Homeowners: Pay Property Taxes and Insurance Yourself

Generally, home mortgage payments consist of 4 parts:

  • principal (a partial payment toward the amount that was initially borrowed)
  • interest (the cost of “renting” the remaining loan balance)
  • property taxes
  • insurance

mortgageWhen someone borrows money to buy a house, the lender has a good reason to want to make sure that the property is insured and the taxes are paid.  (If the house were destroyed in a fire or other accident, the lender would have no way to collect the debt if the borrower walked away.  If the taxes aren’t paid, the local government could seize the house and sell it to pay the unpaid taxes.)  Because lenders prefer to make sure that insurance and tax bills are paid, and paid on time, they include those costs in the monthly payments and pass the money along to the insurance company and local government as needed.  The money is kept in a separate “escrow” account in the mean time.  Federal Housing Administration (FHA) loans always come with an escrow account and include insurance and taxes in the payments.

Many homeowners like escrow accounts just fine.  It’s convenient.  Not making insurance and tax payments means two fewer things to worry about.  Someone lacking in financial discipline might not be able to put enough money aside for the tax and insurance payments, and that could lead to trouble.  Simply forgetting to make the payments can lead to late fees, or worse.

However, someone who is able to manage their money and wants to spend a little extra time doing so might want to consider a no-escrow loan.  While this does not reduce your taxes and insurance costs, it does let you keep your money in your own account until you need to make the payments.  This might allow you to earn some interest from the bank (or credit union!) where you keep your checking and savings accounts.  Additionally, you might more easily meet some minimum balance requirement that eliminates monthly service charges.

It’s usually easier to avoid escrow on a new loan and harder or impossible to remove an escrow requirement from an existing loan.  Even if you can avoid escrow, watch out: banks might charge a higher interest rate on a no-escrow loan.  As always, shop around and negotiate.

Inspiration From Youtube

As I’ve mentioned elsewhere, your thoughts become you deeds.  Thus, if you control your thoughts, you end up controlling your deeds.  That’s called self-control and it’s essential if you want to reduce your spending and thus be able to increase your saving.  One way to control your thoughts is by listening, reading, and watching media on the subject of personal finance.  You can find podcasts and radio shows, books, and (of course) videos.  Here’s an example.

Maybe not everything mentioned in this video is applicable to your situation.  Okay.  So find another video.  You know how to work the internet don’t you?  Then you can find books at the library or among the used books at your local thrift shop.

Finally, I’ll mention that as you get lots of personal finance advice from a variety of sources, some of what you’ll hear or read might be not only not applicable to your situation … it might also be downright incorrect or untrue.  But that’s okay.  If something isn’t true, remember that free advice is sometimes worth what you pay for it.  And it isn’t just the actual factual content that you’re looking for.  It’s also the inspiration that comes from seeing and hearing someone else talk about doing what you want to do.  Just knowing that other people have done it should show you that you can do it too.  That’s one reason why The Richest Man in Babylon is still one of the best books about personal finance, despite the fact that it’s almost 100 years old.  So get inspired and save money!

Spending is Like a Faucet

An old song says “Love is like a faucet … it turns off and on”.  Spending is like a faucet too.  It can be turned off and on.  Or it can be set to any spending level between the off and on extremes.

We can extend the imagery a bit.  Let’s say the spending faucet it attached to a storage tank.  Income is like water flowing thru a pipe into the tank.  Spending (in other words, buying things that are certain to decrease in value, things such as clothes, food, motor vehicles, etc.) is water flowing out of the tank through the spending faucet.  The amount of water in the tank is accumulated wealth.

Spending = Income

spending_equals_income

Is your situation like the first image?  Money is flowing into the tank (as income), but it’s flowing out (as spending) just as quickly. The tank will never be filled.  There will never be any accumulation of wealth.  This will be true as long as spending = income.

Note that as long as spending = income is true, the tank will never be filled — no matter the amount of income.  This first image could represent a person with an income of $20,000 per year and spending of $20,000 per year.  Or it could just as well represent someone with an income of $20,000 per day and spending of $20,000 per day.  No matter how high the income, people who spend all they earn — people who are unable to live below their means — will never have wealth.

Sadly, this is how many people live their whole lives.  They wonder, like Senator Hoar, why they can never get ahead.  In some cases, I believe, the people are doomed to financial failure because they can’t even imagine, or they’ve never been taught, that there is any other way to handle their money.

