Let me just rattle off the stores in my area who have employees brainwashed to ask you at checkout to put your purchase on their 22% interest , God-forsaken, egotistically-driven, logo-emblazoned credit card. Well, they don’t use all those adjectives but I need to make this interesting. They are Sears, J.C. Penney’s, Kohls, Dicks Sporting Goods, Macy’s, The Gap, Old Navy and Ann Taylor. I’m not sure how the scheme operates but perhaps the employee gets a small commission for each sale put on a charge card or certainly a bonus for each new charge card opened. Any way you slice it, the odds are high that you well get hosed by putting your purchase on their card. Why is this?

• If you were going to pay cash at the checkout, they just talked you out of paying off that debt immediately. Well, duh! Now you have another bill on another separate credit card to remember to pay next month. Again, the score is now Kohls 1, you 0.
• I’ve said it before and here it is again. On average, a typical consumer spends 12% to 18% more when using plastic (debit cards included). Exactly the same philosophy as poker chips in Las Vegas. If you don’t see your hard-earned green bills in front of you, you’re more likely to spend it.
• You also just added yourself to their mailing and possibly phone list. DoNotCall.gov will remove you from their telemarketer list, but unfortunately there is no IAmHemorrhagingMoneyAt22Percent.gov to extinguish their confiscatory interest rates.
• Having all of those store department credit cards will eventually affect your credit rating. When my wife and I applied for our first mortgage in 1997 the loan officer asked “Why have you opened and canceled 12 credit cards in the past year?” and we truthfully admitted to doing it for the initial 20% discount when you open a new account at many merchants.

So before you put that Kohl’s or any other purchase on their store-branded card, think twice at how disciplined you will be at paying it off on-time, interest-free.

I’ll begin with a link to someone who has successfully weaned himself off credit cards. He makes some fascinating points including:

• it’s a lot more painful to pay cash than swipe a card
• if don’t use the (credit) card, you won’t get a bill
• he ignores the deluge of loyalty-point offers from banks and credit card companies

I’ll expand my thoughts on each of those items as well as add some more of my own.

First, paying with cash is more painful than swiping a card. During my experiment the last couple months of paying cash for items that allow it (my fixed bills and utilities do not have any benefit of getting paid with cash) I learned firsthand how painful cash can be to use exclusively. A couple days ago I went to a discount grocery store that only takes cash or checks. I forgot my checkbook and did not want to go back to the house. So I withdrew money from the in-store ATM (fee-free surprisingly) and that fixed amount was my budget for this grocery trip. I knew that if I exceeded the amount of cash in my wallet I would embarrassingly have to tell the cashier to skip some items while at the checkout in front of everyone. Having this fixed amount also disciplined me to resist the temptation to buy foods that I don’t need including junk food and convenience foods. If this store accepted credit/debit cards what discipline would I (or any spender in that store) have to stop me from spending 110%, 120% or more than I planned on spending? None.

Second, if you don’t use the card you won’t get a bill. I cannot tell you how many times in the past my wife and I did not clearly communicate to each other our spending on the credit card bill for the month and then WHAM-O we get socked with a much bigger bill than we planned. That would be exactly the reason why banks that offer credit cards often turn into billion-dollar behemoths in a short period of time. They’re collecting all of that massive interest from debt-holders. Sheryl Harris, a consumer advocate columnist details some fascinating facts about the history and current state of consumer credit in the U.S.:

Decades ago, credit was seen as something to be used cautiously. One might borrow to buy a home or a car or in a dire emergency, but lenders and borrowers alike shared the belief that credit was to be doled out sparingly.

In the 1960s, Household Finance’s ads included the caution to never borrow needlessly.

Banks turned away would-be homeowners who couldn’t amass a sizable down payment and show they could devote a chunk of their income to the serious business of paying off a mortgage – both principal and interest.

Credit-card issuers generously funded credit counseling programs to help borrowers who slipped up learn how to budget. If wayward debtors joined a financial counseling program, lenders routinely would lower the interest owed to help them get back on track.

Those days are history.

Tweens – kids 11 to 13 – are pitched secured cards to help them get in the habit of using plastic early. College kids are handed applications for credit cards before they even step on campus. People emerge from bankruptcy court to find new offers of credit waiting in their mailboxes.

Creditworthiness has become a state of mind. No down payment? No real disposable income? No worries.

Between 2000 and 2005, among households that use plastic, the average credit card debt went up 17 percent to $9,159 per family.

