Personal Finance Hacks 1-8

Since, thanks to O’Reilly, everything cool these days is presented as a list of hacks, I present the first installment of Personal Finance Hacks. These are tips that I’ve collected over the past several years as I’ve explored different investments and bought a house. I’m not a financial advisor so I make no guarantees. Hack your personal finances at your own risk!

Hack #1: Live in a Cashless Society

I read a list of financial tips recently that suggested cutting up all your credit cards and only allowing yourself to use cash. That seems incredibly wrong to me, and was one of the reasons that I started writing this. Sure, if you have trouble managing your expenses or if you are drowning in credit card debt, shred those damn cards. But if you are a financially responsible, keep a small amount of cash on hand and charge whatever you can.

I point to three clear advantages of credit cards over cash.

First, credit is protectable. If you get ripped off by a merchant and you paid cash, you have few options. You can go to the Better Business Bureau or call the police but there’s really no evidence that you even made the transaction. With credit cards, the card companies can help you settle disputes. You may also get other benefits like automatic warranty protection.

Second, credit is trackable. I use (and love) Microsoft Money to keep track of my finances. By importing my credit card statements (virtually all cards let you do this), I get an automatic record of what I bought. It’ll even categorize expenses so I can build a chart of how much we spend on gas per month. When I pay with cash, I end up with a receipt that only turns up again in the dryer lint trap.

Third, credit gets you rewards. With my cards (none of which have fees), I get 5% back on gas, 5% back on groceries, and 1.25% back on everything else. It adds up pretty quickly. Instead of paying annual fees for cards, we get nice payments from the credit card companies every year.

Of course, all this assumes that you pay off your balance every month. If you don’t, you should correct that before trying any of these hacks.

Here’s a no-fee Discover card that gives you up to 2% cash back:


Discover Card Wildlife Application

Here’s the Discover gas card, which gives you 5% back on gas purchases. This is a reverse-tiered card, which is good — you get the 5% back right from your first purchase. When you hit a certain cap, the rate goes down. I have this card and use it regularly:


Discover Platinum Gas Card

Note that if you sign up through the links above, I get a small kickback.

Hack #2: Know Your Cuts of Debt
I once had a friend who boasted that her father never had any debt. He owned his house outright and never used credit cards. He paid cash for his car and never leased or loaned. At the time, I thought that was a pretty admirable way to live. As I learned more about money though, I realized that debt is an important tool for increasing your wealth.

Take a look at your current debts and decide if they are good or bad. It’s not as black-and-white as “credit card debt is bad, mortgages are good.” Credit card debt in general is bad, but if you have credit card debt on a 0% interest offer, that’s good as long as you pay it off before the 0% expires. Mortgages are generally good but if you have a adjustable mortgage with a high margin or a negative amortization loan, that’s probably pretty bad. Home Equity Lines of Credit (HELOCs) are generally good but if you have a HELOC and you drew cash out to buy a 42″ Plasma TV and a new SUV, that’s bad unless you intend to pay off the HELOC soon. For more on HELOCs, see below.

In general, I don’t strive to be debt-free. I strive to have good debts that I can use to my advantage.

Hack #3: Don’t Pay Fees for Financial Services

As a rule, I don’t pay fees for bank accounts, credit cards, brokerage accounts, retirement accounts, mortgage brokers, insurance brokers, etc. And yet, I can almost guarantee that I get the best bank rates, brokerage service, morgage rate, etc. This forces me to question why people pay fees for these things.

Take an hour to go through your various accounts and determine which ones are charging you fees. Do a quick search for competitors that don’t charge fees. Then call up your current provider and ask them to either waive fees or close your account.

Hack #4: CDs Aren’t Forever

I am lucky enough to have parents who believed in providing their children with financial education at an early age. I was always aware of how my money was invested and participated in financial decisions.

One of the primary vehicles my parents used was Certificates of Deposit. I always viewed them as fixed-term savings accounts that earned a higher rate of interest in return for not being able to touch the money until the CD came due.

This isn’t always true, however. Many CD terms and conditions allow you redeem the CD early and pay a small penalty. Most times, it’s not worth it. However, during times of rising interest rates (like now), you may find that some CDs you bought a year ago aren’t paying rates that are competitive with current offers. Check the terms of your CD and do some simple math to determine if it’s worth paying the penalty to invest in a new CD at today’s rates.

