Lazy Man and Money

Three Suggestions for Growing Your Savings Account

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[Editor’s Note: The following is an article from my friend Julie. Many tried and true personal finance tips are summed up here… a good way to kick-start your savings goals for the new year.]

You know the funny thing about savings accounts? If you don’t have the available funds to deposit, essentially there’s nothing to save. As many of us struggle to make ends meet, the need to save often falls to the bottom of the list of priorities. Be that as it may, having a savings account is beneficial for various reasons. It provides a nest egg for personal emergencies or for larger priced purchases. The only trouble is finding the money to put in the savings. It seems like there’s never enough to go around.

So what does one do when they want to save, but can’t find the spare change to put in an account? Get creative… and disciplined. I know, I know, more discipline!? But it’s the most effective way to build your savings and for becoming financially stable. Below are a few methods for adding to your savings account each month:

1. Cut Back on Certain Expenses

Often the easiest way to find money to invest in your savings account is to evaluate your spending habits and find efficient ways to cut back. We often spend way beyond our means and in most cases it’s on things we want, but don’t necessarily need. Below are a few ways I chose to cut back:

· Bring Your Own Lunch – I love takeout just like the next person but when I checked my bank statements, I realized that eating out at even $5 per day was costing me a total of about $100 per month. So I decided to cut back on the eating out and now only treat myself to lunch on Fridays. This meant I was spending about $25-30 per month and could put the remaining money in savings.

· Downgrade Subscription Services – Do you have cable, data plans, or other accounts that require a monthly subscription or service fee? You’ll be surprised to see how they add up over the course of 30 days. I decided to remove all premium channels from my cable, downgrade my data plan, and even switch my Netflix services from streaming and DVDs to just streaming.

· Price Comparison Shopping – Lastly, I decided that for every purchase I made (whether its car insurance, hiring a contractor, or purchasing furniture) that I would compare prices. When I was able to find savings, I would put the difference in my account.

2. Start Small

Another way to grow your savings account is to start small. We often assume that if we don’t have hundreds of dollars to put away, it’s not worth saving. However, you’d be surprised to find out how far a few dollars (or pennies) can go over time – especially if your savings account has good interest rates. Start off with even a dollar per day $30 per month. In the course of a 12 month period, you’re looking at a savings totaling $360. The following year you can up it to two dollars per day and double your savings. As you free up more money in your budget, add it to your savings account.

3. Earn Extra Income

I know you’re thinking, “Not another job!” however, there are plenty of ways that you can earn money without ever leaving the house. In fact, according to Natalie Cooper of BankingSense.com , there are a lot of different ways you can earn money during your spare time. She included:

-Become a freelance writer -Sell crafts online

-Sell unwanted items

-Offer your services on the weekend (i.e. babysitting, lawn maintenance, etc.)

Cooper also added, “As you start earning money, be sure to put it all in the savings account. It can get quite tempting to begin dipping into the new earnings, but if you’ve lived this long without that extra money, you won’t miss it in an account.”

As you start earning money, be sure to put it all in the savings account. It can get quite tempting to begin dipping into the new earnings, but if you’ve lived this long without that extra money, you won’t miss it in an account.

You hear experts discussing how much money you should be saving, and it can become very intimidating. However, if you break the bigger picture down into concepts that you can easily follow it makes saving a lot easier to do. Some of the ideas above might require a bit of practice while others will come naturally. As long as you’re saving something, you’re doing a whole lot better than you were in previous months.

Lazy… Useless… Good for Nothing… That’s Not a Bad Strategy.

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The following is a guest post by Rob Pivnick, author of What All Kids (and adults too) Should Know About… Saving & Investing. There is more information about the author at the end of the article, but just reading his accomplishments makes me tired.

Someone recently commented on an article of mine saying “I am too lazy to try to beat the market, so I really like your style of investing.” I immediately thought of Lazy Man. I wish everyone who invests was as lazy as that person and me. Lazy investing necessarily means that one passively invests in indexes, does not try to time the market, does not chase returns, and does not invest emotionally. Lazy means buy-and-hold.

I certainly can’t claim these ideas as my own. I’m merely parroting what the likes of the following great investment minds have said in one form or another: Bill Gross, Peter Lynch, Jack Bogle, Burton Malkiel, etc. Earlier this year, even the most successful investor of our time Warren Buffett recommended a simple portfolio of low-cost passive index funds for his estate.

Recent market movements, and actually the volatility going all the way back to the 2000’s, might lead some to disavow a buy-and-hold strategy. Listen to them and you might be thinking that you can create alpha and generate better returns by pursuing anything other than a buy-and-hold strategy. But the question you have to ask yourself is “Do you think you’re smart enough to time the market’s movements?” The answer is . . . NO. If you are a long-term investor, you should not try to time the market. Be lazy. Do nothing.

So, for the benefit of the most useless and lazy investors amongst us, I offer up these six tips. Follow them for the easiest, do-nothing, lazy investing strategy that can’t even be beat by the professionals.

1. Start Saving Early. Let Compounding Work For You.

Start saving as early as possible because it is the easiest, best and laziest way to let your money work for you.