Spending < Income

saving_and_spending

The second picture is clearly different.  The tank is filled, representing an accumulation of wealth.  Look at the picture for a moment and you’ll see why the tank is filled, and will stay filled:  The spending faucet has been adjusted so that spending has been reduced.  Spending is now less than income (spending < income).

Also notice that the tank has another pipe.  The new pipe leads to saving and investing.  We can think of the tank as a checking and savings account at a bank.  The saving and investing pipe leads to retirement savings accounts, stocks, bonds, IRAs, 401-Ks, and other investments.  Buying shares of stocks or mutual funds might be thought of as “spending” but there’s an important difference: it’s buying things that have a good chance of increasing in value.

If your personal financial situation is like the second picture, then you have learned the lesson of living below your means and allocating part of your earnings for savings and investment.  If your situation isn’t like the second picture, then there’s an important lesson you need to learn.  Start today.

saving_and_spending

Here’s another image, which is the best way to think about the financial plumbing.  It’s basically the same as the second picture.  You can see that spending < income because the tank is full.  But, by using the pipe at the bottom to represent saving and investment, and the pipe at the top to represent spending, the third picture represents the application of another important principle, which is, “Do not save what is left after spending, but spend what is left after saving” (Warren Buffet).

Old, But Good, Advice

Browsing through an old issue of The Sabbath Recorder (A Seventh Day Baptist Weekly, published by The American Sabbath Tract Society, Plainfield, N.J., vol. 76, No. 10.), I found some financial advice from Charles Grant Miller in the form of a story. This was reprinted in the March 9, 1914 edition.

The Saving Habit

They tell a story down in Washington about the late Senator Hoar’s improvidence. A rich friend was riding to the Capitol with him on a street-car, and Mr. Hoar was expressing wonder at the ease with which some men acquire wealth.

“I have had a good income all my life,” he explained, “but never have been able to get ahead. I would like to know how money is accumulated.”

At that instant the conductor came along and Mr. Hoar handed him a nickel while the rich friend turned over a ticket.

streetcar_ticket“There is one way in which you might acquire money.” said the friend. “You could save twenty per cent by buying six tickets for a quarter, and that is a pretty good investment. The habit of saving money grows upon one, and that is a better investment still.”

This is a good deal more than a jest.

The oversight of small investments lying close at hand leads to half the world’s financial miseries.

Of course, none could get rich by investing in street-car tickets. Nor can one get rich merely through small savings in a bank. But it is generally found that the investment in street-car tickets and the savings in the bank go together, and with them go a lot of other frugal habits.

There is no more flexible law of nature than that one frugal habit begets another, and that frugal habits beget riches.

We hear of great fortunes made in a moment. But that is not the common way.

Ordinarily a great fortune is built up like a stone wall — a stone at a time.

The young man who declines to lay the first stone, because it comes so far short of a wall, will never make progress in financial masonry.

It is a sure thing that the young man who considers it not worth while to save small amounts will never have large ones to save. He is first cousin to him who declines to go to work until he can start in at a big salary.

The first savings of Mr. Rockefeller, Jay Gould and the first Vanderbilt all look pitiably small, even to the average laborer of today. But they were seed from which sprang not only increased profits but increased enthusiasm in business-building.

Small savings and investments if constantly added to and the income compounded, grow marvelously in time.

And the saving of money is a habit that grows more marvelously even than compound interest.

— Charles Grant Miller, in Watchman-Examiner.

There’s a lot of good food for thought in that story.  Let’s look at it point by point.

Income Alone Isn’t Enough

“I have had a good income all my life,” he explained, “but never have been able to get ahead….”

As long as spending is equal to income, there will never be wealth.  This is only common sense.  Or, rather, I should say, it should be common sense.  But actually, it’s amazing how uncommon this bit of wisdom is.

Imagine a water tank with water flowing into it thru a pipe at the top.  If there’s another pipe at the bottom of the tank, then the tank will never be filled: The water goes out of the tank as quickly as it goes in.  Now imagine the pipe at the bottom has a valve that can be used to reduce the amount of water going out of the tank.  If the valve is set to allow only 90% of the water to exit the tank, then the tank will fill with water.

Checking accounts work the same way.

