you are loaded with debt for whatever reason, consolidating debt at a lower rate might be a good move. What the guest post promoted was more along the lines of “bilk’em with fees and screw’em.” I have zero tolerance for that kind of finance.
The Frugal Accountant Comes Clean
Frugality is not a destination, it is a journey. Cutting costs also means intelligent planning. You can save a few dollars today by not changing the oil in your car or delaying medical care only to suffer serious consequences in the near future. When I prepare taxes I always consider the consequences of my actions on future tax returns. Saving a dollar today in tax only to pay two dollars next year is a thinly disguised high-interest loan. I am not interested in that kind of stupidity, ah, I mean, frugality.
Let’s talk cars first. My oldest daughter is in the market for a car and I’m thinking it might be time to retire the 2000 Honda, too. (The Honda Accord runs nice, but Wisconsin winters do a number on the body after 15 or so years. She ain’t pretty and she is starting to rust in the wrong areas causing safety issues. <sniff> I’m going to miss that girl.)
In the past I bought all my cars from the bank, as in bank repos. The days of buying a car for $4,000 under Blue Book are over without additional work. Local banks no longer sell to the public, opting to sell all repossessed vehicles at auction. They get less, but have less hassle. I considered getting a dealer license so I could bid on used vehicles at auction, thereby getting the wholesale price. The time and effort to do this for the few cars I buy has held me back. I have no interest in starting a small used car business either.
Even if banks still sold their repossessed vehicles to the public, I am starting to debate the intelligence of buying a used car. Don’t get me wrong. I still love used vehicles. A two-year-old car has shed plenty of depreciation while retaining most of the usage value. New car smell is expensive.
Buying a used car from a dealer is depressing. The prices are waaaaay over Blue Book and they do a great job of putting lipstick on pigs. It is hard for most people to know a pig with lipstick from a quality vehicle. I am one of those people. My interest in cars is limited to turning the key and expecting the darn thing to start and taking me where I want to go. I put gas in the thing and change the oil. That’s it. Enough thinking about the wasting asset in the garage.
But that wasting asset can drain serious ca-ching from your wallet if you let it. Thinking frugally about a car is best before you buy said car. I assume you only drive when necessary. Short trips around town only require a pair of shoes or a bike. No auto expenses required.
The purchase price of a vehicle is small compared to the expenses it creates over its useful life. Fuel, tires, brakes, insurance and other maintenance will add to a higher number than the original cost. (Don’t let a car salesman dazzle you with that investment bullshit, either.)
Time to listen in on some conversations inside the Accountant household. My daughter is struggling with her first car purchase. Now 22, it is time for her own set of wheels. She grew up watching her dad buy a used car from the bank once a decade for well below Blue Book. It always worked and was cheap. The for-sale-by-owner (FSBO) offerings are not encouraging either.
Watching my daughter go through the process I started thinking of new ways to game the system. I am not talking about cheating; I am talking about getting the best value for the outlay of cash.
Since the initial cost of the car is small compared to expenses over the life of the car I started thinking about these costs. In the past, new cars did not offer nearly as much advantage over used vehicles. With new models offering lower operating costs (more miles per gallon; lower maintenance costs), a new or at a least newer, vehicle might be a better way to go.
Example: If a used vehicle costs $15,000 and a new vehicle cost $30,000 (This is an example so don’t tell me cars cost different amounts. I know.) you need to think about operating costs to find the “real” cost of owning the vehicle over its expected lifetime of 10 – 20 years. In my example I assume you run the car until it is worth nothing. In reality you might get $500 to unload the beast as it nears the end of her life.
The first thing you have to remember is that the act of buying a car is when you take the biggest hit, so no buying cars on a regular basis.
In our example we will assume the used vehicle market has a variety of reliable cars in our price range that get 25 mpg. We will also assume a new car (maybe a hybrid or other high mpg ICE offering) gets 40 mpg. I normally drive several hundred thousand miles before my mode of transportation becomes less than reliable. We don’t want to buy cars any more often than necessary so mpg is an important consideration.
Assuming $3 a gallon gas, the 25 mpg car will cost $12,000 for each 100,000 miles driven. The 40 mpg car will cost $7,500 per 100,000 miles, a $4,500 reduction in fuel cost for the new car. If you run the car for 200,000 miles your fuel savings will be $9,000 over the older, used car.
Paying $15,000 extra for $9,000 in savings still doesn’t add up. A quick check around the internet will help you determine if the model you are looking at has mechanical issues. We will assume each vehicle considered has a good track record. We don’t want to get bogged down on make and model issues.
Electric vehicles don’t need an oil change. Newer cars go longer between oil changes. The cost of tires varies depending on the tire required for the vehicle. Assume 80,000 miles before tires need replacement. I’ll let you do the math in these areas. The differences make a modest difference only in most cases.
The biggie is insurance. The cost of insuring a vehicle is serious business. Depending where you live, insurance can cost more than a car payment. Because insurance varies widely based on location we will let you do your own math.
Three more issues to consider before buying your car. New vehicles frequently have manufacturer incentives. The $30,000 car might have a $6,000 rebate and 0% financing. Even if you don’t need financing you still get use of the money at 0%, which has value.
Finally, certain vehicles have federal and/or state tax incentives. The new vehicle, when manufacturer rebates and potential tax credits are added, can reduce the upfront cost of the vehicle to only slighter higher than a newer used car. You also have the manufacturer’s warranty.
To sum up the car talk, a $30,000 new vehicle with a rebate can drop the initial cost to near used car prices. Add in fuel savings and the choice to buy a new car might be the right choice. Counter-intuitive, I know. But you have to consider all costs when making a decision. Of course, you also want to consider time value of money and other issues pertinent to your situation. Vehicles are to transport you or to haul stuff. You can apply the same thought process to a truck.
More Frugal Ways to Live
I am all for lowering expenses, especially when nothing is sacrificed. I recently talked about a better way to get internet service. Where I live this is a major improvement in quality and price. Mix in the bundled services sold from many providers to get a lower internet price only adds to the total cost for services you don’t really want (think commercial-filled cable TV bundled with phone and internet). Sometimes a better deal allows you to dump unwanted services adding to your real cost. Those companies play mind games and rape your wallet in the process.
Cell phones are another growing expense in most households. People tell me they pay $80 and more per month per phone. Insane! The missus and I (and the oldest junior accountant (the youngest doesn’t have her own cell phone yet)) use Google Fi. For $20 a month we get great service and coverage. You don’t need any more than that.
Utilities always drive this accountant crazy. The truth is that after a while there is a diminishing return on additional efforts to reduce electric use. My home doesn’t have a furnace, hot water heater or air conditioner; we have a geothermal unit to handle all that. The geothermal gulps electricity when it is running. We never run the AC in the summer and keep the house 60 degrees F in the winter. In the near future I see a certain accountant running the numbers on a solar shingle roof, Powerwall and electric car. Elon Musk and his Tesla Corporation might consider me a client before long. I need to see numbers first. Eventually the initial costs will come down to where it does work. Then this accountant will swing the bat.
We prepare most of our own meals and grow much of our food. I ferment my own wine. Meat we don’t raise ourselves is purchased from the farmer, cutting out layers of middlemen.
Entertainment is the library and Netflix. Long walks with Mrs. Accountant are a hot night out. We visit with neighbors and family. Your favorite accountant enjoys a German card game called sheepshead. We play for dimes. A bad night could set me back as much as a buck and a half. Sad times in frugalville.