A chart helps you see why compounding makes such a difference. The below graphic shows two savers, both saving $100 per month at an annual average return of 8.5%. The blue line shows the saver who started when she was 20 years old. The red line shows someone who waited until she was 30. The ten year difference (which is only an additional $12,000 saved) results in over $240,000 more growth! So . . . start now.

2. Invest In Indexes; Don’t Be A Fool And Try To Beat The Market.

I’m just an average investor. And I’m lazy. If I actually thought I was smarter than the market, I might not be bothered to even try. And I’m comfortable with that. You should be too. Plus, it would take too much work. It is better to be the market than try to beat the market.

Over the long term it is impossible to consistently beat the market without taking on additional risk. The chart below shows how passive index funds beat actively managed funds over the five year period ended 2013. The percentages show how many actively managed funds beat the benchmark for their category.

Anywhere from 65%-80% of funds cannot beat by the market. A dismally low 20%-35% of professionals beat the market year over year. In fact, over the 15 years ended 2011 a full 46% of actively managed funds closed due to poor performance. 7% of all actively managed funds failed every year. The professionals are not smarter than the market. Neither are you.

Not only can active funds not beat the market, but they charge a full percentage point more on average than passive funds. And assuming active funds could match the market, the one percent fee equates to almost 12% of your returns assuming an 8.5% average annual return. Don’t give up that much for the same (if you’re lucky) return.

3. Do Not Try To Time The Market – You Can’t. Buy And Hold Is The Best Long Term Strategy.

Depending on which research source used, the average investor’s annual return is anywhere between 3% and 5%. That’s compared to the historical average market return of 8.5%. Why? Because we are terrible at investing. We chase returns. We react to fear. We buy into the media hype. And we invest emotionally. Emotional investing causes most of us to buy high and sell low. In fact, the year 2000 saw a record inflow into domestic equity funds in history. Immediately following that the market dropped almost 50% (fueled by the dotcom bubble bursting). In 2008, the opposite occurred as a record was set for the most outflows of funds from domestic equity funds. What happened next? The market has been on an unprecedented climb since then, with returns reaching almost 200% from the market low. As of the date of this article, it’s still climbing. And most investors missed out on that recovery.

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4. Do Not Chase Returns. The Market Always Reverts To The Mean.

Of course you know that over the long haul, by definition, stock returns and markets will generate their historical average returns. Another way of saying this is that the market reverts to its mean and ultimately moves back towards its average return in the long term. Short term returns may vary, but the long term returns always revert to the average.

One of Vanguard founder John C. “Jack” Bogle’s 10 Rules of Investing is as follows:

Remember reversion to the mean. What’s hot today isn’t likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don’t follow the herd.

Emotional investing is a losing strategy. Investors fall into the be-a-part-of-the-crowd trap because social validation dictates that their investment decisions must be the “right” ones if others are doing the same thing. The media says buy, so most investors get in the market. And when everyone else is in a panic and selling, that’s what most people do. But you should stick to your long term plan. See # 3 above. Lazy prevents you from investing emotionally.

5. Minimize Expenses, Invest In Low-cost Index Funds.

Every investor should know that past performance is no indication of future returns.What you might not know, however, is that the single most accurate predictor of future returns is low fees. That’s right. Studies have shown that focusing on low fees solely would result in better returns for investors. When looking at factors such as past performance, manager tenure, expense ratios and Morningstar ratings – expense ratios were the only reliable predictor of future performance. From Morningstar’s own Director of Fund Research Russel Kinnel: “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. . . . Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

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6. Don’t Put All Your Eggs In One Basket. Stay Diversified And Follow A Plan.

Diversifying won’t increase returns. But it does allow investors to lower risk without lowering the expected return. It can limit losses without sacrificing gains. It’s the only way to do that. Unfortunately, diversification won’t protect against the risk that the entire market goes south. But by spreading investments over a wide variety of sectors and asset classes in a smart way (those without high correlations to each other), the risk that any specific investment will fail is partially canceled by all other investments and overall risk is lowered. Investors can and should diversify among asset classes. And investors should also diversify within each type of asset (e.g., diversify among different sectors, geographical regions, market capitalization, industries, etc.).

Invest in a mix of stocks, bonds, and other assets according to your individual goals and investment horizon. Don’t invest emotionally. Ignore the crowd. Stick to your long term plan and . . . please . . . turn off the financial news.

Conclusion

You are not smarter than the professionals. You are not smarter than the market. Heck, even the professionals are not smarter than the market. Put your trust in your laziness and start saving early. Diversify. Then do nothing. It’s ok (and even recommended) that you do nothing (well, you should re-allocate at least yearly). It’s ok to be lazy.

About the Author

Rob Pivnick is an investor, entrepreneur, attorney, residential real estate investor and financial literacy advocate. Rob has both a law degree and an M.B.A. from SMU in Dallas, TX. He is a member of the board of directors of the Texas affiliate of the national Council on Economic Education. Professionally, Rob is in-house counsel for Goldman, Sachs and Co. and specializes in finance and real estate.