If people spend 100% of all they earn each year, year after year, what will they have accumulated when they stop working?  Think about it.  The answer, of course, is … nothing; those people will have nothing.  (And if spending is greater than income, that’s real misery.)

Don’t be one of those people who end up with nothing.

The best way to accumulate wealth is to live on less than your income and regularly save some percentage of your income and invest it so it grows.  The Richest Man in Babylon recommends that you save at least 10% of your income.

Don’t Pass Up Good Deals

“You could save twenty per cent by buying six tickets for a quarter, and that is a pretty good investment….”

Whenever the savings you get from buying something* are greater than what you could otherwise earn if you had invested the same amount of money, then you should buy it.

In the example in the story, tickets cost 5¢ for 1 ticket, or 25¢ for 6 tickets.  If purchased one at a time, 6 tickets would cost 30¢, which is 20% more than 25¢.  There’s no investment that is certain to yield a 20% return; that was true in 1914 and it’s true today, and even moreso in the short time and with the small amount of money it takes to buy and use 6 train tickets (a rider might use 2 each day).

Apply this to your daily life.  Suppose you eat a can of beans each week — so once a month you buy 4 or 5 cans.  Now suppose the grocery store has canned beans on sale.  Say it’s buy 5 and get 1 free (like the deal on tickets in the story).  How many cans should you buy?  Your usual number, maybe 5 cans for a month of bean eating and get 1 free?  That’s okay, but not good enough.  Why not buy enough for a whole year?  Buy 50 and get 10 free!  They won’t go bad in a year.  (Check the labels.)  Remember, a penny saved is a penny earned.  Do you have any opportunity to earn a 20% return on the additional money that you’re spending on canned beans?  No.  The stock market won’t do that well, certainly not with 100% certainty, and neither will bonds nor savings accounts.  So, what are you waiting for?  Put those cans in the cart and get to the cash register!

Some years ago, a large grocery store chain closed the local store in my neighborhood.  For a couple weeks everything in the store was marked down 30%.  Then, in the final week, everything was 50% off.  My wife and I went to the store twice that last week and spent about $400 each time.  A total of $800 spent to get $1,600 worth of groceries.  It was mostly bottled, canned, and boxed goods, of course.  We were eating breakfast cereal, spaghetti, cooking oil, and canned beans from that haul for months thereafter.  But we doubled our money with those 50%-off purchases.

Every time I see a good deal on basic foods or cleaning supplies, I make it a point to stock up if I think I could use them within the next year.

* that means something that you definitely need and will use and won’t spoil or expire before you use it.

Make Saving A Habit

“The habit of saving money grows upon one, and that is a better investment still.”

Like lots of other things you should do — like eating right, exercising, being polite to stupid people — making a habit of saving money takes practice.  The more you do it, the easier it becomes.  Efficient use of money should be your goal, it should be foremost in your mind each and every time you buy something.  You can strengthen your money-saving habit by reading books and magazines, listening to radio programs and podcasts, and watching videos about personal finances.

Just as buying when you see bargains is a good financial investment, developing the savings habit is a good investment of your time and willpower.

… one frugal habit begets another, and that frugal habits beget riches.

The more you practice the efficient use of money — frugality — in one part of your personal financial affairs, the easier it will be to apply it to others.

Slow And Steady Is the Surest Way

We hear of great fortunes made in a moment. But that is not the common way.

It’s the unusual, the uncommon, that most often receives the most attention.  (As the saying goes, “1,000 planes safely land today” isn’t likely to be a newspaper headline.)   So, it’s the rare cases of people getting rich quickly that gets the most attention.  A fortune made slowly, acquired through years of working, saving, and investing is the more common occurrence, but you are unlikely to read much about it unless you make an effort.  Your best chance to acquire wealth, in fact, it’s almost a certainty, is the tried-and-true method of living below your means, spending less than your income, saving at least 10% of every dollar you earn, and investing the savings to earn long-term compound growth.

Accept the Fact That You (Probably) Have To Start Small

It is a sure thing that the young man who considers it not worth while to save small amounts will never have large ones to save.