Yes, you read that correctly. $9,159 of credit card debt per family. At 17% interest paid back over two years, you’d pay back $1709 in interest. Or put another way, you just bought one of the credit card managers in that bank a cruise in the Caribbean for a week! How do avoid becoming one of those families with $9K in credit card debt? Don’t use the card. That is certainly easier said than done, but some useful steps are here in the How To Avoid Using Credit Cards article.

He ignores the deluge of loyalty-point offers from banks and credit card companies. I heard a caller on the Dave Ramsey radio show the other day fiercely debating Dave on how the caller is taking the credit card companies to task. He says he puts everything on his credit cards and pays them off each month. Dave’s rebuttal points were:

• Studies have shown that consumers spend 12 – 18% more when using plastic (both debit and credit). How is this guy coming out ahead if he is spending more 12 – 18% money just to get some loyalty points? He’d have to buy everything on sale at 12 – 18% off just to break even!
• Does the caller actually believe he can beat multi-billion-dollar credit card companies at their own game? The banks plow millions of dollars each year each year into television, radio and print advertising in an effort to alter consumer behavior. “Come on, you deserve than trip to Vegas. Tough day at work? Go buy yourself those new $500 golf clubs? Need some home improvements but don’t have the money? Put it on your new Home Depot card and get 10% off your first purchase.”
• As I detailed in paragraphs above, Dave reminded the caller that paying with cash is inconvenient and therefore you spend less.

The caller was bullheaded and probably was not convinced by Dave, but millions of his listeners including me certainly were influenced by that call.

Another intangible benefit I received from paying with cash for items is the satisfaction of saving up for something. How many parents teach their children about spending by saying “here’s ten dollars for that new toy. You can pay me back over 12 months by doing your chores around the house for nothing!” No, you teach a child proper spending habits by making the child save up for that big-ticket item (big-ticket to them). If a child receives a toy by doing nothing he or she won’t fully appreciate that toy. If the kid needs to spend two months saving for it, you can bet she will take great care of that toy and play with it often. The exact same holds true for adults. Eliminating the “have to have it now” attitude makes us savor and enjoy the big purchase once the big day finally arrives.

If you give yourself several months to change your mindset about using cash versus plastic eventually the seeds will sink into your subconscious mind to save up for items rather than make impulse buys. You can’t put a value on the personal satisfaction of paying with cash as well as your savings in interest from credit card use.

Let’s begin with a statistic taken from the U.S. Department of Agriculture:

“In 1994-95, 57 percent of Americans consumed meals and snacks away from home on any given day, accounting for about half of their daily calorie and fat intake on average.” This is “is 33 percent higher than in 1977-78.”

http://www.bcm.tmc.edu/cnrc/consumer/archives/mealtime.htm

The “What We Eat In America” survey is based on personal interviews nationwide. The 1994-96 study is USDA’s 10th national food survey since the 1930s. Over 15,000 Americans including low-income individuals, children and the elderly were asked to recall their food intake for two days. Now, the purpose of this section is NOT to lecture you on healthy eating versus unhealthy eating (although the odds increase dramatically for unhealthy eating when you go out to eat). The purpose of this section is to, once again, show you how you can give yourself a raise by reducing your eating costs.

Let’s look at three types of eaters:

Frugal eater: packs lunch every day; dinner and breakfast home; rarely goes out to eat

Occassional go-out-to-eater: packs lunch sometimes; goes out for dinner sometimes; Goes out to eat on weekends often

Spendy Eater: eats lunch out every day; dinner out 4-5 times per week; all weekend meals are eaten out

(Short commentary on the Spendy Eater: it is highly likely that this person is NOT a trim person. Also, it is highly likely that this person will tell you that he can’t pack a lunch for less than $4 – $5 per day so why waste his time packing one? )

For the purpose of this example I will eliminate the extremes and not analyze the “Frugal Eater” or the “Spendy Eater” (although I believe more and more Americans and becoming Spendy Eaters). Let’s look at a typical week and potential savings.

The Occassional Out-To-Eater

This person “brown bags” it for lunch at work 2-3 days a week and goes out the remaining days. He goes out to eat for dinner 3 times per week (or orders pizza delivery) and mostly eats breakfast at home. On weekends he eats a couple meals out.

Lunch: 3 days per week X $5 lunch = $15/week

Dinner: 3 days per week X $10 dinner = $30/week

Weekend meals out: Approximately $20 per weekend in meals out

These assumption are for the “average” Out-To-Eater.

