Roger's Keys to
06 November 2005
- Always pay cash. This is rule number one because if you
donít have enough money to pay cash you must wait until you do have
enough cash. Often, by the time you have enough cash you find you either
don't want the item anymore, a new model becomes available, or a more
important use for your money comes up. Plus, it avoids rule number 4.
- Exception to rule 1: you may pay by credit card to take
advantage of the benefits of credit cards: better return policy at the
store, frequent flyer miles, trip insurance, etc. However,
- All credit cards must be paid off each month no matter
how much it hurts. (And it will hurt!) Obviously, this requires planning
to ensure you keep enough money set aside to pay the credit card bill when
it comes in. In 30 years of using credit cards I have paid interest maybe
10 times; half of which because I missed the payment deadline due to
- Never pay interest!
- Exception to rule 4: you will probably have to buy your
first house and a car or two on credit. However, go for the shortest repayment
term possible; e.g., 15 years on a house and 3 years on a car. Never buy a
house or a car that you cannot afford to make payments on unless you must
go for the maximum term (minimum payment)! You'll be paying for the
house or car two or three times in interest. Pay off the loan as soon as
possible to avoid paying interest. Never lease a car.
- Buy only good quality used cars, usually no more than one
or two years old. Let someone else lose 20% for driving it off the lot!
Older cars (usually over 30,000 miles) soon will require excessive
maintenance due to needing tires, battery, timing belt, etc. Prior to
buying, research your purchase by reading Consumer Reports, available at
your library. Do not have automotive work done at gas stations or
independent garages. The dealer is often the same price, they know the
car, they use only parts designed for the car, and they will be there next
week if their repair is faulty.*
- When you finally have a nest egg, never spend the
principal, only the interest. Even then, you should only spend the
interest that is above taxes and inflation! For example, assume you have
$10,000 in savings at 10% per year interest, or $1,000 per year. But taxes
will take 20% ($200) and the inflation rate is 3% ($300), leaving you $500
- Get at least a Bachelor's degree so you can get a job
that supplies good health insurance. Doctor's bills and bad cars can
wreck your finances faster than just about anything else.
- Always carry homeowner's insurance and car insurance.
Keep the deductibles high to keep the cost down. Increase the
deductible until the savings in premiums is at least 1/5 of the premium
increase. For example, if your home insurance is $500 per year with
a $500 deductible, and it is $400 for a $1000 deductible, it's a great
deal. It is highly unlikely that you will have a claim over $500 in
a 5 year period. If you have one claim of $1000 or more in 5 years
you break even. If you have no claims over $500 in 10 years you've
saved a lot of money. So, always self-insure up to a 5 year payback
of the deductible increase.
- Never buy whole-life insurance. It's a poor
"savings" account; buy only term life, only as much as you need.
Keep track of term rates and re-enter every few years (unless your health
is poor) to keep the cost low.
- I don't recommend buying individual stocks! The
stock market has historically out-performed virtually all other forms of
investments over long periods of time, but as we have seen in 2001 and
2002 one can lose his/her shirt in a hurry! If you want to invest in
the stock market, buy "index" funds such as the Vanguard Index
500 fund which invests in the stocks which make up the S&P 500 in the
same ratios as the S&P 500 market report. Historically, the
S&P out-performs about 98% of the stock funds and stock
"gurus." Individual stocks (and stock funds) are extremely
risky as evidenced by the fiasco of Enron and Worldcom in
- Buy and sell stocks, mutual funds, and bond funds
yourself! It's cheap and easy to do on the internet these days.
Your friendly "financial advisor" and banker will
be happy to buy them for you--for a mere 5% or so fee! Stay away
from funds with "front-end" or "back-end" fees.
(If you don't understand these terms find someone who will explain them to
you. They will cost you lots of money!) USAA, Vanguard,
Janus, and many other investment services offer funds with no front- or
back-end fees. Also, select funds with small 12.b.1 fees. Go
to your library and study some of the investment reports or search the
internet to learn more.