Frugality is a mindset. I don’t go around thinking about being frugal. I live frugally because I am naturally frugal. Waste irritates me to no end. Too much stuff drives me crazy because I have to store and work around stuff I don’t want or need.
A natural frugal nature is healthy. You can go too far with frugality, too. It’s not about living with less; it’s about living right.
It does not take long when you wander the blogs of the ‘retire early’ community before you hear the common refrain: If everybody did this stuff it would kill the economy. To which I promptly call bullshit.
Bill Gates and Warren Buffett managed to not spend over $100 billion of their money over the last few decades and the economy has done fine. In the 1950s the savings rate was much higher and the economy more vibrant. When the research is reviewed there is no doubt excessive debt, a low savings rate and excessive spending have more to do with an anemic economy than any responsible spending will do.
People look for any excuse they can to remain married to their poor habits and lack of self-control. It is easier to complain about successful people than it is to take responsibility for your own actions. Somehow these people have been bullshitted for so long they actually think poverty is the only way to keep the economy going. Really? They think the only way to survive is to spend every nickel they have. They think living on the financial edge of ruin from the first light breeze is what makes the economy purr and provides job security. Where does this nonsense come from?
No Help from People
In my office most payments are made automatically. Services are handled without much human intervention. Billing/invoicing is on automatic, payments are made by automatic transfer, personal and business bills are set up for automatic payment by either credit card (for the rewards) or from the checking account and the credit card is set to pay the balance in full on the due date from the checking account. The process keeps flowing without any human intervention in one big circle. All parties can focus on their tasks instead of wasting time playing around with financial transfers.
Think about what this really means. If the rapture were to happen this very second and God thought we were all worthy of the instant removal from earth to heaven and no one had a chance to turn off the electric generators, the economy would keep humming along fine. The automatic transfers would keep going round and round. In fact, the economy might actually start growing at a faster rate without people around to fuck it up!
Now, if the economy will do fine without a living human on the planet, how bad will saving and investing half your income harm the economy? The arrogance it takes to even assume responsible spending behavior will destroy jobs and the economy blows the minds of intelligent people everywhere.
The economy will be fine if you save/invest a significant portion of your income. Look back at the most stable and productive times in human history. These times are marked by large levels of saving and investment. Without an ample pool of ready money there is no opportunity to move from concept to reality. Money for investment comes from savings—money people earned, but decided not to spend.
The Economy is Bloated
The economy is too big as it is. Most of the economy, the sales of goods and services, is mostly wasted material. If you don’t believe that statement, I invite you to join me on a short trip to your local landfill. That enormous pile is a testament to all the stuff people wanted and then threw away. If it was so important to spend money on, why are landfills so goddamn huge? All the resources wasted to produce junk we didn’t want in the first place end up as a credit card payment for the next 28 years at 17% interest. And you want me to believe this is good for the economy?
The stuff that really makes us happy and fulfills our lives is about a third of the economy. Yes, I mean two-thirds of the economy is nothing but fluff, waste. We keep buying shit until our homes are so full we can’t move. Then we buy bigger homes to store the stuff. The basement and attic are loaded. Don’t worry. In the name of ‘keeping the economy going’ and jobs we can always rent a storage unit. Let me ask you this. When was the last time you looked at your stuff in the storage unit? Thought so.
All that stuff and the debt from buying it harms the economy! A ‘healthy’ economy does not have so much waste. You, me and everyone else in town can easily live on a third to half our income without any problems. The economy will keep humming along. Debt loads will be modest. Stress will be low.
There are a few losers. The government is fucked without all the tax revenue they need to service the massive pile of debt. The world governments have over $63 trillion in debt as I write this and it is growing at a rapid pace. The United States has nearly $19 trillion of government debt alone! World government debt interest is accruing at over $500,000 every seven seconds! At least it is good for the economy. Right?
Another loser in a world of modest spending is landfills. These tremendous piles of dirt covering the junk we bought on credit and decided we did not like after all would be mere molehills. Other than governments straddled with debt and landfill companies, there are few losers if the FIRE community ran the place.
A quick look around the internet gives a few different answers to the total worldwide government debt load. The numbers are all large and the differences are semantics at best. Debt in and of itself is not bad. What is bad is the level of leverage and what the money was wasted on to create the debt. Governments can print their way out of debt crises if they are willing to risk economic dislocation and/or inflation. You on the other hand need to glace toward your ankles and start reaching.
The current world environment would seem to indicate high levels of debt are NOT healthy for the economy. More debt does not automatically translate into a larger economy, dollar for dollar. As more debt is added it has less affect on economic growth.
More is not Better
The sickness affecting Western societies and spreading to other cultures around the world is that more equals better. But does more make you happier? Research tends to indicate it does not. Having more stuff is a responsibility increasing stress levels protecting, insuring, maintaining, and using said stuff.
Modern technology has made stuff cheap compared to our earning level. The more we have the more we want when it makes no sense to add more to the heap of crap already in the stable. Happiness declines instead of increasing after we reach a certain level of saturation. More things then start to eat into our happiness and overall satisfaction with life. You can have more, but does it matter?
The FIRE community is on to something and it boggles my mind more people have not climbed aboard. Where people got the idea financial independence and early retirement are a scourge on our society is beyond me. I am only a country accountant; I don’t have the answer for such an ignorant mindset.
Problems will not magically disappear if people start saving and living more financially responsible lives. The problems will change, however. The problems will also be less critical. Money is the leading cause of divorce so reduced money issues will lead to better family life. Children will have more nurturing formative years which translates into lower levels of crime and higher levels of overall life satisfaction.
Issues of resource usage will be reduced, but still an issue to apply our efforts toward solving. Moving from a carbon economy to a more green, renewable framework will increase further the quality of life. Technology will still be a vital part of a smaller, more efficient economy.
The real question to ask is: If we are happier spending at a much lower level, why do we waste so much of our most precious resource, time, so we can have stuff which ends up making life less pleasurable? Sure, we will still work, especially for things that interest us. I can’t imagine myself sitting around all day and there is no doubt I will find something constructive to do. But this idea of working ourselves to death for just a little bit more needs to stop.
With most of our time freed from required work to meet our basic needs and a modest amount of wants we can explore what truly drives our passions. It is easy to say what we really like, what we really want. But until we are in a position to really have the opportunity to live that dream we cannot be certain of our choices here.
Happiness dust is not fantasy. Happiness is possible. Living on $20,000 or so a year is easy. All the rest is play money. And we have enough toys. The Earth can’t take anymore waste. The place is starting to look like a dump. Even the oceans are filled with waste from garbage and stuff spilled from ships headed for markets around the world.
It is time for less trade and more living. And the economy will be fine without us.
Discussions around here have focused on early retirement and financial independence with a few assumptions: either you own income properties, own a business, or have a side hustle. But what about the other 95% of the people working their tail off, day in and day out, looking for a retirement plan? For those fine folks I have a treat today. We will focus on normal people and wealth accumulation. We will avoid tax talk because income level and type of income create too many variables muddying the conversation.
You would think it should be simple if you are a wage earner only, but it’s not. There are several choices you need to make to maximize your wealthy building. Accelerating to the early retirement line is straight forward if you know where to start. Without passive income like rental properties you only have your earned income (wages) to rely on. Your passive income will be limited to dividends, interest and capital gains.