Hack #5: HELOCs are Wonderful

If you’re a home owner and you don’t already have one, you should keep HELOCs in mind. Even if you don’t have a need for one right now, a HELOC can help you. A HELOC, like a mortgage, lets you take a loan out against the value of your house. With the appreciation most people have seen recently, you are probably eligible for a sizeable line of credit.

There are several “traditional” reasons for opening up a HELOC. In my case, we bought our house with 10% down. To avoid paying mortgage insurance on a 90% loan, we instead got an 80% mortgage and funded 10% through a HELOC. This is very common, especially in California. A lot of people use HELOCs to fund renovations. You take out $50k against your equity with the goal of increasing value further.

There are other reasons to look into HELOCs though. First, they’re generally free or cheap to open. It’s not nearly as difficult as getting a mortgage. Second, you can use them as sort of a second-tier emergency fund. You still want to have cash on hand, but if you need money right away and already have a HELOC opened, you can tap it as-needed. Third, with favorable rates, you can use a HELOC to get free guaranteed money. For example, you could open up a HELOC with a 3% introductory rate and invest it in a 5.5% CD. Actual rates will vary and, of course, after the introductory period, the HELOC rate will shoot up. But depending on the introductory period and the CD term, you could arrange a very nice guaranteed return. Just make sure you have the cash flow to pay the HELOC interest every month! Finally, HELOC interest is tax-deductible like mortgage interest. I’ve heard of people using their HELOCs to pay off their credit card debt. Again, as long as you can swing the monthly payment, that might be a good idea.

Don’t get HELOCs confused with Home Equity Loans (HELs). HELs are usually fixed-rate loans for a particular amount whereas HELOCs are generally variable-rate lines of credit that you can use or not use at your discretion. HELs are good too, but they’re less flexible. Instead of having a line that you can draw on as-needed, a HEL is just a traditional loan of a fixed amount.

Hack #6: Hack Your Credit Score

There are so many myths about credit scores, many of which have been stated by the credit agencies. Here are some things you should know:

  • Non-credit items like bank accounts do not affect your credit score, though you may suffer a brief hit (2-3 months) if the bank does a credit check before opening the account.
  • If you are denied credit, you are entitled to a free credit report. You also get one free credit report per year as of 2005.
  • More accounts does not necessarily mean a lower score. In fact, the extra credit available to you (assuming you don’t actually use more than half of it) will probably raise your score. A lot of people (myself included) have made the mistake of closing old, unused accounts because the credit bureaus say “too many accounts” on your report. Don’t do it! The length of time that your credit lines have been open is a major factor in calculating your score. You want those old lines around!
  • If one of you or your spouse/partner has a lower score than the other, consider getting the lower scorer as an authorized user on one or more of the higher scorer’s cards. The lower scorer will benefit from the increased available credit and there may not be a credit check. You should only do this with someone you trust though as you can now totally jack each other’s scores!
  • The formula for calculating credit scores is a closely guarded secret. Nobody can say for sure what will help and what will hurt. A lot of web sites and services that give you a “credit score” are actually just using their own algorithm. To get your real credit score, make sure the service you are using is providing an actual FICO score.
  • There are two types of inquiries on your credit history. Hard credit pulls are done when you apply for an account. These tend to temporarily lower your score under the (somewhat dubious) theory that since you have recently applied for additional credit, subsequent potential creditors should be less inclined to offer you credit. Soft credit pulls are when you check your own credit or when a potential creditor obtains basic information about you for the purpose of marketing to you (i.e. those pre-approved offers you get in the mail). Soft pulls do not affect you in any negative way.
  • Don’t let a mortgage lender tell you that applying to several lenders will hurt your credit score. In fact, multiple mortgage credit pulls within a short time period (I’d say a week to be safe) are treated as a single inquiry for the purpose of calculating your score. Anybody who tells you otherwise is just trying to pressure you out of comparison shopping.
  • Some cities are starting to report unpaid parking or traffic tickets as negatives on your credit report. It seems likely that in the future, more of these not-necessarily-credit-related items will start to show up.