- Instead of investing heavily in the stock market via
individual stocks, funds, or index funds, I prefer to buy tax-free bond
funds. These funds invest only in bonds backed by individual states,
cities, or local taxing agencies to build airports, power plants, water
infrastructure, etc. They are Federal tax-free but your state will
tax the earnings from other states. As such, they are probably the
second safest investment vehicle (Federal bonds are the safest but are
taxable on the federal level). I use USAA Intermediate and Long-Term
Tax Exempt Bond Funds. All USAA funds are AMT (Alternative Minimum
Tax) exempt. Current earnings are in the 4-5% range tax-free.
This didn't sound like much in 1999 and 2000 when stock funds were
averaging about 50% gains, but with stock funds down over 30% in 2001 and
again in 2002 I'll take 4% growth any day! In investing, "Slow
and steady wins the race!"
- Recycle. It makes you feel good and it's the right thing
- Shop at flea markets, thrift stores, and garage sales.
This allows you to satisfy your spending urges without bankrupting your
savings. You can often buy quality items you think you want for 10 cents
on the dollar or less. Then, if it turns out you don't use the item you
don't feel guilty! And if it is useful, you've been frugal.
- Make sure your soulmate/spouse/significant other shares
your desire to be frugal!
- Never pay for water, parking, or sex! Only use
bottled water if the tap water is totally unpalatable or is known to be
unsafe. If your water just tastes bad install an undersink activated
charcoal filter--you can install it yourself. It's about $30-50
(cartridges are about $10 and are good for 1000s of gallons and last for
up to six months) at your hardware or Sears store and will save you lots
of money and reduce plastic waste immensely! If you must buy bottled water buy it in the off-brand one
gallon jugs--it's much cheaper and just as good as the designer
brands. I never thought I'd see the day when water costs more than
soda! Park a few blocks away and walk--you probably need the
exercise anyway and you'll save $5-$10 for a 5-10 minute walk. Not
bad pay. Have a monogamous sexual relationship--it's much more satisfying
and much safer.
- Never fly first class, even if your company is paying for
it. Save up your frequent flyer miles and get free upgrades.
Remember, the front of the plane arrives at the same time as the rear of
the plane. A couple of hours of slightly more discomfort will save
you hundreds of dollars. Again, not bad pay! Or, drive instead
of flying. A 90 minute flight takes you about 4-5 hours of personal
time: drive to the airport, park, get to the gate one hour early,
fly, get your baggage, rent a car, drive to your destination--it adds
up! Or, drive all the way in maybe 8-9 hours. Figure gas,
wear-and-tear on you and the car. You'll probably save yourself
$25/hour by driving. Double that for two people. Double again
if you have to rent a car if you fly. Not bad pay! Where else
can you make $50-$100/hour for a nice drive?
I hope you find these thoughts helpful; they have proven
very valuable to me. Try them; it won't hurt, and who knows, maybe they
will keep you financially independent and out of debt.
* Here's some pointers for
when you go in to purchase a new or used car:
NEVER let a salesman play games with
you. Since he cannot approve the "deal," but you can
approve your end of the deal, why deal with the salesman? Always
demand to deal with the Sales Manager directly. Look him in the eye
and ask for the "best" deal he can give you--usually $300 or so
over invoice. Be sure to ask him to include kickbacks, holdbacks,
rebates, etc. You should
already know the bottom price because you've done your homework (see #6
NEVER let a salesman have the keys to your
car for any reason!
NEVER tell the salesman or Sales Manager
that you have a trade-in until AFTER you've found out their bottom offer
for the car you want to buy. Only then mention you have a
trade-in. Then, you'll learn the true value of your trade-in--which
won't be much! Sell it yourself.
If you sell your car remember to remove
the license plates BEFORE you let the buyer drive off (except for a
test drive)! If they have an accident while your plates are on the car,
even though you have a bill-of-sale, you and your insurance company are still
liable for any accident the buyer has! After completing the sale the
buyer must go to DMV and get a temporary registration tag to allow her/him to
drive the car home and get it registered. She/He returns and places the
temporary tag in the rear window. This applies even if you are carrying
the loan for the buyer.