Building an Empire
There are two parts to living the Financial Independence (FI) lifestyle: the building phase and the maintaining phase. During the building phase you save like crazy. My recommendation is to save half of what you earn. It is more important than ever to have a high savings rate if you don’t own rental properties or have a side hustle. It will take 16-17 years to reach FI at a 50% savings rate assuming a 5% growth rate and a 4% withdrawal rate once retired.
Here is where I get pushback. Save 50%! That is impossible. But it isn’t. I could go into a series of stories of clients at all income levels doing just that, including clients earning $20,000 or less a year. It is possible. The cable has to go. So does the car if you have a lower income. A bike is a cheap mode of transportation. Soda and cigarettes are off the menu. Of course eating better and more exercise biking will go a long way towards better wellbeing.
And it is all a lie. It will not take you 17 years to reach FI. The 5% growth rate assumption is lower than long-term market averages. I doubt you will have 17 years of subpar earnings growth. Real world experience tells me most people reach FI in 10-12 years when they save half their gross income.
There is another benefit to saving. Taxes. I promised not to talk taxes and I will not. What I want to point out is the tax advantages to savers. You see, spenders pay more tax than savers. A portion of your savings will be in tax-deferred retirement accounts. This means saving half your income will not feel like half your income is gone because your taxes will decline faster. Remember, money diverted into tax-deferred vehicles comes off the top where your highest tax bracket is. When you are done saving you will only pay at lower tax brackets and may qualify for a Saver’s Credit and other tax benefits.
Your Money of Your Life: Transforming Your Relationship with Money and Achieving Financial Independence by Joe Dominguez and Vicky Robin is an important resource for living large with small amounts of money. I read this book from the library years ago and tried linking to Amazon. Amazon does not allow linking. The book is out of print, but you can pick up a used copy. Vicky Robin has a follow-up book shown with a link in this post.
Dominguez and Robin said something in Your Money that always stuck with me. They made two claims: one is that you can live on very small amounts of money and still live well. If memory serves, they lived on $9,000 per year. Inflation had little impact on their long-term spending. As prices increase your spending habits change. If beef prices rise, you eat more chicken or more of some other foodstuff.
The second recommendation they made which couldn’t foresee the future was that you should invest your money in government bonds of the country you are living in. Governments may default on their debts, but usually outsiders take the biggest hit, sparing the domestic economy a further body blow. The argument was you could live off the guaranteed interest forever without worry. They published Your Money in 1999. Thing changed since then.
Government bonds in most countries are safe as long as you only consider the return of your principle as the end of the term. With interest rates zero or lower recently, the bond idea espoused by Dominguez and Robin does not work without additional considerations.
How and When to Buy Bonds
Bonds should be purchased with the intention of holding them till term. Trading bonds is not something I consider. I don’t like bond mutual funds either. When I buy bonds (many, many years ago) I bought Treasuries directly from the government. You can do so online at Treasury Direct today. Most brokerage firms also allow you to buy Treasury bonds at issue without cost and hold the bonds in your account. Either way, bonds purchased should be held until maturity.
If you buy bonds to hold them, the only reason to buy bonds is for the interest coupon or for inflation protection if you buy Treasury Inflation Protection Securities (TIPS). As I write this there is no reason to purchase bonds. None. Interest rates have been low for so long most people will have few bonds in their portfolio if they follow my recommendations.
Dominguez and Robin were only partially right. Bonds are not the path to wealth most of the time, but are a safe store of wealth in some instances. People must invest the bulk of their capital in index funds if they are to reach their goals, especially if they do not have other sources of passive income.
So when do you buy bonds? My policy (and preaching to clients) is to start adding long-term (30 year) Treasuries to your portfolio when interest rates hit 7%. It has been a long time since we saw those kinds of yields on Treasuries of any maturity. Those days will come again. When they do the world will tell you to avoid bonds as risky like they did in 1982. The world is usually wrong.
Once Treasury bonds touch 7% you want a small portion of new money to go into the guaranteed investment. You will get 7% for 30 years, plus your original money back at the end. TIPS are an even better deal. Inflation increases your payout every six months. Nice. And you will get your original money back, plus the inflation adjustment. Really nice.
As yields climb, more and more of your new money goes into bonds. At 10% all new money is invested in bonds. The stock market averages 7% over the long haul, plus the inflation rate. That is why you see long-term equity returns of 10% batted around so much.
If we see a return to the late 70s and early 80s with Treasury yields well into the double digits I would recommend a 50/50 portfolio mix of broad-based index funds and long-dated Treasuries. The steady stream of interest income is state tax-free and will continue for 30 years. A good plan if I say so myself.
Municipal bonds are another consideration. I am not a big fan of munis and never owned one that I can remember. The interest rate paid is lower, but is exempt from federal tax and possibly state taxes, too. The problem with munis is they are not without risk. There have been plenty of muni defaults over the years. Municipal bond funds are too risky for the benefits involved for the average investor. If you want some tax-free income from your bonds, a broad-based muni bond fund is your best choice. The issue with a muni bond fund is that for most investors the interest income will be taxed on the state level. If there is interest (no pun intended) (okay, it was intended) I will write a detailed post on the issues surrounding municipal bonds and how to invest in them properly. I have experience with several clients building muni bond portfolios even though I never use them personally.
A Better Way to Invest
To provide blanket advice is a disservice to the readers around here. I give the blanket advice often because it is expedient to do so. Dropping all your money into a broad-based index fund and forgetting it is not a complete truth. Qualified money (funds inside a retirement plan) can take the advice and be satisfied. Non-qualified money will cause some problems on your tax return.
Index funds are an awesome tool for wealth creation and preservation. In the early stages of your FI career the index fund works fine. Once you start accumulating a larger nest egg, the capital gain and dividend distributions begin to cost you tax dollars. There must be a way to mitigate this tax problem and there is.
Once you fill retirement accounts you will have extra money to invest. By default it will go into index funds. As the account grows the taxable distributions grow larger. Somewhere between $50,000 and $100,000 you start to feel the tax pain. Taxes start consuming more money you would rather invest. At this point we need to change our strategy.
Index funds are too powerful of a wealth building tool to change investment types. Rather, consider tax-loss harvesting using index funds within a framework offer by companies like Betterment. The cost of Betterment is so low even frugal people will be delighted in using the service. By allowing Betterment to do all the heavy lifting, your taxes are lowered so more of your money stays invested. In effect you are diverting your taxes into your investment account. I don’t know about you, but I like that idea. A lot.
The process for people without income properties, business, or side hustle is pretty straight forward. I think it takes a slightly longer time to reach FI without some of these traditional streams of passive income, but still doable in a relatively short time. Going from start to full retirement in 17 years or less in the worst of economic environments is exciting to me. Getting there in 10 or so years is more likely and more exciting.
Reaching the finish line happens faster than you plan. As a Dave Ramsey Endorsed Local Provider for years, I saw people with large debts pay them off much faster than anticipated. For some reason the debt payoff accelerates into warp speed as long as you stick with the program. The same applies to wealth accumulation. The folks over at 1500 Days to Freedom reached their goal early, in less than 1500 days. Pete over at Mr. Money Mustache reached retirement by age 30. The Mad Fientist made the news recently for retiring at age 34. Yours favorite accountant hit FI somewhere around age 32. It happens faster than you think.
