2014 in the Books

Credit: Stuart Miles

2014 has flown by. I’m starting to relate more and more to Ferris Bueller’s famous quote: “Life moves pretty fast. If you don't stop and look around once in a while, you could miss it.” That being said, this is not a time to take your foot off the financial planning gas pedal.

As I’ve proposed in years before, I’d strongly advise you to take a few moments during the holidays and look at your financial situation. Don’t just say you’re going to lose weight, take a trip, or volunteer more in 2015, make some financial resolutions, too! My wife and I plan to try to boost our cash savings by 25%, make Roth IRA contributions, and increase what we contribute to our employers’ 401(k) plans by a few percentage points. What are you going to do in 2015 to make progress financially?

2014 was a good year for 2MuchCents as there have now been more than 27,000 unique views! Viewership was up over 200% this year! I thank all of you for your support and continued sharing of my posts. I couldn't do it without your help!

The top five posts for 2014 were:

1. Tips for Buying a Car
2. How to Plan an Affordable Trip
3. Freedom from Student Loans
4. Quit It! (bad financial habits not to do)
5. Summer Jobs, Life Lessons

If you missed any of them, please give them a read now.

 

It’s my plan to keep at it in 2015. I’m already working on a few posts that will cover topics such as buying vs. renting a house, freezing your credit, things to consider if you’re moving, stress-free ways to pay down debt, and why watching your portfolio go down hurts more than watching your portfolio go up feels good. I hope you’ll check them out.

 

Happy holidays. I wish you and your family a happy, healthy, and fulfilling 2015!

 

-Tom

My Default Savings Plan

Credit: stockimages

I don’t know about you, but I often do better with a plan. To my wife’s credit, she’s helped me become more able to enjoy going along with an unexpected or unanticipated opportunity, but there are still some areas in my life where I need some “navigational buoys” so to speak. One of those areas is savings, and I don’t think I’m alone in that regard. Without a savings plan in place, money seems to burn holes in pockets and disappear.

With that in mind, I’d like to offer up my default savings plan. Now, this plan is not exactly what I always do, it is not what I always advise accumulating clients to do, and it might not even be what I’d specifically recommend for you, but I do believe it is a good place to start for most people. Here goes:

1. Try to live off of 60% -70% of your take-home pay. If you so choose, tithe or donate 10%, spend 10% on fun, and save 10% - 20%.
2. Of the 10% - 20% I recommend you at least save, I’d suggest you consider doing the following, and in the following order:
1. Save six months’ worth of your monthly expenses in a cash savings account separate from your day-to-day checking account.
2. Pay down any and all outstanding credit card debt you may have and keep it paid off!
3. If applicable, make sure you are contributing to your employer’s retirement plan the amount or percentage you need to in order to maximize their matching contribution.
3. Once you’ve addressed number two, I’d propose making maximum IRA contributions (probably to a Roth IRA if you can, but it could depend…).
4. Once number two and number three are checked off, I’d propose you utilize your savings in the following ways:

• 1/3 as additional contributions to your employer’s retirement plan.
• 1/3 as contributions to a taxable brokerage account (after all, you may want to be able to access some of your investments penalty-free before your 50s).
• 1/3 as additional principal payments to reduce your school, car, home, or other debt(s).

Sure, there might be a college fund for a little one, a pending basement renovation, or an upcoming anniversary trip that needs some of your savings firepower, but this should at least get you started. It is my hope that you will use my plan as your plan. It is my hope that you will use this plan as your policy as your personal and financial situation progresses, so that one day, you don’t look back and wonder where all of that hard-earned cash went. However, if you want to talk specifics about your situation, I’m happy to. You know where to find me.

 

-Tom

Warranties

Credit: nirots

Let’s say you have just finished picking out something such as a new smartphone, a refrigerator, or a car. Doesn’t it feel good? All of that weight that’s been on you as you try to make what you think is an informed decision based on your hasty research and the salesperson’s rapid jargon almost immediately leaves your shoulders just as soon as you utter a derivation of the words, “I’ll take it.” But alas, your relief is short lived. That ever so friendly salesperson has one more devious question at their disposal: "Would you like the extended warranty?" Oh, the humanity!

Personally, I’ve always been inconsistent on extended warranties. Sometimes I go with them, sometimes I don’t. My general rule of thumb has been if it is really expensive or if there is a pretty good chance that I can mess it up, I go with the extended warranty. If it’s not that expensive of a gadget or gizmo, it’s really good quality, or I think there is a pretty good chance I can protect it, I usually don’t. So when someone recently asked me to weigh in on whether extended warranties are a good financial investment or not, I had some work to do, and I’d like to share what I found.

First of all, let’s call a spade a spade. An extended warranty is nothing more than a bet. If we were talking about the Dallas Cowboys and you asked me if you should make a bet on their game this week, the answer is maybe. You might bet correctly, and then of course it was a good idea to bet, or you might bet incorrectly, and then of course it was a terrible idea for you to bet. Only time will tell! Extended warranties are just like bets, only we’re talking about the Whirlpool Front-Load Washers, not the Dallas Cowboys.

Based on my research, and now, in my opinion, extended warranties do not seem to often be a good financial investment. Dr. Rajiv Sinha, a professor of marketing at Arizona State University who is currently working on a research paper about warranties seems to put it best when he says, “From a purely economic standpoint, it usually doesn’t make sense to buy an extended warranty, but consumers aren’t always rational. When buying a car, iPad, phone, home, or any expensive item that might break, they are willing to pay for peace of mind.” In a recent U.S. News and World Report article, Dr. Sinha continues making his case by offering, “Consumers aren’t buying extended warranties for such products because they think they’ll break, but because they’ll feel bad if they do break and didn’t buy the warranty. You wouldn’t expect a washing machine to fail, but if it breaks after a year, you’ll have wished you bought the warranty.” How true are his words? They are somehow profound and obvious at the same time.

Other tidbits I found were...

• If you are buying a typically reliable product from a reliable brand, you likely don’t need an extended warranty. If it’s going to break, the odds are it will happen within the original warranty or return window.
• Laptops and tablets are more likely worth getting warranties on than desktop computers. Their parts are smaller, and they will probably face more wear and tear.
• If the price of an extended warranty is anywhere near the fair market value of whatever widget you are about to purchase, you probably don’t want it. Besides, aren’t you going to want the latest and greatest version that’s faster and more lightweight in a few years anyway?
• Used cars and previously lived in houses may be good items to buy an extended warranty on. No matter what CARFAX or the convincing home inspector tells you, there has got to be a reason someone doesn’t want that car or house anymore; otherwise they’d still be driving it or living in it! Like all warranties, this could be hit or miss, but no one wants to get stuck with a lemon - especially a big one!
• Before you add on an extended warranty, see what basic warranty you are getting. If the product, store, or even your credit card offers you a longer time frame or additional guarantees, you may not need that extended warranty emotionally or financially!
• If you are negotiating something big, such as a house or a car, and you’re close to agreeing on a price, see if you can get a more favorable extended warranty. There is no harm in asking, and as long as you are not paying a lot more than you were already willing to pay, you’re sort of getting an extended peace of mind for free.

 

So what should you say the next time someone asks you if you want an extended warranty? It depends. I’d listen to your head and consider your wallet or purse, but I’d probably still go with my heart. After all, it’s just a bet - one that I hope you win.

 

-Tom