People often assume that you have to either drastically cut your expenses, or find new and inventive ways to increase your income in order to have more money. That is simply untrue. While it certainly helps to make more money and to stop frivolous spending, there are a couple key financial moves you can make to simply grow the money you already have! It’s funny how often people hear about low interest rates, inflation, and the bull market, yet they don’t actually listen to what all of the above means.
Here is a quick economics lesson for you. Low interest rates are great when talking about borrowing money. I have a mortgage at 3.75% right now and couldn’t be more pleased. We are truly borrowing money at the lowest rates in the history of the world. Our parents were borrowing money with rates in the high teens back in the day, just imagine how much less you could afford if that was the case today. The problem with low interest rates is that the safest places to store your cash are actually money pits, i.e. banks. We have been told since we were children that we need to have a bank account, when that bank account pays a pitiful 0.10% interest rate you might as well throw it under a mattress. This is where inflation comes in. Inflation is quite simply a general increase in prices, which means the value of a dollar becomes less each day that passes. Remember when gas was under $1? All of this factors in the bull market that we have been experiencing for 6+ years. A bull market is a term that illustrates a hard charging stock market with upward momentum. Low interest rates make stocks look more attractive, and that is because everyone wants to beat inflation…see how they all tie together?
Below I am going to provide you with some real and tangible ways to increase your net worth without cutting back on expenses, or earning more money…so pay attention.
Brokerage Accounts over Bank Accounts
I am willing to bet that each of you reading this has a bank account. Don’t get me wrong, I have a bank account too, I just don’t keep much money in it. My bank account consists of enough money to pay my monthly bills, like my mortgage and utility payments. I do have a separate account that I like to keep enough to pay for any sudden expenses, like a new A/C unit (happened last year) or sudden home repair. I actually don’t think you need a bank account to store an emergency fund. Emergency funds are sort of a fallacy propagated by the so-called financial guru’s out there who want to sell books they have written. Whenever they run out of material to write about they change the supposed number of months of expenses you should keep in one of these accounts. I have seen it fluctuate from 3 months to 24 months… don’t waste your time reading that crap.
Don’t get me wrong, it is extremely important to SAVE money. You just need to go about saving it smarter! If you have a bank account, then make sure it’s an online account. The little bit of money you keep in there should be subjected to the highest interest and lowest fees possible. You won’t find that combination with a brick and mortar bank, not even a credit union, times are a changin’. I’ve included a banner below for Discover Bank…I’m a huge fan of both their credit cards, and their banks accounts for whatever amount of money you feel comfortable with in a savings/checking account.
Now this is where I tell you that if you don’t have an after-tax brokerage account then you need to get one! I automatically deposit a set amount of money that is taken right out of my bank account on the 15th of each month, and placed into my brokerage account the same day. I have this account, and deposit automatically setup for 3 specific reasons.
- My unrealized gains from last year (2014) amount to just over 27%. This is the amount from both my the appreciation of the stock/funds, as well as the dividends earned throughout the year. Please note that I automatically reinvest all dividends back in. Even the best online savings account only earns about 1.0%, and most brick and mortars are somewhere around 0.1%. Just to illustrate, if you had $10,000 in your brokerage account versus a bank account last year, with my investment mix, you would be a few thousand dollars richer. If it was in a bank account, then I can say that you actually have less money now than you did last year, simply due to inflation of roughly 0.6% last year.
- I typically invest the same time each month, the 15th, to take advantage of dollar cost averaging. By investing the same time each month I am not guessing on the movement of the market. Statistics tend to show that this is the best way to invest over a lifetime, and gains tend to be significantly higher than if you try to time the market yourself. I will admit that I do look for steep drop-offs in the market, and more specifically, in the stocks and funds I hold. When JP Morgan and BP had their major crises a few years ago I took advantage of it by buying into them immediately, simply because I knew they weren’t going belly up. To me it’s simple logic, but the market tends to panic, which cause them to sell when they should hold, and only buy after everyone else has bought…which is the worst time possible.
- Lastly, these accounts are highly liquid! People often worry that they can’t get to the money if they need it. This couldn’t be further from the truth. Before I proposed to my wife a few years back I actually cashed out some of my investments and had a check sent to my house. It took about 2 days from the time I sold the stock until I had the money in the bank. If you don’t mind paying a $25 wire transfer fee then you can have it even quicker. Had I been saving the money for that ring in a plain ole bank account I would have had a lot less to spend, I can tell you that. Also, there aren’t any penalties for cashing out an after-tax investment, this isn’t your 401k, you simply pay capital gains taxes which is the appreciated amount since you initially bought the stock. This means that if you are paying any sort of tax on the investment then you must have done pretty well!