The above post is a simple outline for living right at every stage of the FI process. Stay on course and your dreams will come true.
Mrs. Accountant and I recently went on a business trip. Like most business trips we invested time, but no money. The trip was better than free; we came home with more money than we started with and did nothing crazy like house-sitting or couch surfing. We enjoyed meals at excellent restaurants and slept in 3 and 4 star hotels every night. We drove in this instance because we like seeing the sites as we go. In all it took three weeks to complete the business trip. It was a great time for Mrs. Accountant and me to spend quality time together without interruption.
There are a million ways to travel for free. Many people in early retirement dream of doing so. But what about the rest of us? You might not be retired. And then there is the unique breed of animal called the business owner. I fall into the last group.
Traveling is something I avoid. Life on the road is not something I look forward to. As I get older I find myself on the road more and more for longer periods of time for business. Now you know why Mrs. Accountant works for my company.
The reason for the trip is not important. What is important is how I accomplished the feat of three weeks of travel and got paid to do so. Actually, three entities paid for our trip: the organization I was asked to speak for, the bank, and the government. The government paid the largest portion of the bill and it was all legal.
Speaking engagements are the biggest reason for time away from home now. Training conferences are second. Many conferences extend over a long weekend, four days in this instance. The four days at the conference were covered: meals and lodging. Personal entertainment and travel were my own.
Owning a business has multiple opportunities for travel. Even folks in early retirement can benefit from a side gig. The tax rules surrounding business travel offer multiple ways to reduce reportable income legally.
To understand how I accomplished a free trip at taxpayer’s expense, you need to understand my personal situation. I own an accounting practice. Mrs. Accountant works for me as a personal assistant. To date she is the only employee I am allowed to sleep with (if I know what’s good for me). The business trip needs to satisfy a few IRS rules. The travel needs to serve a business purpose. And, as with all allowed business expenses, it also needs to be regular and ordinary.
To deduct the expense of a spouse going on a business trip there needs to be a business purpose. Whenever I speak to a group I always have a crowd wanting to speak to me personally. (I’m lovable that way.) Mrs. Accountant handles the scheduling so I can see more people during and after the conference. The goal is not always to acquire new clients, but to build relationships. So we have determined Mrs. Accountant is a part of the business purpose for this trip.
The nice thing about business travel is that the biggest expense is frequently getting there. Once there the cost is relatively low, especially if you cozy up with locals. They know where all the good stuff is and at a reasonable price.
This particular business trip had three days of travel on each side of the conference, plus the four day conference. After the conference I spent several days with attendees of the conference. My travel home was glacial. Traveling to the conference, the conference, and time with peers after the conference consumed 10 days. It took 11 days to travel from the conference to home.
Those were 11 very productive days. The drive home was far from straight. At the conference I scheduled meetings with people somewhere between the conference and home. I visited several tax offices and provided input.
The entire trip was business so I get a deduction for all expenses. Time to break out the calculator.
This whole process so far is based upon owning a business, even a side gig, and enjoying the work you do. None of this felt like work ever! If it started to feel like work I would have drove straight home to spend more time with my junior accountants.
Before I spill the beans on making money on such a straight forward business trip, I will outline the deductions and out of pocket (OOP) expenses.
The four days of the conference were completely free because I stood in front of a bunch of people and shared information. Funny how that works. I still had to get there and there were another 17 days to account for.
I keep gas receipts; blame it on the accountant in me. I use the mileage rate on my tax return, however. I consider the operating expense of the car to equal the IRS mileage rate even though I drive an older car that is far lower in cost to operate: around 30 cents a miles versus the 54 cents IRS rate. I love non-cash deductions.
Then we have hotels for 16 days (the 17th day we slept in our own bed). The total hotel expense was $2,112 and change. (We will round numbers here.)
Meals are the last expense we will consider. At the conference meals were provided, but there were no snacks later in the day. I love my evening munchies so much so you might think I smoke weed. I don’t. You just might think it. Actual OOP for meals was $862. Mrs. Accountant is a cheap date. We rarely dine out, but when traveling do so more often. We also hit the grocery store when on the road for snacks, drinks and many of our meals. Most hotels now offer a complimentary breakfast which is more than enough for the missus and me.
Let’s add it up. Mileage is a wash (gas receipts added to $266 for those interested); hotels $2,112; and meals $862.
So how did I make money? Merchants asked me for $3,240 over the course of the trip. (There were also a few stops for museums and a zoo. Entertainment was less than $200 and not deductible in this instance and also disregarded for our math.)
On the business tax return I will deduct something different. The mileage deduction is $1,750 (3,241 miles @ .54). Gas was only $266, but there is wear and tear on the vehicle and insurance to consider. Actual meal expenses totaled $862. Using the hi-low method per diem rates we were allowed to deduct $68 for eight days and $57 for 12 days for meals and incidentals. The tax deduction for meals came to $1,228.
We already listed hotels at actual cost: $2,112.
There is still no profit involved, WA! You pullin’ a fast one? Nope.
Cash out was $3,240 while deductions added to $5,090. We want to toss out mileage as a wash because estimating auto expenses after fuel costs is a pain in the ass. So, cash out is $2,974 and deductions totaled $3,340.
Let’s assume I am in the 32% tax bracket, federal and state (25% federal; 7% state). I’m not. Just play with me here. If I am going to claim the IRS turned this venture into a profit merely by traveling, I am wrong. My non-cash deductions over actual expenses add to $366 ($3,340 – $2,974). $366 * 32% is $117 in tax savings. Not enough to cover all the OOP expenses.
At first glance it looks like the above business trip set me back a bit. But I have a secret. I paid nothing, zero, nada for hotels and meals! I have an American Express card for the business and the points were accumulating.
The problem with using credit card reward for business travel is that you can’t deduct the cost because the amount to deduct is undetermined. Using points to buy an airline ticket means you get no deduction (except for add-on costs such as baggage fees and taxes). I also have an IHG card which has at least 11 hotel stays ready for use. I save those for personal travel.
I did not use these points for free travel because they would limit my tax deductions. American Express, on the other hand, hands out gift cards for restaurants and hotels. See where I am going? I used points to get gift cards and these are now like cash in my pocket and cash in my pocket used for a business expense is deductible.
My real OOP expense was only gas: $266. I paid for hotels and meals with gift cards from Amex. I wanted tax deductions, but wanted to keep my money tucked safely away. I get a $3,340 deduction with only $266 OOP (without considering mileage rates and other expenses of the auto). $3,340 * 32% is $1,069. I left home with a credit card and gift cards. The gas expense on the credit card earned additional cash rewards we did not include. And the government gave me $1,069 in tax benefits, cash. Plus I gained new clients and consulting fees. Where ya going ta get a better deal than that?
The goal behind this thought experiment is to get you thinking about the tax code in creative ways. None of what I illustrated is illegal in any way. Non-cash deductions can rise to significant amounts over the course of a year.
Your situation is probably different than mine. Following my path each step of the way is the wrong way to think about this. A business or side hustle makes it easier to game the tax code. Major corporations have been doing it from the beginning of time. Normal people can do the same. Whether you are retired and traveling or looking for some time away from the shop, there are ways to utilize the tax code to your advantage. We discussed one way to do so. Use this as a starting point to turn travel into a money-producing activity.