Don’t wait until you have a large income to start saving.  Start now.  Right now.  Chances are good that your income will grow as you advance in your career.  But small amounts you save and invest now have the advantage of having more time to grow.  To grow the kind of personal fortune you’ll need to be secure after you retire, you will need to invest…

Small Amounts … … For a Long Time
Middle-size Amounts … … For a Mid-length Time
Large Amounts … … For a Short Time

Just remember, at least 10%.  That percentage of a small earnings will be a small amount, and as your earnings grow, that same percentage will be a larger amount of larger earnings.

The Most Important Thing to Remember

Small savings and investments if constantly added to and the income compounded, grow marvelously in time.

It’s all right there in one sentence

  • A small amount, just 10% of your earnings,
  • consistently put aside and invested,
  • subjected to the miracle of compounding.

That’s all you need to know.  That’s all you need to do.

Online Mistake Costs $70 (Which I Got Refunded)

I sorta like opening checking accounts (and setting up direct deposits and e-bill paying, maybe opening a savings account so as to avoid any monthly fee) just to get bonus of $150 or more.  One of the banks I’ve done this with offered me a credit card charging 0% interest for the first 12 months and paying me a $350 bonus if I charged $500 per month for the first 3 months.  I took the offer and earned the bonus.  All was going well until a few days ago.

I was online, making a payment, and I accidentally clicked the wrong button!  Instead of selecting to make a payment from the credit union where I keep most of my money, I accidentally selected the checking account at the same bank that issued the credit card.  I was paying off nearly the entire card balance (I guess it’s okay to carry a balance when the interest rate is 0%), which was a little over $1,000.  But I didn’t have that much in the checking account at that bank.  No matter!  Without any warning, the payment was made and the checking account had a negative balance.  I looked in vain for a way to un-do the transaction.  I was so flustered that I immediately made another mistake when I tried to transfer some money from the savings account at the same bank into the checking account, so as to partially offset the negative balance.  I accidentally did the transaction backwards, resulting in an even larger negative balance!  Finally, I transferred money from the credit union to the checking account at the bank (the money which I intended to use for the credit card payment in the first place) and I waited.
reverseJust as I feared, the next day there were two $35 service charges for insufficient funds.  Despite the fact that these accounts exist solely for the purpose of obtaining the bonuses for opening them, I felt pretty strongly about being charged $70 for just clicking the wrong button.  Especially when the bank’s online system didn’t give me any error message (“hey, you’re trying to make a payment of $1,000 from an account that only has a balance of $500”) or any way to un-do the transaction.

I did an online chat with one of the bank’s customer service people and, with sufficient amounts of politeness and contrition, along with the fact that I actually did transfer the $1,000 from my credit union account to the checking account at the bank, was able to get both fees reversed.

Moral of the story: Be careful not to click the wrong button. And, as is often the case with customer service, it often pays to ask.

The Cost of Credit Cards

Data from the Federal Reserve show that Americans owe close to 1,000 billion dollars of revolving debt* (which I’ll refer to as credit card debt).

Dividing the total credit card debt ($1,000,000,000,000) by the adult population of the United States (the 245 million (245,000,000) persons over age 18) shows us that, on average, every American adult carries a total balance of about $4,000 on his or her credit cards.

Note that this is an average for all adults.  Because we know that some adults have no credit card debt, we can be certain that the average total credit card balance of adults that do carry credit card debt must be higher than $4,000.  Many of them carry these balances for months, or years, or decades.

How much does it cost to carry a credit card balance?

The answer depends on two things:

  • the size of the balance
  • the credit card’s interest rate

Let’s assume Joe College gets his first credit card.  A short time later he has spent $1,000 — all charged on the card.  Thereafter, the credit card balance doesn’t go much higher (let’s say that’s close to the card’s credit limit, and Joe’s a smart guy; he knows he might be hit with an over-the-limit fee if he goes over the limit).  If Joe paid off the entire $1,000 as soon as he got the bill, then there’d be no balance and therefore no interest charge.  But that’s not what happened.  Joe makes payments in an attempt to pay it off, but too-often he gives in to temptation and uses the card to buy something he wants, or there’s something he urgently needs and he charges it. Thus, the balance is sometimes a little below $1,000, sometimes a little above $1,000, but it averages $1,000 for an entire year.

Most credit cards have interest rates between 10% and 30% per year.  People with good credit scores (who are probably likely to have low balances) might get cards with rates that are lower, while those with bad credit scores might have cards with interest rates that are even higher. So let’s assume the interest rate on Joe’s card is 15%.