Now, this person is spending $65 per week eating out or $279.50 per month eating out! That is a car payment for some people. To reduce these costs I’m not recommending eliminating eating out entirely. Rather, find ways to make it cheaper or reduce just some meals out. Possible suggestions:

• Buy an Entertainment book from someone local or from entertainment.com – the book costs around $30 and it includes $1000s in savings and coupons
• Use coupons for restaurants
• Cut one section IN HALF (reduce lunches out in half or dinners out in half)
• Get carry-out more often (thus eliminating tips, drinks, tax, etc)
• Cook more meals at home and pack your lunch more often

Now, some of these tips are common sense and some require discipline. But look at it another way – if this is you then you are spending $279.50 per month and you have nothing at all to show for it (except for maybe a bigger waist!)

If you still don’t have the discipline to reduce these costs, what if I told you I would give you a $140 per month RAISE if you could only find a way to cut these eating-out costs in half? Well, YOU CAN! You don’t need me to get that $140/month – just cut the $279/month in half and BINGO! … there’s your $140/month RAISE.

1. Stick the money in a shoebox, under the mattress or in a hole in your backyard – just do it though! Remember as a kid when you received an allowance? Wasn’t there a certain satisfaction in knowing you had waited many weeks or months to buy that new toy or game?
2. Eliminate impulse buys. Which are you more like to regret? Going out to a superstore to buy a $300 video game console or saving up, researching and shopping around for the $300 unit over six months?
3. When it’s YOUR money in YOUR shoebox there will NEVER be an interest rate charge on the money! Think about it; if you essentially are paying cash for most items you’ll never pay interest on those items because they are paid for. Put another way: a $300 purchase can quite easily end up costing $320, $340, $350 if you leave it on your credit card long enough.
4. Some sellers offer cash discounts. On average a car dealer makes $1500 profit on a customer who leases, $700 from someone who finances (through the dealer’s financier , of course) and $72 on a customer who pays cash. Knowing the cost of the car is the same regardless of how you pay, it makes you think twice about increasing the dealer’s profits doesn’t it?

Now, if you’ve already used the credit cards and have a balance you want to eliminate read How To Save Money On Credit Cards

Choice A: Getting a raise from your boss

Choice B: Reducing your spending

Perhaps you have a boss that is kind, understanding, sympathetic and willing to help you out with your money issues. Or maybe you are like the rest of us and you have to fight for every penny you get. That being said, let’s do a simple example of two different scenarios.

Which would you rather have?

Choice A: $1000 per year pay raise

Choice B: $1000 reduction in expenses

OK, some of you may have chosen Choice A and that’s fine. But let’s be realistic here. Is it that easy to get a raise at work? How much are you in control of your pay at work? Are you in any amount of control of your pay at work? Of course, you can work hard, increase your education and hopefully get a merit-based promotion if your employer believes in that. In most cases, that could entail longer hours, more responsibility and more time away from loved ones at home. However, let’s explore more by this example:

Choice A: $1000 per pay raise = $13.84 per week after taxes *

Choice B: $1000 reduction in expenses = $19.23 more money in your pocket per week!

Now, the major purpose of this article is to help YOU find that $19.23 per week in your budget and very likely a whole lot more if you follow all of the principles mentioned in this article.

* assumes federal tax rate of 27%

Making the lifestyle choice
My goal for this article is to show you several key concepts in life to reduce your costs (thus giving you a raise). I learned most of this from the “school of hard knocks” and personal experience and self-education. I would hope that these principles will start to become a way of life for you. Sure, there will be some readers that use this article for a quick shot-in-the-arm and then forget it about it or let it collect dust. Don’t be a one-time user of these concepts! Make them your part of your subconscious. I have heard it put best like this:

“Every penny I spend, I try to think of ways to possibly save money. I DO NOT use slimy or sleazy lying tactics. Everything I say and do is completely legal and moral. Some people may call me cheap, frugal, or a penny pincher….I like to call it being an intelligent, educated consumer.” I could not have said it better myself.

Many of the concepts covered here will get you the best deals just by asking! You don’t have to be some high-power negotiating attorney or steamroll a sales person every time you buy something. Let’s look at the different types of expenses in life and examine each:

Example 1
Purchase: One-time large purchase:
Description: This may include a house, car, big-ticket electronic item or anything that is not purchased very often.
Potential for savings: HUGE! It is imperative for you to research these purchases and to get the best deal possible when buying big-ticket items.