Now that you have virtually unlimited amounts of money for travel, you need to find some time. We’ll talk later.
Note: Check the TWA Recommends page for all the latest best credit card rewards programs.
Buying a car is like marriage to me; it is until death do us part. So far she has been the one dying and I remain to keep the memories alive. In 2009 I bought a 2007 Toyota Camry from the local credit union to help them clean up a bad loan. I have never had serious problems, but periodically I have to invest a bit into the vehicle so the ‘ol girl makes it to 20. The Camry had one of those days.
The exhaust pipe broke near the head next to the catalytic. The metal was too thin to weld so replacement was the only option. My neighbor across the road (how convenient living out in the country), Roger, has a lift in his garage and handles most minor repairs for me. I still change the oil so I can brag this accountant gets his hands dirty now and again.
The replacement part had the cat in it so it wasn’t going to be cheap. I went over the O’Reilly Auto Parts for the replacement. It set me back $184. Roger charged me $25 to change it. I knew it was going to be a bit more than a simple muffler repair. When I picked up the section of exhaust pipe the kindly clerk asked me if I was a member of their rewards club. I said I was now. It works like this: for every $150 you spend they send you a $5 coupon for a future purchase.
I’m a sucker for that crap. But when I really think about it for a minute I realize how much a waste it really is. I don’t buy stuff at O’Reilly’s that often. The only way to use the coupon is to run over there for oil and a filter before the coupon expires. All for $5. I charge $120 per hour minimum for my time at the office. I average just under $340 for every hour I actually work at the office. (I don’t work that much.) Even if it is a slow day and I only turn $200 per hour, my time is worth over $3 per minute. How much is that $5 coupon worth now?
And so it goes, as Kurt Vonnegut said. Mrs. Accountant sits at the kitchen table clipping coupons and testing products for surveys for some side change. She wants to feel she is contributing to the household finances. She doesn’t understand how valuable she is to me regardless the coupon clipping or product testing.
Mrs. Accountant is not alone in such foolish endeavors. I like to handle certain projects around the farm and at the office myself. How much money do I really save changing my own oil? Roger charges me ten bucks (I have to buy the oil and filter). He does it faster and cheaper than I ever can. I convince myself it is a good expenditure of time because I am not working at the office so I may as well do something that saves money. And it is the prime reason I am not richer; it is the prime reason I don’t help more clients. I spend too much time fucking around on projects I have no business doing in the first place. My free time is worth as much as my work hour rate! Free time is important time to recharge and refresh; time to grow the relationship with Mrs. Accountant and my girls. But at least I saved $10. Right?
People spend too much time crying about money when they need to focus on their strengths. I’m pretty good at earning money; I’m also tight with money so there is a stickiness between money and me. I’m not so good as an auto mechanic. I have ramps so I can crawl under the car and pull the plug. What if those ramps ever failed? I would be killed or worse over $10. Do they have a medicine for that level of stupidity? Doubtfully.
The $10 spending spree to pay someone to change the oil does not affect my financial situation one bit. In fact it makes it worse because I am focusing my time on a weakness. A short consult with a client during the same time the oil is changed would yield 20 times more wealth.
The line becomes blurred as the activities change. Some people steal (yes, steal) soap from hotels. Vacation time is an opportunity to fill the soap drawer back home. Jesus fucking Christ people! The last several years I have earned 8% interest guaranteed from banks around town on up to $50,000 at a time. Every bank with a bonus offer had your favorite accountant enjoying a FREE cup of coffee and opening an account. One day after the bonus period ended I went back and got my money. Yes, I know that is $4,000 per year, but the full $50,000 wasn’t always invested as there were a varying number of banks with offers at any one time. The amount of time I spent dicking around opening accounts and closing them for what ended up as no more than $2,500 per year was a fool’s errand.
My sanity has returned. Sort of. I have given up on the idea of sticking it to the banks and their bonus programs. I’m still a sucker for a credit card bonus, but the time involved is small and I rarely cancel a card. I don’t sign up for as many cards as I once did. I carry two with me and another dozen reside in the sock drawer with other assorted personal possessions. The card I always use pays 2% back on everything. Story over. Time to live life.
It’s not just about money either. All this stupid stuff takes time. Because we have employers (or are a motivated business owners) we keep the coupon clipping and other crazy stuff to our personal time. While Roger is fixing the Camry I will not be on the phone with a client. I stuck around and helped (if Roger reads this don’t believe a word he said about me standing around the entire time with my hands in my pockets). Between busted knuckles we talked. You know neighbors used to do that kind of thing.
Filling our down time with tasks destroys happiness. Everyone needs downtime to recharge. Not every second of every day needs to be filled with productive labor. It is okay to read a book, watch a movie, and make small talk with the wife. AAHHHHHHH! Yes, you must talk with your wife. She is a nice lady if you ever got to know her.
When was the last time you had a beer with a neighbor? When was the last time you snuggled your wife. . . for hours? When was the last time you sat quietly alone in a room doing nothing, only you and your thoughts? Yeah, I thought so.
Friday night is cards for your favorite accountant. I play sheepshead with family and neighbors. As a bunch of old codgers, we don’t play late. My youngest daughter likes to sit behind one of the neighbors and watch him play. The memories created on Friday night will make us smile a lifetime and one of the experiences every one of us will hold fondly on our death bed.
Turning Failure into Success
You are a failure because you focus on the unimportant. Financial independence is not built on 30 cent coupons. Yes, Mrs. Accountant still uses coupons, but a hell of a lot fewer than in the past. Most grocery coupons are for processed food we should not eat anyway. Mrs. Accountant loves testing products and reporting her results. It makes her happy so I support her efforts. The $250 or so a month she earns testing said products is not a productive use of time unless it brings happiness. It is not a real moneymaker. If she did anything else it would earn more.
Elon Musk is so hyper focused on his businesses and ideas there is no time for a personal life. People like Musk create the world we live in with their products and services. I am okay with that. Most of us don’t possess the ability to be so driven. Most business owners live their business, but still need down time to maintain good health.
Yet, we all try to act like Elon Musk, filling our days with stuff to do. We fail because what we focus on is unimportant time wasters. A free second waiting in line causes fidgeting. Soon the Mister Spoke tricorder, aka, the smartphone, comes out. Gotta check the time, email, and news. God forbid we have more than nine seconds without mental stimulation.
You can turn failure into success. Money is not the indicator; happiness and satisfaction are. When you sacrifice time with your significant other and kids to save $10 changing the oil in the car you need your head examined.
Instead of wasting time saving a few dollars, educate yourself to earn more. Improve your investing skills by learning how great investors like Warren Buffett control their emotions during market turmoil. Time is your most precious commodity. You get the same exact (notice the redundancy in my writing here) amount of time as the greatest men and women in our society. Bill Gates revolutionized the world with his software and had no more time available to him than you do. So why the difference in results? I can tell you one thing. Mark Zuckerberg didn’t make his money Facebooking all day. He did it by building Facebook. When you learn the difference you will start living a significant life with plenty of money.
Money doesn’t make you happy so success is not measured by the size of your Vanguard account. I know plenty of people with eight figure net worth’s so unhappy they contemplate suicide. I know happy, well-adjusted people with very little money. It is all between the ears, my friend.