The average balance on Joe’s card is $1,000 and he pays 15% interest per year.  How much does that cost him?

The annual amount of interest paid is a simple calculation of the interest rate as a percentage of the average balance, or:

[interest rate]/100 × [$ average balance] = amount of interest paid per year

which in our case is:

15/100 × $1,000 = $150

or:

0.15 × $1,000 = $150 **

The $150 is broken down into monthly changes of $12.50 that are added to each month’s bill. If Joe paid only $12.50 per month, the $1,000 balance would never be reduced.  If he didn’t even pay the $12.50 interest change each month, his debt, the credit card balance, would grow as the interest would be compounded.  (His debt would also grow because he’d be hit with a late fee that would almost certainly be even higher than the month’s interest charge.  A payment greater than $12.50 would reduce the balance by whatever amount was additional to the interest.

We assume that Joe makes the payments that are normally required, which takes care of each month’s interest charge and applies some additional amount to the balance — but, as already noted, Joe keeps making purchases with his credit card, so the average balance is continually at $1,000.

This costs him $150 per year.  Consider that for a moment.  After 7 years, Joe will have paid more than $1,000 in interest, effectively doubling the cost of the first $1,000 worth of purchases he made soon after he got the card.  If he keeps going he will pay for those purchases several times.  After another 7 years, the credit card issuer will have another $1,000 of Joe’s money, … and so on for as long as Joe carries that balance on his credit card.  If Joe ever pays late or misses a payment on this credit card or any other debt, it’s quite likely that the credit card issuer will increase the interest rate on Joe’s card.  If the rate goes up to 20%, Joe will pay $1,000 every 5 years.  At 30%, he will pay $1,000 in interest charges every 3 and 1/2 years.

borrower_is_slaveLet’s remember that Joe’s spending spree stopped when he reached the card’s credit limit.  After that — after he charged that initial $1,000 — he was able to keep new charges on his credit card and what he was able to pay in equilibrium.  It’s that initial $1,000 that made Joe a borrower.  If he had been able to find that equilibrium when the credit card balance was $0, and kept his average balance at zero by charging only what he could afford to pay off each month, he would have saved that $150 each year.

The Bible says that the borrower is slave to the lender.  That should make us wonder: What was it, in that first $1,000 of charges, that was so important, so essential, that Joe had to have it, even at the cost of turning himself into a slave?  There’s an excellent chance that after he’s paid over $1,000 in interest, Joe can’t even remember what he’s paying for as he finishes paying for it for the first time and begins paying for it the second (or third …) time.  As the old saying goes, the purchase should outlast the payments.  If Joe can’t even remember what it is he’s paying interest on, can it be important enough to pay for it over and over again?

Think how much better off he would be if he had resisted the temptation to over-use his credit card.  If he had cooked dinner at home instead of going out to a restaurant, if he had gotten some new (to him) clothes at Goodwill, if he had gotten some free furniture from Craigslist or hand-me-downs from friends or family.  Had he done that, he would have been at least $1,000 richer every 7 years.

Now consider that the average American has a credit card balance of over $4,000.  Take a look at Joe’s story again, but multiply every number by 4.  A balance of $4,000 at 15% costs $4,000 in interest payments every 7 years.  At 20%, it’s $4,000 every 5 years.  At 30%, $4,000 every 3 and 1/2 years (which is well over $1,000 per year!).

Look at yourself: Are you an average American?  Are you running a credit-card-interest tab (put it on the card, put it on the tab) that’s costing you hundreds, or thousands, of dollars each year?

Remember the annual-spending tip.  If you earn, say, $50,000 per year and you’re paying $500 in credit-card interest, then interest on credit-card debt is costing you a full 1% of your income.  Are you paying 1% of your income in interest when you’re not even saving and investing 10% of your income for your own future … and maybe telling yourself you can’t save 10%, there’s nothing you can cut down on.  Well, how about cutting down on the credit-card interest you pay?

The moral of the story should be clear: If you don’t have a credit card balance, do everything you can to avoid getting one.  If you have one, do everything you can to pay it off.


* Revolving debt is basically what people owe on bank-issued credit cards and retailer-issued store and gas cards, which allow the borrower to make additional charges without any additional application process. Thus, many borrowers add new debt as fast as they pay off old debt. Home equity line of credit (HELOC) loans would also seem to fall into this category, but the Federal Reserve does not include loans secured by real estate in total revolving debt.

