Randy's Homestead: Personal Finance: The Secret Plan

The Secret Plan*

Where does the money go? Take last year's check book and credit card statements and add up your expenses in categories (rent/mortgage, phone bill, groceries, dining out, etc. When you see where your money really went it will probably be a lot different than what you thought. Identify areas where you can cut back on spending (such as long distance calling, dining out, electric bill) and where you have fixed expenses (such as car payment, rent/mortgage, etc.).

Create a "Secret Plan" to spend less money on discretionary items. Using financial software like Microsoft Money 2007 Deluxe, Premium and Home and Business or Intuit's Quicken 2007 Basic, Deluxe, Premier and Home and Business, can show you where you are spending your money so you can find ways of reducing expenses.

Pay yourself first. Put 10% of your take-home pay into a retirement plan or a savings account that you will not touch for day-to-day expenses.

Get out of debt. Apply the remaining extra money to pay off your highest interest debt first. When that is paid off, use the entire dollar amount used on the first bill and add it to the payment of the next highest interest debt. Keep this up until all the debts are paid off. Yes this can take years, but the same amount of time will pass whether you pay off those debts or not.

Insurance

Shop around. This takes time but you save hundreds of dollars a year. Ask your friends, check out the yellow pages, consumer guides and online insurance quote services. But don't buy on price alone, you'll also want fast, quality service if you need to file a claim. And don't be afraid to ask what they could offer to lower your costs.

Increase your deductible. The deductible is the amount you'll need to pay out of your pocket of a covered claim. Most insurance policies have a $500 deductible. If you increase your deductible to $1000, you may save 25% on your premiums. Build up a savings account so that you can self-insure your deductible.

Buy auto and home policies together. If you can buy these policies from the same company, you may save 15% (maybe even more) on your premiums. However, make sure the combined price is less than buying different policies from different companies.

Improve your home's security. Ask your insurance agent/representative what to can do to make your home more resistant to natural disasters and fire damage. Some companies offer discounts for monitored burglar and fire alarm systems.

Stay with the same insurer. You may get a discount of 5% to 10% for staying with the same company. But still make comparisons periodically to ensure you're getting a good rate.

Review your policies annually. If you've added to your house, be sure your policy covers the of rebuilding the addition in the event of a disaster. If you have high-dollar items (jewelry, expensive electronics), you made need a "floater" (extra insurance to cover the full value of items not covered by your standard homeowner's policy).

Consider insurance before you buy. For a home, your premiums may be higher if you don't live near a fire hydrant or if the community doesn't have a professional fire department. Flood and earthquake damage is not covered by a standard homeowner's policy. The Federal Emergency Management Agency provides information on flood insurance on their website. Contact your insurance company about earthquake policies.

Renter's Insurance is what you need if you don't own your home. Renter's insurance covers your possessions while the landlord's insurance covers the building you're living in. Be sure to get a replacement cost rider or in the event of a loss, you will only be reimbursed for the depreciated value of your possessions. Don't think the landlord's insurance will cover your stuff - it won't!

Make sure the new insurance policy is in effect before canceling the old one.

Automobiles

Car Rental Rates can vary greatly. Shop around to get the best rates. Check both on-line (Priceline.com) services and call local rental car agencies. Ask for the lowest rate available - it may be a slow day and they'll make a deal to rent a car.

Car Rental Insurance and waiver options also vary. Check first with your car insurance agent (and credit card company) to avoid duplicating existing coverage.

Save thousand of dollars over the lifetime of a new car by selecting a model that has low insurance, gasoline, maintenance and repair costs. Combine this with a low purchase price and low financing for the best possible deal. Your public library has car guides with this information, and don't forget the resources on the internet.

No "cooling off" period on new car sales, so once you have signed a contract, you are obligated to buy the car.

Check the Blue Book before buying any used car. This way you can compare the dealer's price with the average retail price for any car. This is available in most libraries, credit unions, banks and online at Kelly Blue Book.com.

Ask a mechanic to check out a used car before you commit to buying it. You may have to pay a fee for this service, but if it keeps you from buying a "lemon," it will have saved you many times the fee.

Consider purchasing a used car from an individual you trust. The price will usually be lower than from a dealer and the owner may point out any problems with the car.

Don't lease a car just because the payments are lower than a traditional loan. The payments are lower because you don't own the car at the end of the contract.

When leasing, compare the price of the car, your trade-in allowance, any down payment, monthly payments, excess mileage fees, excess wear-and-tear fees, end-of-lease fees, and the cost of buying the car at the end of the lease. Leasing is very complicated - don't let the low monthly payment blind you to the other lease factors.