Failure and success are measured by how you live your life. For some reason, people who live life right always seem to accumulate enough money to satisfy their needs and more. When you get greedy things tend to head south fast. Stop checking your email all day; same applies to social media and news. If you are a business owner stop selling to every person you meet. It’s annoying. As an accountant people want to ask me tax questions at inappropriate times. For example, while standing at the urinal is not the time to ask me about your required distributions from your IRA. I’m just saying. If I lose my concentration I might piss on your shoe. What I am trying to say is: turn it off. I am as guilty as hell on this, too, so go ahead and rub it in. An hour is not enough. The world will not end if you take a few days off here and there. Trust me. (Nothing ever goes wrong when someone says, “Trust me.”)
The most productive, successful, and happy people know how to separate work from play. They know how to come home and unwind. Happiness is not another $10 in your pocket. Happiness is handing Roger $10 to change the oil in your car and catching up with him on family news.
If you are failing in life, if you are not living the life you want, then maybe this post explains why. Focus on the important. Anything is possible when you believe. Start thinking big. You can do this. It is too important not to. Your family—your children, for Christ’s sake—depend on you. They need you; quality time with you. Kids could give two shits if you worked more overtime for more stuff. The time spent together playing cards or throwing ball are gifts they will never forget. If you enjoy changing the oil in your car at least bring junior along and have some bonding time while you work on the car.
There is so much more I have to say on this. Maybe later. I have a $5 coupon in my email with an expiration date and the Camry is due for an oil change.
More Wealth Building Resources
Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?
Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!
We think of credit cards as those things which allow us to manage our financial lives without carrying money around. Bills are easy to automate with credit cards and paying the card at the end of the month is a simple, one-time, setup online and it is paid in full on the due date without any further action on your part. Even if you don’t record your spending, a credit card has a nice list of all your spending in one neat, compact location for future review.
Those crisp pieces of plastic come with a dark side also. Without constraint, you can dig a financial hole difficult to crawl out of. Make no mistake; credit cards are debt, even if you pay them in full monthly. Debit cards serve the same purpose and are not debt because it comes out of your bank account; when the money runs out, the purchases are declined.*
Previous posts discussed bonuses, cash-back credit cards, and interest free/fee free loans. I consider those the easy benefit of credit cards. Debit cards offer limited bonuses and cash back, but credit cards take it to a whole new level.
There are a lot more benefits to credit cards most people either don’t know about or never take advantage of. I seek to end that problem now. These benefits are worth anywhere from a few hundred dollars a year to thousands, depending on your level of spending and the items/services purchased with the card.
The Fine Print
I carry several cards at one time. I use a specific card for certain purchases depending on the underlying benefits the card offers on such purchases. You should have received a booklet describing your benefits when you opened the account. If you tossed it because it was all fine print, you can review the benefits online for most cards.
This review is with a credit card I currently use. I will not name the bank/credit card because benefits can change and differ between products. The benefits are similar across credit cards with a few notable exceptions. These exceptions are generally used as an inducement to acquire more card holders for the bank. I will focus on the common benefits. When you are done reading this post I encourage you to print out a copy of all your credit card’s benefits and keep them with you. They are money in the bank.
Most credit cards include some form of rental auto insurance when you use their card to rent the vehicle. Read the fine print! There are a few exceptions. Really expensive cars, like a Bentley, are excluded. The insurance on the card I am using covers physical damage, theft, loss-of-use charges assessed by the rental company, and towing. If you have auto insurance for a personal vehicle, check if your liability protection covers you while driving a rented auto. It usually does.
The car rental companies push hard to get you to buy their insurance. It’s a good deal for them with a high profit margin, frequently more profitable than renting the car! The insurance at the rental company is very expensive for what you get and because you may already be covered. By checking with your regular auto insurance company and reading the credit card fine print you can save a bundle.
Before I move on I want to point out a few caveats. If you buy insurance at the rental company that insurance pays before credit card coverage. The credit card does not cover injury, items not original to the vehicle, war, impaired driving (drugs or alcohol), off-road use, or loss of personal belongings. Long term rental periods (31 consecutive days or longer) are frequently excluded, also.
Here is one benefit you have passed on without knowing it. On the card I am reviewing they cover theft, damage or involuntary and accidental parting. Purchase protection replaces, repairs, or reimburses you at their discretion. The maximum is $500 per claim and $50,000 per account. Think of the value! The kids get a new toy and break it accidentally or it is stolen. You file a claim and should be covered if the terms of the agreement are met. Of course, you had to buy the item using the credit card you file the claim with.
A few things are generally excluded, and include: animals/plants, antiques/collectibles, boats, cars, aircraft, computer software, items purchased for resale, mysterious disappearance, fraud, abuse, war (this shows up a lot, it must be an issue), medical equipment, and perishables. As always, a few minutes of reading the fine print and keeping it handy when needed can be financially rewarding.
My card extends the manufacturer’s warranty of three years or less for an additional year without cost. The maximum claim is $10,000 with a lifetime cap per account of $50,000. This includes gift purchased with the card! Once again a few items are excluded: cars, boats, aircraft, items for resale, computer software, medical equipment, or used items. The manufacturer’s warranty applies first.
The extended warranty covers a lot of stuff. Cell phones come to mind. The fear of loss, damage, or defect is a major concern if it is not covered by the manufacturer. Most smart phones have a one-year warranty. They try to sell you expensive insurance with fear factors (broken glass or theft) which your credit card covers under the purchase protection and extended warranty benefits. No need to worry about a financial hit if you pass on the insurance which rarely, if ever, gets used. That is why credit cards offer it as a free benefit. But if you are the lucky winner, the coverage is a real benefit if you know to file a claim.
When you purchase a vacation package or tour they always encourage trip cancellation insurance, except it is unnecessary since your credit card probably covers you for free if purchased with their card. It also covers family members on my card in review. The cancellation coverage is up to $5,000 per trip on my card. The part I like is you are covered if the trip is one or more miles from your residence. Really! Just one mile? A trip to the store doesn’t count?
There are a few restrictions as with any insurance. “Change of plans” is one excluded item, which makes sense. I’ll let you read the additional details in the fine print of your card which is similar to the coverage offered by trip cancellation/interruption coverage offered at the travel agency.
Bet you missed this one. Many cards, including the one reviewed here, offer price protection. On my card I am covered if I find an advertised price lower within 90 days of original purchase. This includes non-auction online sites like Amazon.
The limits are $500 per item for an annual limit of $2,500 per account. You are even covered for $50 per item/$150 annual for cash-only advertisements, close-outs, liquidation, and going-out-of-business sales! With my card you only need to pay for part of the purchase to be covered. Nice.
There are a few restrictions. Advertised items excluded are: flea markets, fire sales, limited quantity promotions, season sales, and auctions. Seasonal and discontinued items are also excluded, including: holiday decorations, clothes, and costumes.
After you get done tearing the airline a new one you might want to check with your credit card. The benefit reimburses you for repair or replacements costs. The nice thing about this coverage is that my card’s benefit is up to $500 for jewelry, watches, cameras, camcorders, and other electronic devices, with a $3,000 limit on all covered items for each trip. Money, securities, tickets, money orders, traveler’s checks, and furs are not covered.
A perfect vacation can be ruined by lost or delayed luggage. My card says if my luggage is delayed more than six hours I will be reimbursed for emergency purchases of essential items. The benefit extends to family members and frequent flyer travel rewards when some portion of the trip is paid with the credit card. My card reimburses up to $100 per day for three days maximum. After six hours, go enjoy your vacation. It’s covered.