Example 2
Purchase: Monthly cost or fees:
Description: This includes cell phone bills, lease payments, apartment rent, utilities, credit cards, gym memberships
Potential for savings: These require some due diligence but can easily save you HUNDREDS or THOUSANDS per year. More on later.

Example 3
Purchase: One-time setup fee
Description: This can be on a wide variety of purchases – cable/dish installations, ISPs, banks, credit cards, cell phones, auto mechanics, travel
Potential for savings: These fees can very often be reduced or eliminated by asking or threatening to go elsewhere with your business.

In each and every purchase let remember one thing, folks. YOU hold the upper hand. YOU hold the cards. YOU are their customer. YOU decide if the purchase is needed, worthwhile, cheap or expensive. Don’t let a sales person persuade, trick, steal or lie to you!

Think about price. One-time prices. Monthly prices. Yearly prices.

You need to retrain your brain to always think about price. I am not going to lecture you on whether or not things are a need or a want. My successful techniques can be applied to needs and/or wants. It requires only a bit a critical thinking. This also requires some common sense in that it is not wise to try negotiating the price of green beans at the supermarket. Based on all the examples throughout this detailed book, you should be able to recognize which items or services are negotiable and which are not. There are a few questions you need to ask yourself when deciding whether or not to attempt to get a better price.

Key Questions:

Is the person I’m buying from considered or labeled a “Sales Representative”, “Account Manager”, “Customer Service Rep”, “Sales Associate”, or anything that resembles or represents a salesman? That will surely give you some negotiating power.

Bottom line: can the price for this good or service be reduced?

Let’s look at an important list of concepts to remember when making a purchase:

1. If a purchase is more than $100 sleep on it or spend several weeks before buying.
2. Don’t make impulse decisions on big purchases! Many sales people or retail stores want you to make an “instant buy” without thoroughly thinking through your decision. Bounce the idea off your spouse, parents, friends, etc. if you are unsure of yourself.
3. If it is a big-ticket item ($300 or more in our opinion) be sure and check Consumer Reports from your local library for free or you can get a one-month only subscription for $4.95 at http://consumerreports.org if you need their ratings for just one month.

Now, rather than make this post even longer I am going to list articles below that relate to the topic of giving yourself a raise. The common theme among all of these articles is that it is up to you, the empowered consumer, to make these choices. It’s your money!

Let’s suppose you start an exercise program but you’ve only been doing it a couple of days and you dread every minute of it. Let me digress for a moment. What if I told you that I wanted you to wake up every day and swallow a live frog first thing out of bed? Pretty insane, huh? Now I’ve heard of people swallowing a raw egg (like Rocky Balboa) first thing in the morning but never a live frog. Now, eating a live, slimy animal first thing of the day would virtually guarantee that it’s the worst thing that happens to you all day. By comparison getting a flat tire on the way to work or spraining your ankle playing basketball after work would still be much easier than eating a live frog at daybreak? Get my point?

Now, back to the exercise program. Suppose you did your push-ups, sit-ups, jogging, excerise bike or aerobics first thing out of bed each day. Wouldn’t that make the rest of your day look relatively easier? You’ve just completed 25 minutes of calorie-burning activity before your eyes were even wide awake. Cleaning out the garage, folding laundry or finishing that report for your boss today all look relatively easy now, don’t they?

So, by “swallowing the frog” first thing in the morning you’ll kick-start your day virtually assuring yourself the day will only get better and better!

• Taking small steps at first Eric and Donna Reed first went a month without buying anything. This included drinking powdered milk, giving up fast-food french fries and wearing pants to work due to holes in Donna’s pantyhose
• They then took a leap to three months with no spending. This included mapping out in advance the number of bars of soap, rolls of tissue paper and loads of laundry detergent down to an exact science.
• During their annual buying spree, jokes from the cashier at the warehouse club included “do you own a restaurant?” and “do you own a cleaning service?”
• They did allow $10 per week for milk and fresh produce. Also gift cards were purchased for restaurants with the twofold purpose of limiting the spending at the restaurant and treating them to a fun evening now and then
• This frugal planning saved them approximately 50% in groceries. That would be equal to clipping thousands of coupons per year.
• They made exceptions for dry cleaning, medical prescriptions and car repairs.

This wasn’t easy for Eric and Donna, but they eventually compared themselves to their missionary friends in Asia who were told to bring four years of supplies for their trip. When compared to that couple the Reeds didn’t have it too bad with that level of required planning.

With some discipline, planning and flexibility the Reeds show that we needn’t live the hyper-consumption lifestyle to which so many are accustomed.