Save hundreds of dollars a year by comparing gasoline prices at various stations and using the lowest octane called for in your car's owners manual. Keep your engine tuned and keep your tires inflated to the pressure recommended in the vehicle's manual.

Consumers lose billions of dollars on unneeded or poorly done car repairs. The single most important step you can take is to find a skilled, honest mechanic. Look for a mechanic who: is certified and well established, has done good work for someone you know, and communicates about repair options and costs.

Banking and Credit

Save $100 a year in banking fees by using a checking account that doesn't a service fee or has a low minimum balance requirement to waive fees. Some accounts are free if you have checks directly deposited in them. Direct deposit also offers you convenience, security and immediate access to your money.

Before opening a savings (or investing) account, find out if it is insured by the federal government (FDIC or NCUA). An increasing number of products such as mutual funds and annuities are not insured.

Little or no risk is available with Certificates of Deposit, Treasury Bills and Notes, but consider the inflation rate as well. You don't want to be earning a "safe" 2% when the inflation rate is 3%!

Save a thousands dollars in lower credit card interest per year by paying off the entire balance each month. If you can't pay them off (and you're not alone), switch to a credit card with a lower annual percentage rate (APR).

Reduce credit card fees by getting rid of all but one or two cards, keeping those with no annual fees. Careful planning will help you avoid late payment fees and over-limit fees.

Making a large down-payment on an auto loan (using your low yielding savings account), could save you several thousands of dollars in finance charges.

Housing

Save tens of thousands in interest charges by shopping for the shortest term mortgage you can afford. Your payments might be higher, but you'll spend much less in finance charges and you'll own your house sooner.

Consider refinancing if you can get a rate that is at least one percentage point lower than your existing mortgage rate (and you plan on keeping the new mortgage for several years). Ask an accountant to calculate precisely how much your new mortgage will cost (including the up-front fees), so you can decide if refinancing is better for you in the long run.

Be cautious when taking out a home equity loan. The loan reduces the amount of equity you have built up in your home and if you are unable to make the payments, you could lose your home

Using a Buyer's Broker can often negotiate a lower sale price since they work for you and not the seller.

Select a Home Inspector to examine any house before you buy it.

Home repairs cost thousands of dollars and are the subject of frequent complaints. Choose from several well-established, licensed contractors who have submitted written, fixed-price bids. Don't sign any contract that requires full payment before satisfactory completion of the work.

Before buying major appliances, consult Consumer's Reports (available in most public libraries and online at www.consumerreports.org). Use this information to evaluate different brands, their repair history, their energy usage and what features to look for or avoid.

Utilities

Save hundreds of dollars on electricity a year by making sure any new appliances, especially water heaters, air conditioners and furnaces. are energy efficient. Federal law requires Energy Guide Labels to be on major appliances.

Call your electric company to see if you qualify for any energy savings programs. Some electric companies offer free or low-cost energy audits of your home to help you identify where you can save money. Call your gas company also if you use natural gas in your home.

Check with your phone company to see whether a flat rate or measured service plan will save you money. Also see if you have optional services (speed dialing, conference calling) you don't really need or use. You could save $40 a year by dropping some of these options.

Subscribing to a calling plan will save you money over the standard rates for non-subscribers. Also consider some of the 10-10 dialing programs. Compare and see which will save you the most money based on your long-distance calling pattern.

Miscellaneous

Save hundreds of dollars a year by shopping at the lower-priced food stores. Convenience stores typically charge the highest prices.

Use a shopping list to minimize impulse buying.

Compare price-per-ounce (or other unit price as appropriate) on many store's shelf labels. If your store doesn't put the unit price on the labels, carry a calculator with you. Price per ounce is: $Price divided by the total ounces. Stock up on items with a low unit cost.

Prescription drug prices will vary from pharmacy to pharmacy. If your insurance plan doesn't have a fixed-price prescription drug program, call around to get the best price.

Generic drugs will save you money over the name brand, ask your doctor if a generic drug is appropriate for you. Ask your pharmacist if a generic drug is available for your medicine.

Consider a mail-order pharmacy, if you are taking the same drug over a long period of time. They often charge less money and your medicine will be delivered to your mailbox instead of your waiting in line at the store.

* "Secret Plan" is our code phrase for a budget. To most people a budget means they can't spend money, doing without things, no fun, sitting and freezing in a dark room in winter. Nothing can be further from the truth for us. Our secret plan will free us to enjoy life by eventually eliminating our money worries.

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Spend Less Than You Earn

The Secret Plan*

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Insurance

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Automobiles

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Banking and Credit

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Housing

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Utilities

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Miscellaneous

Summary

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