Trip Accident Insurance
This animal is really an Accidental Death and Dismemberment policy. My card provides $500,000 of life coverage if I die while traveling with the common carrier and $100,000 if I die within 24 hours of an accident on the carrier. I’ll save you the morbid details of the benefits if you suffer loss of speech or body parts. My guess is if you ever need this benefit you will not care much about the lost/delayed luggage benefit. (Bet you were waiting to see how long it would take me to be a smartass.)
Travel and Emergency Assistance Services
Traveling is stressful so I avoid it like the plague. When I do travel it is nice to know I have a help line at my fingertips. There is a list of services attached to this benefit, including: emergency message service, medical referral assistance, legal referral assistance (you would think a crazy accountant could use this fairly often), emergency transportation assistance, emergency ticket replacement (a real stress reducer), lost luggage locator service, pre-trip assistance, and prescription and valuable document delivery arrangements.
My auto insurance automatically covers me for this if I have collision on the car, which I don’t. They also charge for the benefit. Not my credit card! They love me. They give me the toll-free number of a motor club I can call 24/7 for help. If you are driving a rental car you need to call the rental company first.
The cross-section here is only the start. Your credit card may offer more or fewer benefits. Your lifestyle will determine the right credit card for you. These benefits are often unused. That is too bad. Lost or delayed luggage is stressful, but if you knew you were covered it might make the situation a bit more bearable. Price protection and extended warranties are also valuable benefits.
When is the last time you filed a claim with your credit card company? Thought so. Bet a dollar to one you never filed the claim because you were unaware of the benefit. That needs to change. Credit cards offer a wide range of value. The bonuses, cash-back, and travel rewards are only the beginning. Come to think of it, traveling seems more appealing all of a sudden. Think I’ll book a flight for the missus and me.
You can review and compare the litany of credit cards here.
* Some banks and credit unions have decided it is okay to let people overdraw their account rather than decline a purchase to maximize overdraft fees. Financial independence requires discipline on your part regardless the method of payment you choose.
Note: Check the TWA Recommends page for all the latest best credit card rewards programs.
Credit cards were always a powerful cash management tool for business owners. Individuals can harness the same power, but frequently use credit cards wrong, piling on high interest debt, and suffering financially. In times past, credit cards allowed for easy payment and tracking of expenses. As banks grew more competitive, the opportunities also grew. Most people are familiar with cash-back and bonus offers when opening a new credit card, but there is so much more.
There is a whole additional universe of value available from credit cards missed because it is buried in fine print. In this post we will focus on one of those benefits: interest free loans. Tomorrow I will focus on the litany of advantages you can use to make your life simpler.
Interest free loans from credit cards are not for everyone. I will focus on three groups who should find value in the strategy I will soon outline. The three groups are: people digging out of debt, people interested in accelerating their investments in index funds, and individuals and business with seasonal revenue.
How it Works
If you have a credit card you are aware of those checks they send you for cash advances at a 0% interest rate. That is not what we are talking about here. Those cash advance checks are junk because they charge a 2%-4% fee upfront. When I say interest free, I also mean fee free.
Many banks offer credit cards with a 0% interest rate on purchases the first 12-20 months you have the card. This provides a limited opportunity to cut some spending on interest. The strategy is as follows: You get two credit cards per year and use them like this: The first card is used for six months and the second card (acquired six months later) the next six months. See where I am going with this?
Okay, if you put every possible purchase on your credit card to max out cash, bonus, and travel benefits, you can also reduce your interest expense should you still be working out of debt. The goal is to never pay credit card interest ever! You have 12-20 months to pay off the card in full. By paying the minimum the first six months and then paying the card off over the next six months you effectively keep around half your spending available for investment or debt reduction.
It looks something like this:
Since you should be paying your current spending in full each month, you are never spending more than you have available to pay off the credit card. I used 10 months as an example, but you can expand this to any duration, depending on the 0% grace period of the cards involved.
It sounds like a lot of horsing around to avoid interest if you are on your way to financial security. It is. For many years I worked as a Dave Ramsey endorsed local provider. If I felt the client was disciplined enough to handle this strategy, I would teach it. By utilizing two new credit cards per year we could accelerate high interest debt reduction. In the above example we could reduce debt by nearly ten grand before we started paying off the new card.
During the 0% grace period, all funds used to pay the new card would be funneled to high interest debt. Then payments would be turned back to the new card so the balance was retired before the 0% grace period ended.
There are serious issues surrounding this strategy. First, if you have lots of debt you might also have a bad credit score. Getting a new credit card every six months could be an issue. Second, and this is the big one, it takes discipline. People with loads of debt have not been good in the past with money. Their discipline is suspect before we start.
If you have the discipline you can reduce some of that high interest debt so you can start investing toward financial independence. Once you have reduced your debt burden the rotating credit card strategy can be used to funnel cash into investments, but the returns are diminishing.
It is important when you are adding debt interest free to the new card that all funds to pay for that spending is allocated to high interest debt payments. Ten thousand dollars of payments shifted to a credit card at 18% is a $1,800 in annual savings. This snowballs (using Dave Ramsey’s term) into faster and faster debt reduction.
Another problem is not considering alternatives. Refinancing debt at a lower rate might be an easier and better solution.
Moving six months of spending payments to high interest debt adds to serious interest savings. Discipline is the hardest part. Delaying high interest expenses six months to a year still leaves you in debt! Bad spending habits in the past got you here; financial discipline is the only way out. Rolling up your sleeves and slashing spending is required, applying the reduced spending to debt reduction. It isn’t easy. If it was you would not be in this position.
Remember, you are not spending more than you normally would. You only shift your spending to a new credit card for half the 0% grace period and then use a new card while paying off the first. You are still accelerating your other debt reduction at the same time.
I don’t like this idea, but I will share it for informational purposes only. When debt is eliminated you can keep using the same strategy to funnel six months of spending into index funds. I think it is a lot of extra work once you are building your net worth to invest a half year of spending a bit sooner. You make the call.
A Personal Story
The third group benefiting from this strategy is owners of seasonal businesses. We will use my tax office as a guinea pig. As a tax office I am flush with cash April 15th. Year-end spending challenges the business finances while revenue tends to be lower than any other time of the year.
Up front, I never carry a credit card balance, but use credit cards for every possible business and personal expense. The business does have a line of credit which rarely gets used except as a tax management tool. If I can allocate funds in a way that reduces taxes I will use the LOC for a short period of time.
Due to the seasonal nature of my business (it isn’t so seasonal lately) we can apply the above strategy to manage cash flow. As the guinea pig, I acquired a credit card with a cash-back bonus and travel rewards. I will put every possible expense on the card until tax season when I will pay it in full. I’ve never done this before.
I really don’t need the extra funding this year for any major projects or tax reduction strategies, but it is a kick in the pants to harvest a few more bonuses.
Seasonal businesses can use this credit card strategy to avoid interest expenses while maintaining the business between busy times. Once again discipline is required. It is too easy to build debt. If you have problems handling money, this isn’t for you.
A large number of readers here are well on their way to financial independence or are already retired. I get enough requests from people starting out to make this post a valuable addition to the herd. Use it as you see fit. Also consider modifying it to your needs. The most important point is to think differently. If you act like everyone else, you will have what everyone else has. Better yet, if you tend to follow the crowd, hook up with a frugal group. It makes it easier when people around you tend to spend less.
