Down to my last dollar!

Thanks to the thoughtful person who recently sent me a copy of a new book called ‘The Power of Nice’ by Linda Kaplan Thaler and Robin Koval of The Kaplan Thaler Group. It’s subtitled ‘How to Conquer the Business World with Kindness’, but the many hints and tips it gives are applicable to all of us in our everyday lives. You might think that being nice is a fairly obvious way of doing well in life, but believe me, plenty of us could benefit from the lessons in this short book! I’m a firm believer that cynicism kills (dreams, ideas, people, you name it) and ‘The Power of Nice’ certainly affirms my belief. N.B. The Kaplan Thaler Group is ranked as one of the fastest-growing advertising agencies in the United States, with over a billion dollars in billings - so they are definitely worth listening to!

My thought for today is (yes, I KNOW, remember I am new to this!) the ‘miracle of compound interest’. It seems to be a popular topic at the moment, probably because it appears to be a risk-free way of making free money. The basic principle is that you find the savings account that gives you the highest rate of interest, put your money in it, and…er…that’s it. The interest is added to your savings, increasing their value, then further interest is calculated on the increased total, and so on and so on. As long as you leave it there, your savings will continue to grow.Of course there is always a price to pay for safety. In this case it’s one of time. Depending on the size of your savings (and the rate of interest you can find), it will take a long time to make decent money. But then, we all know that the only way to get rich quick is to rob a bank, right? (and no, winning the lottery doesn’t count - see previous post). By embracing compound interest, your money (even just your last dollar) is growing WITHOUT YOU HAVING TO DO ANYTHING. The Motley Fool explains ‘the miracle of compound interest’ much more clearly than I can.

I think I’m in love. Again.

When you’re in need of essential finance advice (like -”What do I do? I’m down to my last dollar?”) it certainly helps to hear what others have done in the same situation. Don’t they say ‘A problem shared is a problem solved?’ So here’s an idea - if you email me your financial problem, I’ll post it right here on the site (names will be changed - or not. Up to you). We’ll open up the post to hints, tips and advice (I’ll pick the most appropriate comments), and see how it goes. I’m guessing that this will work better than a forum because many more people will be able to share your problem. You can email your questions now to advice@downtomylastdollar.com (don’t send them as a comment on this post). The world is waiting to help you out!

Probably not. Cardsharps use the laws of probability to increase their chances of winning and you can use the same tools with the lottery/lotto. It turns out that winning the lottery is not as random as we might imagine.If you study the winning numbers of any particular lottery over time (quite a long time), you’ll find that certain numbers come up more often than others do. Moreover, some numbers come up less often than others (step forwards our fickle friend, the number thirteen).

This article, using the UK’s Lotto as a basis, outlines the numbers drawn most often. It also points out that whatever you do, your chances of winning a significant amount are still small to negligible. (As an aside, if you’ve read the book or seen the movie ‘A Beautiful Mind’, you’ll know that is based on the life and work of John Nash, who popularised (and won a Nobel Prize for his work on) Game Theory. If you haven’t done either of these things, you probably should.) 

Being down to your last dollar means different things to different people. You might adjust your family budget when you check this and find out what being down to your last dollar means in some parts of the world. For instance, you’ll be amazed by what $350 means to a family of four in rural Bangladesh.

The Guardian is one of the UK’s leading national newspapers (bear with me on this one…). I wasn’t a big fan of the print version, but the online version is great (and apparently one of the ‘most read’ newspaper sites in the WORLD). For the purposes of making that last dollar grow I strongly suggest becoming a regular reader of their daily personal finance section - money. Everything is set out in the type of ‘ABC’ language that even I can understand. They have a regular column called ‘cash clinic’ which gives e.g. debt and mortgage advice.

It has been pointed out to me that if one of my objectives is to save, it’s a heck of a lot cheaper to pay off what I owe first (especially credit cards) as the rates of interest on a regular savings account is pathetically low in comparison with the interest I’m being charged on borrowings. So thanks for that tip - the first of many I hope!