I do think you need to exercise some discrimination when picking the right type of brokerage account. Most of them you can start with as little as a $100 investment! Forget about the Edward Jones type establishments that charge you $50 per trade, or some ridiculous annual statement fee, open a an online account. I have had an online brokerage account for years, just make sure they are FDIC insured and you are good to go. I pay about $6 per trade and nothing for my online statements or any advisory fees. Some of the brokerages I recommend are below.
TD Ameritrade is well known, and has a great online presence! They offer everything from a user-friendly mobile app, to an easy PC platform as well.
The other company I recommend is Trade King. They don’t have the brick and mortar presence that TD does, but then again, you don’t really need it either. What I like about Trade King is that they have better promotional offers, like their $200 new account bonus…If you don’t have an account already then they are the way to go.
Use Your Credit Cards
There is nothing wrong with using credit cards, it’s just that people so often misuse them they get a bad rap. Credit cards companies just want you to use them whenever you purchase something because they charge a transaction fee to the merchant, usually between 3% – 5%. When you fail to pay for you monthly statement in full they are then able to charge you interest as well, which is just icing on the cake for them. However, they are still perfectly happy, and quite profitable just by making money off the merchant fees. Don’t do them any favors by adding to their bottom line. Remember those so-called financial guru’s I mentioned above? Many of them advocate a cash only lifestyle. If you only spend your cash then you will never spend more money than you have, which can be a good thing, but it also take away from your potential overall wealth. The reason they advocate cash is merely a psychological thing. You are more deeply affected by spending money versus plastic, you will tend to spend less, and it’s an overall safeguard on the human need to overspend. I’m here to tell it to you straight, if you want to be wealthier then you need to control yourself, not trick yourself. Use your credit cards, just use them wisely!!! My wife and I received a $700 check from American Express last year simply by purchasing items that we planned on buying regardless. Had I used cash instead of credit then I would be out $700 right now…I simply don’t get the logic. Keep in mind that we didn’t pay a dime of interest.
You are probably wondering what the best card to use is, many often do. I don’t even stress when looking anymore, because despite the thousands of credit promo’s an offers, it’s actually quite easy to determine the best card for you. First, you simply need to understand that every credit card “point” is typically equivalent to $0.01, that’s all. So when you get 5,000 bonus points for signing up it usually equates to $50. I’m not saying that isn’t a nice sum of money to receive, but if the card comes with a $175 annual fee on top of it then it probably isn’t worth it. I don’t care about all these damn rotating spend categories, that is for the credit card companies benefit, not yours. Fine the card with the highest overall % payout without limitations. Actually, now that Costco is ending their relationship with Amex, I am thinking about ditching the Amex for a Chase card. There’s a new chase double cash card available that pays you 1% on all purchases, and then an additional 1% whenever you pay the bill for them. Simple math tells me this is 2% cash back on ALL purchases, no gimmicks. Take advantage of it! It is a whole 1% higher (hence the name double) than just about every other card out there.
Stop Overpaying Your Mortgage!
This is one that I ALWAYS get pushback on from people. Obviously you need to pay your mortgage, and pay it on time at that. However, you don’t need to be, nor should you, paying extra on it each month. I have a 20 year mortgage because it aligns with my retirement goals, and was equivalent to the lowest rate I could get at the time. Outside of that, I have zero reason to pay down more on that mortgage. At a miniscule 3.75% I am paying right now, I can EASILY out earn that in the market right now. Look above at my online brokerage advice. There are several tried and true companies out there that are paying dividends in excess of 3.75%…why would you not take your extra money and put it there instead? Any regular stock appreciation is just icing on the cake as well.
The part of overpaying your mortgage that many people fail to realize is that you are going to take away one of the most valuable tax shelters the average consumer has available to them today, mortgage interest deduction! You might be paying 3.75% interest on your mortgage but you are getting a sizeable portion of that money back via a deduction on your annual taxes. This is the sole reason I am able to itemize my taxes versus taking the standard deduction every year, so it’s nothing to sneeze at. Invest your money rather than overpaying on your mortgage and I promise you will be MUCH wealthier in the long run…actually, even in the short term!
In the end, if I had to sum up my advice in one sentence, I would advise you to pay attention to your net worth rather than your annual income. Doing so will make you infinitely wealthier in the long run, and my advice above won’t hurt either 😉