** The actual calculation used by credit card issuers is a bit more complex.  It involves dividing the interest rate by the number of days in a year (~365) and multiplying that by the average daily balance each month.  But our approximation works well enough for our purposes.

Think About Spending in Annual Terms

Changing the way you think about money can help you change your spending and saving habits.

You probably have a good idea of how much money you earn each year:  Your annual salary, your gross income (that’s the total you earn before any deductions for taxes, insurance, and of course, … your contribution to your retirement savings account).

For the purposes of this discussion, let’s say we’re talking about someone who earns $50,000 per year (which is pretty close to the average in the United States).

Saving more means spending less, and that means carefully considering everything you buy.  One thing that might help is to think of your spending in annual terms, which means multiplying a thing’s cost by the number of times during a year you spend money to buy it.

If it’s an expense you have, say, 5 times a week, then you might multiply that expense by 250.  (5 times a week × 50 weeks per year.)  Then compare the annual expense to your annual income by looking at it in percentage terms.

Let’s say you buy coffee every workday: maybe it costs $2.30 per day.  $2.30 × = $575 per year.  $575 is a little over 1% of a $50,000 per year.  So you ask yourself:  Is it worth spending over 1% of your total income for your daily coffee?

(If you’re not clear on the calculation, it’s the annual expense divided by the annual income, which in this example is: $575 / $50,000 = 0.0115.  Multiply the answer by 100 to put it in percentage terms: 0.0115 × 100 = 1.15%, which, as stated, is a bit more than 1%.)

Maybe you spend $25 each week for something, maybe it’s beer and pizza at a restaurant or bar, or movie tickets, or whatever.  Do that every week for a year and that’s $1,250.  ($25 × 50 = $1,250.)  That’s 2.5% of a $50,000 income.  Is it worth it?

a_new_hatMonthly expenditures are easily annualized and percentaged (or maybe it’s “percentualized”?).  Just multiply by 12.  Do you buy $100 worth of clothes that you don’t need each month?  That’s $1,200 per year, which is 2.4% of a $50,000 income.  Or maybe your cable TV bill is $120 per month.  That’s $1,440 per year, which is  nearly 2.9% of a $50,000 income.  Is it worth it?

Ask yourself:  Is it worth it?

If you’re adding a good-sized percentage of every dollar you earn to your retirement savings, if you have wisely invested your retirement savings and seen them grow from the compounded earnings they generate, and if the total of all your retirement accounts is several times your annual income … then maybe you can reward yourself by paying someone to make your daily coffee.  Maybe you can afford a weekly outing for pizza and beer or a movie.  Maybe cable TV isn’t a a big deal.

But, if you’re spending 6% of your income on coffee, pizza, beer, movies, and cable TV …and you’re not putting 10% (at the very least) to 15% (or more) of your income into your retirement savings accounts … then I would suggest that you think it over.

Why Read This Blog?

I can think of three reasons.

First, and not the most important:  You might learn something, some specific little tip or trick, that might save you money.  Just maybe, there might be something here that is directly applicable to your life and your circumstances.

Second, and more important:  You might change your way of thinking about spending and saving money.  That might allow you to come up with your own ways of using your limited resources (e.g., money, time) more efficiently.  That’s what it’s really about: using what you’ve got more efficiently, doing more with less, so you can save more.

Third, and most important:  Personal finance blogs, books, radio shows, and the like can inspire you.  There’s an old saying, one version of which goes like this:

Your thoughts become your words;
Your words become your actions;
Your actions become your habits;
Your habits become your character;
Your character becomes your destiny.

Another version is:

The thought manifests as the word;
The word manifests as the deed;
The deed develops into habit;
And habit hardens into character.

Start with the first part:  Your thoughts.  You can exercise a great deal of control over your thoughts.  One way is by controlling what you put into your mind.  Read books about personal finance, money management, saving, and investing and your thoughts will turn to those subjects.  Read blogs about the same topics.  Listen to radio programs about saving and investing.  Be inspired.

The book I always recommend is The Richest Man in Babylon.

