Accounting For Different Kinds of Accounts

savings_bank

Different kinds of accounts where you can keep your money … and how to use them.  This is the way I do it.

Checking account (for day-to-day expenses).  Even if it’s only used to fund ATM withdraws, debit-card purchases, and online bill paying, everyone should have a “checking account” — despite the fact that many people don’t even have blank checks these days, and the last time I purchased blank checks I probably got enough to last the rest of my life.  A checking account is for your usual day-to-day bills.  It should have enough money to cover transfers to your savings account (pay yourself first) as well as your regular monthly expenses, such as the rent or mortgage payment, and bills for utilities, groceries, transportation, and other things that you pay for every month.  Whatever spending comes out of your checking account should be replenished by income coming in.  (Did you see the post about how the money in your checking account is like a tank of water?)

In addition to your checking account for expenses that come due every month or more frequently, you should also have separate accounts for expenses that come less often.  The first three, like the checking account, should be at a bank or credit union.  The last one should be with a mutual fund company so the money can be invested in stocks.

Short-term savings (once-per-year expenses).  Money set aside for foreseeable and predictable expenses that come once per year, such as birthdays, holidays, and vacations.   

Medium-term savings (once every-several-years or just a few times per lifetime).  Money for foreseeable, but perhaps not predictable, expenses that come less often than yearly, such as an automobiles, refrigerators, heating and air conditioning systems, washers and dryers, or new roofs.  Other medium-term savings goals might include weddings, houses, college educations for your children, or starting a business.   

Emergency savings (unexpected expenses).  For unforeseeable expenses: accidents, medical problems, periods of unemployment, and special opportunities.

Long-term savings (once in a life).  For foreseeable expenses that come just once in your life, such as buying your dream house and retirement.

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“Compound Interest” vs “Compound Earnings”

dividend_stocksRepeatedly I see the term “compound interest” used to describe the growth of stock market investments.  I think this is incorrect.

Strictly speaking, you only get interest from bank deposits and bonds.  If you invest any interest you earn by depositing it in the bank or buying more bonds, then you earn interest on the interest — and that’s compounding.

If you invest in stocks, you (might) earn dividends.  If those dividends are reinvested by using them to buy more stock, then you will start earning dividends on the dividends  — and that’s compounding.  But because there is no “interest” earned on stocks, I don’t think it’s right to call it “compound interest”.

Henceforth, I suggest we use “compound interest” only for investments in bank deposits and bonds … and we use “compound dividends” for investments in stocks.  We can also use “compound earnings” in a general way to refer to any investments that grow as their earnings are reinvested in the same investment.


A little further explanation:

The interest you get from bank deposits and bonds arise from a contract: you deposit your money in the bank or you buy a bond (in both cases you are, in effect, lending money and the borrower is agreeing to pay you interest), and the bank or bond issuer is legally obligated to pay you the stated interest and return your money (the principal) to you.

The dividend you get from owning stock is a portion of the profits to which you are entitled because by owning stock you become a partial owner of the company in which you purchased stock.  However, dividends are not guaranteed as there might not be any profits or what profits there are might be used for something other than dividends, such as expansion or development of new products.

Super Magnets from Old Computer Hard-Drive

Inside computer hard-drives are one or two super powerful magnets.  Probably worth a couple dollars, potentially useful, or just fun to have.  Inside the hard-drive, the magnets are usually glued to metal brackets that have holes in them.  You can put screws through these holes to attach the brackets to a wall, and then you’ve got a wall mount for any metal object, such as a tool, that you want to keep handy.

You can find instructions online that tell you how to take apart a hard-drive.  It’s easiest if you have a set of Torx screwdrivers.  Helpful hint: hard-drive manufacturers often hide some of the screws under labels or in other hard-to-find locations.  Getting the magnets out of a computer hard-drive is a fun project to do with a kid.

Cold Showers

I had a recent experience with cold showers, which got me to thinking that they’re not so bad — at least in the summer.  Not only does taking cold showers have many health benefits (i.e., there are many claims of health benefits), it also saves money.

Every time you turn on the hot water, cold water flows into your water heater and that increases the amount of power (either electric or gas) it uses.  One sure way to reduce your bill is simply to reduce the amount of hot water you use.  If possible, don’t even touch the hot water faucet handle when you wash your hands or shower.  Use less hot water, and you save money every day.  Cold showers have the largest potential for saving money by reducing hot water use, because hot showers use a lot of hot water.

Cold showers are easiest in the summer, when the temperature of the “cold” water might be above 70° F (~ 20° C).  That’s not as warm as most people like for a shower, but it’s far from really cold.  For the past several days, I have taken only 100% cold showers, no hot water at all, and I’m getting quite used to it.  It’s really not bad.  Quite refreshing, actually.  (Of course, it’s July now.)  I’ll probably continue taking cold showers until fall, but I anticipate using less hot water than I’ve previously used during cold weather.

cold_showerNot only am I saving on the gas bill by reducing the amount of gas used to heat water, I’m also saving on the water bill.  Here are three reasons I use less water by cold-showering: (1) I don’t send water down the drain waiting for it to “heat up” as hot water moves through the pipes from the water heater to the shower.  I’m only using cold water and it’s there as soon as I turn the faucet handle.  (2) I use less water in the sense of gallons-per-minute of water flow and (3) I take shorter showers.  I also use the minimum amount of shampoo and soap, so as to reduce the amount of time and water it takes to rinse off.  No question about it, a cold shower is a quick shower.  Of course, I still use a shower shutoff valve.