Tomorrow I will dig deeper into credit card advantages everyone can use.
Use this link to help you research credit cards. There are a lot of choices. I recommend a card with a bonus and ample cash back. I did not include any of these benefits in the illustration above, but they increase the value. Finally, if you order a credit card and receive approval when you use the banner below, I will receive compensation. I thank you if you do. If you prefer to avoid such arrangements you can go straight to www.cardratings.com. You get the same exact thing, but I do not receive compensation. No hard feeling either way.
Note: Check the TWA Recommends page for all the latest best credit card rewards programs.
Insurance is for the mathematically challenged. Insurance companies have the largest buildings in town for a reason. What other company do you write a check to for a thousand dollars and get nothing more than a promise to cover some bills in the event of certain losses? Commissions to the salesperson can reach or exceed 100% of premiums in the early years of some life insurance policies. Many credit card companies offer free extended warranty insurance at no additional cost when you buy with their card. You can guess the real value of the extended warrantee offered at Wal-Mart on $88 headphones.
Warren Buffett built an empire funded by insurance premiums at Geico. Some insurance is required by law. In the U.S., auto insurance is required for liability. Health insurance is also required since the Affordable Care Act passed.
Insurance is about risk management. Insurance companies are masters at it. The goal for the insurance company is to bring in as much as possible in premiums and pay out as little as possible in claims. Insurance always has a built-in profit for the insurance company. This is the house advantage.
Most insurance claims are for stupid small stuff. The cost of insurance to cover claims under $10,000 is massive. The processing of a claim is expensive. That is why higher deductible can save so much. But even better is not buying insurance at all and pocketing the cash.
When Insurance is Important
Auto insurance is required on the vehicle itself if you have a loan on said vehicle. Required auto insurance is for liability only, regardless of loans. The liability portion of the auto insurance bill is small compared to the cost of collision. This should tell you something. Liability claims are rare. Most auto insurance claims are for fender benders. The reason liability insurance is so important is because when the rare occurrence arises, the claim gets really big.
A new trend is emerging among the FIRE (financial independence, retire early) crowd. To cut spending to the bone, these people pay off their mortgage and then forego homeowners insurance. I understand the concept, but worry about the consequences. Homeowners insurance runs from $500 a year into the thousands. As long as you have the financial resources to manage any physical loss the insurance is an elective, maybe.
I agree that all small claims should be handled without the help of an insurance company. Even a higher deductible homeowners policy doesn’t save all that much. Claims on a home are rare and the claims that do come in are related to smaller issues rather than a complete loss of the structure on the property. Still, homeowners insurance premiums have skyrocketed.
My office building is in a floodplain. Actually I am surrounded by a flood plain so I am considered an island and if I had a loan on the property I would be required to carry flood insurance. Flood insurance would set me back over $2,000 per year. Insane! My office building has no encumbrances and no flood insurance either. I have owned the building 21 years. That means I saved at least $42,000 in premiums. In the last 21 years there was only one incident where there was a flood. The sump pump died at the same time and some old books were destroyed. Value: $0. I did have an afternoon of cleaning out the office basement so I guess if you count my time as worth something there was some out of pocket cost in 21 years.
I still have insurance on my building, however. And that is where this story is going.
The Old Reliable HO-3
The HO-3 homeowners policy is the most commonly sold today and is required by most lenders. It covers all the things you would expect: fire, tornado, or any direct damage to the home or surrounding buildings. The insured is covered for replacement value without depreciation. There are a few notable exceptions to the HO-3. Flood and earthquake, for example, are not covered; additional insurance purchase is required to insure against loss from these events.
Having casualty insurance increases your costs. Many years ago I hit a deer coming home from work during tax season. Back then my attitude was to have collision coverage if the car was valued over $5,000. (Today I only carry liability regardless the value of the vehicle.) I filed a claim and started looking for a shop to repair my car. All the quotes kept coming in around $4,000 and I had a $1,000 deductible. This was crazy. Finally I decided to get a few more quotes and tell the shop I was uninsured. Now the quotes were all under $1,000! The final bill was $800 and the guy gave me a $50 discount for paying cash. It was the last time I had collision coverage on my autos.
All this is good and well. But, since you know the odds of making a major claim are small, bypassing insurance is a calculated risk insurance companies take every day. The cost of repairing or replacing a vehicle is rather small when you think of it. If you can’t afford to replace the car, you can’t afford the car. I have pocketed a small fortune since I dropped all but the liability coverage on my autos.
Back on the farm I have homeowners insurance. I have to. My only debt in the world is the farm mortgage and I could easily pay it off in cash, but I am reluctant since the interest rate is under 2 ½% and my investments do better than 2 ½. That isn’t a problem at the office. The office building is debt free and I still carry insurance. Why?
You are Liable
The real value (the only value) insurance has is protecting you from the big one, the one that would destroy you financially. A $10,000 loss is an inconvenience; a multi-million dollar lawsuit could easily change your life for the worse. Even if you win the lawsuit, the legal bills to win could reach into the six figures. A family member was caught uninsured and paid over $75,000 to fight a lawsuit he eventually won. He was still out 75 grand. I’m a fast learner. Lawsuits are the real risk. Especially frivolous ones.
The office is covered by an insurance policy. No one requires I carry the insurance. There is no mortgage on the building. However, my office is on a corner where a lot of moms and kids cross my parking lot on the way to a park and beach. Drivers sometimes cut through my parking lot to avoid the stop sign. If a driver broke the law by racing through my parking lot and injured or killed one of those kids I would also be sued. In Wisconsin wrongful death is $500,000 for children and $350,000 for adults. That means even if I am not at fault, maybe it was just an accident or the driver’s brakes failed, I would be on the hook for a minimum of half a million dollars for wrongful death if a child is killed. Then the attorneys can get serious about getting the rest of my net worth.
The HO-3 policy covers liability. (Always check with your insurance company or agent to understand what coverage you really have. The blanket statements I make here are for illustration only. Also read your policy and ask questions if you don’t understand something.) That is the one reason why I recommend homeowners insurance even when you are not required to have it.
Piddly claims don’t concern me; I can handle those on my own. The big, take’em out behind the woodshed lawsuits, is what I want protection from. Even if I am so rich I can write a check and walk away, it isn’t that easy in a lawsuit. Lawsuits take time and money. It’s the time I have a limited supply of. Living without money is fine if it ever came to that; I grew up poor and am none the worse for it. But spending years fighting a mega-lawsuit would damage the one thing I value: time.
There are bloggers out there acknowledging they have no homeowners insurance because they reached FI and can easily handle a complete physical loss of their home. I agree on that part. Besides, it will cost the insurance company a lot more than it will me to rebuild my home. I disagree because of the liability protections involved. I never encourage a client to go without homeowners insurance. Extended warranty, auto collision, disability, and life insurance are all things you can take a pass on and still get my blessing. Not the homeowners insurance.
Frugality and responsible spending are quality traits. If taken too far it can cause more harm than good. At some point you cross the line from frugal into becoming cheap at the risk of spending serious amounts of time and money defending yourself.
Life is too short to fight those kinds of battles. A small amount of insurance assures you can keep living the quiet comfortable life you have grown accustomed to.