The average American has around eight credit cards. I have ‘only’ three, but paying them off regularly certainly does not come naturally, either to me or to millions of others and I am worried. I’m not too bothered about the credit card companies getting their money back. What worries me is that I know they don’t really want the money back; they want to keep charging me for it. And paying for the debt wastes a significant proportion of my income.

In order to reduce the debt, I’ve decided that we only need one credit card. Now I know that might sound like someone with an alcohol problem saying they need to keep one bottle of whiskey a day and they’ll be fine, but hear me out.

The credit card will be for real emergencies and necessary big-ticket items only e.g., a member of my family is in hospital and I need to pay now; a flight cancellation forces me to rent a car, and so on. For everyday expenditure, I will only use my debit card. It comes straight out of my checking account, and my bank doesn’t charge me for using it. If I don’t use it, they actually give me interest!

To end up with one credit card, I’ll need to pay off all three and then ditch two. But paying off those three cards seems such a mountain to climb that I usually end up staying at the bottom and doing nothing except flinch as the minimum payment leaves my paycheck each month.

After conducting a thorough investigation to find the simplest and quickest way out, I found an interesting article by Andrew LaPointe that makes it all seem much more manageable. He suggests seeing the mountain as a pyramid, starting at the top and working downwards. His 4-step plan looks workable to me. By breaking the problem up into pieces, and starting with the smallest one, it becomes approachable.

I can feel the stress easing already! I’m going to stick to this plan and each time I finish paying off a card I’ll cut it up and show you the pieces here.

P.S. If you want to do the same, send me a picture of a piece of your cards (the top left hand corner - not the important bit!) and I’ll post it here too - we can beat the debt together!

It’s good to relax with a DVD occasionally. My choice is usually a comedy or a classic and ideally a comedy classic. In this spirit, and in keeping with the general theme of this site, I commend to you The Money Pit. You probably remember the movie - a newly married couple (Tom Hanks and Shelley Long) struggle to repair a very dilapidated house. As the tagline says, The Money Pit is ‘for everyone who’s ever been deeply in love or deeply in debt’. The Money Pit premiered in 1986, which in Hollywood terms makes it ripe for a very bad re-make. Buy it now for your collection, before Adam Sandler spoils it.

I’ve worked out why I’m down to my last dollar each month. It’s not because I don’t earn enough. It’s not because I spend too much (though that has something to do with it). It’s because I’ve allowed my money to be in control. I don’t mean that it’s whispering from my wallet “Spend me, spend me now!” (Though I understand that this might be the case for some people), more that the way I spend it, or have spent it in the past, controls what I do with my life in a far bigger way than it should. Building up debt from loans, overdrafts and credit cards, and then repaying it too slowly and gathering up interest, fees and penalties and then building it up again means that a significant percentage of my monthly income is deducted to pay for borrowing - debt that will roll on, growing like a snowball, until I take control. I resent the monthly deduction. It means that I am never able to enjoy the full benefits of my salary. I now recognise that it is actually a ‘Stupidity Tax’ levied on me through my own actions. The big difference between Stupidity Tax and regular state, federal and other taxes imposed by government, is that you can actually do something about it. In a previous post, I outlined my plan for finally tackling the credit cards. In the case of the loans, it appears to be a simple question of biting my lip and waiting until they are paid (24 more months) and then saying “No more!”. Assuming that I will have paid off my cards around the same time, I need to remind myself that I will effectively be awarding myself a pay rise of around 30% in October 2008. Of course, I will still be paying my other bills - rent, school, utilities, and cable and so on, but I don’t mind that. I choose to spend my money on those to give my family and me the quality of life with which we are comfortable. From now on I’m taking control. I’m my money is going to work for me. I’m just saying ‘NO!’ to the Stupidity Tax.