Hack #7: Refinance Intelligently

The refinancing craze has cooled a bit now that rates are higher, but since we all tend to have 5/1 ARMs, refinancing is clearly a part of life. I hear about a lot of people doing it for silly reasons though. The decision of whether or not to refinance is actually pretty simple — are you getting a lower rate?

You can look at the payment and convince yourself that you’re saving money by refinancing. But there’s no escaping the fact that a lower rate is the only way to save money.

By the way, I recommend reading through mtgprofessor.com for some fascinating articles about mortgages.

Hack #8: Rebates are a Tax on the Disorganized

Most people hate rebates. Heck, most vendors and retailers hate rebates because they’re a pain to process and deal with. But rebates are an incredibly good deal for the company offering them because redeption rates are so low. And they’re incredibly good for the personal finance hacker for exactly that reason.

On any given Sunday, you can look through the newspaper ads and find a wealth of products that are free or nearly free after rebate. Most people buying these products don’t follow the directions or are too lazy to send in the rebate. That’s what allows you and me, the conscientious rebate sender, to get the product so cheap.

When I buy something with a rebate (which is disturbingly often), I fill in all the forms, underlining the requirements as I fulfill them, and then scan everything and put it in a folder on my computer with the expected redemption date and the amount of the rebate. If there’s ever a problem (and about 20% of the time, there is), I have a record of everything and can dispute it with the company. In the past few years, I’ve probably done 200 rebates and haven’t been stiffed for a single check. I currently have $850 in outstanding rebates and I expect to get every penny of it.

More Personal Finance Hacks coming soon…

3 Comments

  1. August 26, 2005

    Just one quick addition with regards to the credit card section. People should realize that 0% credit cards are good vehicles ONLY if you NEVER use them. The 0% is usually a transfer balance which is fine. However, the following situation often occurs:

    1) Transfer $2000 onto 0% card.
    2) Spend $200 per month for 10 months.
    3) At the end of each month pay off the $200 of “new” stuff.
    4) Think that you’re doing fine.
    5) Realize that over the course of ten months you’ve replaced the $2000 of 0% with $2000 of 10-20%.

    The credit card company nearly (if not 100%) pays off the 0% debt first.

  2. September 14, 2006

    For the most part I agree with your comments on credit score. The formula is a secret yes, but guidlines are available.
    35% – Your Payment History
    This is the major key. How do you use your credit over time? Use it regularly, pay it regularly (off)? Best. When do you pay it? On time every month. Very good. Before it’s due? Best. A few days late. OK. More than a few days? Bad.
    30% – Amounts You Owe
    Not suprising, how much you carry each month and how close are you to the limit? Less than 75% very good. At or near 0, best.
    15% – Length of Your Credit History
    As you stated, the longer you have it the better. Active credit is the important part. In active cards neither help or hinder.
    10% – Types of Credit Used
    Car loan, boat loan, student loan, line of credit, HELOC, etc. The more you use and pay out the better.
    10% – New Credit
    Are you a credit hound? Do you apply for credit once a month? If so, the lenders will start asking themselves why every month? It may be a small part, but you don’t want lenders to be asking themselves questions.

    As for shoping your mortgage around, from first hand experience, I would have to disagree. I pulled a clients score and he did the same the next day. His score was 30 points less than mine (one hard & one soft)! Let your mortgage broker do the “shoping” for you. They pull it once & give it to the various lenders (so they don’t, unless you have a bad broker).

  3. klep
    September 16, 2006

    John,

    Thanks for the reply and the rough guidelines on how various factors influence your credit score. I still have disagree on the final point. While I’m sure you see more credit reports than I do, I have heard from many others that as a policy, the credit agencies treat inquiries for similar lines of credit as a single inquiry when calculating your score.

    Unless I’m misunderstanding the sequence of events, it sounds like in the case you described, the client did a soft pull the day after you did a hard pull — so of course his score went down. His report came after the hard pull and yours *was* the hard pull.

    Though I do agree that for many people, going with a broker makes sense of a lot of other reasons. Frankly, unless you consider chasing good rates and dealing with questionable lenders a hobby (I do), it’s probably better to leave it to someone who does it every day.

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