Q: If cold water saves money, why not just turn off the water heater?

A: Hot water is absolutely necessary for washing clothes and dishes.  When doing laundry, hot water does a great job of killing germs, dust mites, and getting all of the grease and dirt out of your clothes.  Even though some detergents claim to work well in cold water, I still use hot water for the reasons stated.  If you try to wash dishes in cold water, you’ll find your dishes come out greasy and spotted.  (However, it’s a good idea to turn the water heater off when you go on vacation.)

To sum up: The shower is the place to save money by reducing your hot water usage.  Why not take the cold shower challenge?  Ease into it.  Reduce your hot water use in the shower by about half for your next few showers, then go total “cold shower” after that.  Good luck!

 

The “Nest Egg”

People use the term “nest egg” to refer to their life savings, their retirement savings, what they will live on after they stop working.  “Nest egg” can also refer to any long-terms savings that are accumulated over time for a specific purpose.  I wonder how many people know the origin of the phrase.

nest_eggsAmong people that raise chickens, especially those in the egg business, it has long been known that leaving an egg in the nest will encourage hens to lay more.  Maybe even get a hen started if she hasn’t laid yet.  The practice of leaving an egg in the nest gives us “nest egg” — the nest egg is the egg that’s left in the nest.  Nest eggs don’t necessarily have to be real eggs.  Wooden or ceramic eggs seem to work just as well.  The principle is the same: the egg farmer doesn’t eat or get rid of the nest egg.  The nest egg is quite similar to “seed corn”, the seed that is saved from one year’s harvest for the next year’s planting, rather than being sold or otherwise used.  (Maybe there’s some reason we don’t refer to our live savings as our “seed corn”, but I don’t know what it is.)

Thus, the next egg is something akin to what economists call “capital”: money or some other asset that is used to make money.  Eat your nest egg, and you’ll have fewer eggs.  Eat of your seed corn and there’s no crop next year.  Spend your retirement savings, and it won’t be there to provide for you when you need it.

The Saving Road to Independence

Here’s inspiration from a century ago from The Baltimore and Ohio Employees Magazine (February 1916):

The Saving Road to Independence

For Men and Women of Limited Salary

DEBTS accumulate rapidly. Savings accumulate just as rapidly! It’s therefore a matter of determination, first, whether it shall be savings or debt.

Money will either serve or rule you. The minute you save your first dollar and begin to think of safe investments you are master of the situation. So reflect NOW. Do not regret later.

saving_roadMany people today are closing the door of opportunity by failing to lay aside some part of their earnings—thus condemning themselves to a life of continuous hard work. Your problem is one of persistence, not one of existence. So be up and doing!

Saving is the springtime of prosperity. To be effective, it must be practiced daily. It’s the steady, consistent, aggressive saving that makes men and fortunes. Save to the limit of your possibilities!

It is not enough to make money. You must make your money work for you. Putting your money to work means investment, and investment cannot begin until you have learned, or until you have an earnest desire to learn, to save.

Economize, but in the right manner. Avoid foolish, extravagant expenditures; save your money and invest it carefully while saving. You will always be in a position to live well and view the future complacently. Isn’t it worth while? A man who has always intended to start tomorrow has nothing. He is a slave to pay day.

Every dollar you save and invest brings you just one dollar nearer the goal of prosperity—the time when interest on your investments will provide for your comforts.

Prosperity begins when a man invests his savings or surplus capital intelligently. The man who saves his money will always have an opportunity to invest it. If he invests wisely, he will soon become a man of means and of credit.

Be prepared! Being prepared is half the battle. More men and women learned the value of ready money during the last financial depression than ever before during a similar period. Cheap investments abounded on every side and a man with ready money was master of the situation.

What of tomorrow? Are you prepared for it? For any emergency that may arise? Commence TODAY to fortify yourself against sickness, misfortune or financial difficulty, by saving and investing your money systematically. There is no time to begin like now, which, spelled backwards, means success.

Work hard! Plenty of work is your greatest need. It keeps your mind clear, your body strong and your appetite good. And see that your work accomplishes something. Your days are numbered— your earning period is short. Make each day show a satisfactory result. The best results are obtained when you save, invest and realize.

Nothing makes a man feel safer, happier and more courageous for life’s battles than a nest egg in the shape of good investments. It destroys fear of a rainy day and enables him to grapple with the big things.

If you have failed so far to lay aside any money, try again today.

To be a capitalist it is not necessary that you have several thousand dollars in the bank. A man with five dollars is a capitalist just so soon as he decides to make that five dollars work for him—to place it so that, with other sums he may add to it regularly and systematically, he will save, invest and realize in the shortest space of time consistent with safety.

Remember that interest in our work means interest on your money. Get the habit of doing things! Go it alone! You can succeed.