• February 2008
  
• May 2008
  
• August 2008
• October 2008
  

If you get paid on Fridays some of the above months will give you three paychecks.

At the end of each month do you find yourself having too much month left and not enough paycheck? A colleague of mine is remarkably disciplined with his personal finances. His employer pays every two weeks for a total of 26 paychecks per year. Now most people would live hand-to-mouth or paycheck-to-paycheck waiting for that check every two weeks. Not him. When he started the job years ago he structure his household budget on two paychecks per month. Using this method gives you two “bonus” paychecks for those months with three paychecks in them. Confused? Look at an example for this year:

(assume this employer pays every other Friday)

Paycheck days in 2006:

January 6 and 20

February 10 and 24

March 10 and 24

April 7 and 21

May 5 and 19

June 2, 16 and 30 (*** three paycheck month)

July 14 and 28

August 11 and 25

September 8 and 22

October 6 and 20

November 3 and 17

December 1, 15 and 29 (*** three paycheck month)

This example had two extra paychecks in 2006 for those whose monthly budget is structured on two paychecks per month. Imagine that? Reading and implementing this just gave you a couple extra paychecks per year.

Cottageblog’s author shares this two-extra-paychecks-per-year philosophy here in step 2 of the post.

After reading the Millionaire Next Door three times (I currently own 5 copies and give them as gifts to friends and family when they graduate from high school/college) it had a profound impact on my life. I think following the seven principles of millionaires covered in that book can drastically increase your odds of becoming FIRE [Financially Independent Retired Early.] They are:

1. They live well below their means.
2. They allocate their time, energy, and money efficiently in ways conducive to building wealth.
3. They believe that financial independence (the FI in FIRE) is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.

The book explains in full detail each of these principles and how they achieved their net worth. And by the way, Fools, the back of the book lists the professions of those interviewed for the book. Among some of the surprising careers on the long list:

Accountant, ambulance service, auctioneer, citrus fruit farmer, geologist, horse breeder, janitorial services contractor, lecturer, meat processor, oversize vehicle escort service, trader, timber farmer.

Also shocking–> the impression I got from the book is that doctors and lawyers statistically have the odds stacked against them of achieving great wealth. This is due to their expected high lifestyle and status artifacts they are expected to own. The more I think about this, my son’s pediatrician is probably only in her 30s and she drives a Lexus. Good luck, becoming a FIRE.

Anyway, the whole reason for this post is that I wanted to share with my fellow Fools a simple formula I’ve developed to evaluate how “on track” you are to becoming FIRE. Here it is…

At what age in life did you (and your spouse) achieve a net worth equal to that of your household income?

For example, if your household income is $60,000 per year how old were you when you had that much built up in your 401k, IRA, stocks, home equity, etc?

For some of us, it happens in our 20s, others in our 30s and so on. For some of us, it happens in our 50s/60s and some of us never build up a net worth equal to our household income.

For me and my spouse, we hit it at age 27.

Now, what’s amazing about this formula is that it has ABSOLUTELY NOTHING to do with your income, career or starting net worth. If you make $200,000 per year imagine how long it will take you to build up a net worth equal to that amount. Obviously LBYM and maximizing your investing will drastically speed up hitting that goal.

Here’s an even neater concept I love sharing with co-ops/interns/recent grads in our office:

If you stick 15% of your salary per year under the mattress you will have saved up an ENTIRE YEAR’S salary in 6 years, 8 months. Plus, you will be accustomed to living off 85% of your income (from saving 15% per year). So, in theory, you could quit your job for a year at age 29 (assuming graduating at age 22) and have a BETTER lifestyle than to which you are accustomed (you’ll have saved up 100% of your income, but you’re used to living off 85%, remember?). Pick any age for yourself and this still works.

Now, here’s where it gets really fun:

-invest it in stocks with a 9% annual return
-get a raise at any point during those 6 years, 8 months
-have a company that matches your contribution in any way

…and you can very easily reduce that build-up-a-year-of-income goal to a mere 4 or 5 years. Of course, in a retirement account you can’t touch it until until 59 ½ or thereabouts, but you get my point.

Remember……..two quotes by which I live my life:

“It has nothing to do with how much you make, it’s how much you save.”

“Invest until it hurts.”

And talk to my wife….she claims we’ve burn hurting for quite a while now!

Just my .02

Matt

Note: the original post on that well-known website can be found here.

The same can be said for you brown-bagging your lunch at work. It could even accumulate to $10,000.