Start Your Savings with MyRA

A couple years ago the U.S. Treasury Department started a program called MyRA (My RA,
sounds like “IRA”).  It’s a savings account that allows anyone to save small amounts of money in a retirement account that pays interest similar to U.S. Treasury bonds.  (It’s basically the government securities fund that’s part of the TSP retirement savings program for government employees.)

myra
Learn more at myra.com

The MyRA account is much like a Roth IRA: you can deposit only after-tax earnings into the MyRA, so there are limited tax benefits for putting money in; however, all accumulated earnings can be taken out free of taxes (if the withdrawals are made under certain conditions, such as the account owner being over a certain age — this is a retirement account, after all).

Several news articles have criticized the MyRA program on the grounds that it can’t completely solve the nation’s retirement savings problem.  One criticism is that there are no investment options to allow accounts to be invested in stocks or corporate bonds.  The interest rates on U.S. government bonds are only slightly higher than what is available on passbook savings accounts at banks.  Another criticism is the maximum account value, above which you are not allowed to make additional deposits.  This maximum is so low ($15,000) that the MyRA by itself won’t make much of a difference in a retired person’s financial affairs.

However, I think those criticisms are more than offset by the MyRA program’s advantages. First, the minimum amount required to open an account or make a deposit is very low.  Like, $2, I think.  That’s obviously lower than the required minimums at commercial banks and much lower than what’s needed to open an account at mutual fund companies.  Similarly, there are no fees charged to open or maintain an account.  What bank is going to open a savings account for someone with an initial deposit of $10 and then allow that person to make $20 monthly deposits — and without charging any fees?

If you have the minimum amount required to open an account at a mutual fund company (which is $1,000 at the very lowest and more likely $2,000 or $3,000) then I highly recommend you go directly to the Vanguard website and open an account right now.

For everyone who can’t easily gather up $3,000 to start their retirement savings accounts (e.g., most people who earn less than our country’s average earnings, a group that includes many young people), MyRA is an easy and safe way to get started.  $50 a month,  maybe a bit more now and then, will grow to over $2,000 in 4 years.  That balance can then be transferred to a private Roth IRA at Vanguard or any other investment company.  This is the real purpose of the MyRA — to help people get started and allow them to save a sum that can be transitioned to “real” investments.  Once there, of course, it can be invested in stock or bond mutual funds where it will earn returns that will make a real difference in retirement.

That’s the beauty of the MyRA.  It gives everyone the opportunity to start saving and investing.

To learn more, go to myra.gov.

 

Einstein, Algamish, and Compound Interest

compound_interest
“Burritt’s Universal Multipliers for Computing Interest, Simple and Compound” by Elijah Hinsdale Burritt

Albert Einstein probably never said,

  • “Compound interest … one of man’s greatest inventions.”
  • “The most powerful force in the universe is compound interest.”
  • “Compound interest … the greatest mathematical discovery of all time”
  • “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

At least, despite all of the appearances of these and similar quotes attributed to the great physicist in modern personal finance literature (and all I’ve seen were published long after Einstein’s departure from this sphere), I’ve never seen any that had a proper citation.

The formula used to calculate the future value of an investment with compound interest is pretty cool.  Maybe that’s what Einstein was talking about.  But I digress.

While there’s a lot wisdom in those (probably) spurious “Einstein quotes”, and I especially like the last one, here’s another saying about compound interest that I like even more (and I don’t know who said it):

Compound interest can either work for you or against you.  You decide.

Borrow money and you’re in debt.  If things go as planned, you pay all of the interest and part of the principal in a given month.  (Of course, you should pay more than just whatever part of the principal is required by the lender.  You should pay more so you can get out of debt as quickly as possible)  But if don’t manage to pay all of the interest you owe in a given month, then that interest is added to the principal.  Let that happen and you owe more than you initially borrowed.  Then you owe interest on the interest!  That’s compound interest working against you.  Another reason to avoid debt.

But:

Put your dollars into a good investment.  They earn more dollars.  Then put those dollars you earned into the same investment.  They will earn even more dollars along with the dollars that were invested first.  It goes on forever.  That’s what’s so powerful about it.

In The Richest Man in Babylon, Algamish says it this way:

Every gold piece thou keepeth is a slave to work for thee.

Every copper it earns is its child that also can work for thee.

If thou wouldst become wealthy, then thou must keep and save.

And every coin thou keepest must work and earn, and their children must also work and earn, that all may help to give thee the abundance thou dost crave.