Rob’s book, “What All Kids (and adults too) Should Know About Saving & Investing,” targets young adults/millennials with vocabulary words, fun facts, “Did you know?” sections, and 14 key takeaways. Statistics, charts and graphs from expert sources bolster the information. It aims to help students develop proper habits for saving and investing for long term. Not get rich quick. Chapters include budgeting, debt, setting goals, risk vs. reward, active v. passive strategies, diversification and more. Visit www.whatallkids.com for more information. You can follow him on Twitter: @RPivnick

MoneyStepper on Escaping the Rat Race

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[Editor’s Note: The following is a guest post from Graham Clark at MoneyStepper. It’s rare that I accept a guest post from outside North America as what works there, might not work here. However, I found his story inspiring and that’s relevant everywhere.]

The rat race. We all want to escape it. But, why? What is the rat race? Well, according to Wikipedia:

“The Rat Race is a 1960 American drama film directed by Robert Mulligan and starring Tony Curtis and Debbie Reynolds as struggling young entertainment professionals in New York City.”

However, I’m not sure that this is the rat race that most of us are trying to escape from. Let’s keep looking:

“A rat race is an endless, self-defeating, or pointless pursuit.”

That’s more like it.

After 7 years in a Big4 Accountancy Firm, I started to realise that I was in the rat race. I had no specific goal in mind. My pursuit was simply to earn a pay-check. But, what for?

Nothing. I wanted out.

What does it mean to escape the rat race?

Escaping the rat race can have different meanings to different people. My first step was to define exactly what “escaping the rat race” meant to me. In order of preference, I determined that my definitions were:

  1. Retirement, i.e. no longer needing to work.
  2. Becoming financially independent from an employer.
  3. Working from home.
  4. Moving to another different job that doesn’t involve working 9 to 5 and/or a long commute.
  5. Moving to a less intense role either at a different company.

    6. In mid-2012, I made this my mission, and I was going to get intense about achieving it. Over the course of the past 2 years, I have been able to get into a position whereby I was comfortable enough to leave my employer and put myself in position 2 above.

    How did I do this? Breaking it down methodically, I followed these steps:

    Step 1 – Perform a personal gap analysis

    My first, and biggest, change was to perform a personal gap analysis. If you have not heard of the phrase “gap analysis”, it is a term used in business whereby you define exactly where you are right now, where you need to be and what “the gap” is between these two scenarios. Once you understand the gap, you can devise a strategy to fill it.

    Once I had decided that I wanted to escape the rat race (and the sooner the better), I started tracking (penny for penny) my budget and my net worth. From a financial perspective, this told me exactly where I was.

    To determine where I wanted to be, I needed to work out what my financial needs were at each of the 5 definitions of “escape the rat race” above.

    1. Have truly passive income that exceeds my future needs
    2. Have income coming from sources that is not my employer and which exceeds my future needs
    3. Find an employer where my income exceeds my future needs, but allows me to work from home
    4. Find an employer where my income exceeds my future needs, but where I work less hours
    5. Find an employer where my income exceeds my future needs, but which is less stressful

    This allowed me to define my “gap” for each scenario.

    I then decided, due to the respective size of the gaps, that my goal over the following two years would be to stay in the rat race, all whilst doing everything I could to earn additional income elsewhere, in order to get myself all the way to step 2.

    Whilst I considered steps 3-5 as suitable alternatives, none of these hugely appealed to me in the long term and I decided I would rather sacrifice in the short term (2-3 years) in order to step up the ladder a little quicker.

    Step 2 – Work really hard and find additional income

    Therefore, I got to work. I worked really hard at my full time job, which ensured that I received good ratings and good annual bonuses. This would then help me narrow that gap.

    I started my site, MoneyStepper, in order to generate additional income. This would then help me narrow that gap.

    I created a sports quiz app, in order to generate another stream of income. This would then help me narrow that gap.

    I sold a lot of my material possessions that I didn’t need or use regularly. Golf clubs – sold. Second TV – sold. DVDs – sold. Clothes I didn’t wear very often – sold. Surfboard – sold. Xbox – sold. You get the idea. This would then help me narrow that gap.

    I monitored my spending very carefully through a monthly budget, which pushed my regular average savings rate over the past 2 years to over 66% of my net income. This would then help me narrow that gap.

    I invested my money that I had saved into a diversified portfolio of equities and real estate. This then generates passive income through capital growth, dividends and rental income. This would then help me narrow that gap.

    Step 3 – Make the leap

    Now, two years down the line, that gap has been narrowed. Therefore, in the past few months, I prepared myself to make the jump out of the rat race.

    My net worth and corresponding passive income is not currently sufficient to not work at all. Instead, I continue to focus on my aforementioned projects, putting me at step 2.

    Personally, this takes me out of the rat race and where I want to be. At 29, I don’t think I’m quite ready for step 1 and total retirement yet! Instead, I am focusing my efforts on things that I enjoy doing and from which I get a great sense of achievement and pride when people provide me feedback on what I do.

    However, I wasn’t fully confident relying only on these sources of income this early in my life. Therefore, before making the leap, I identified a number of potential consulting contracts that I could perform with clients that I have previously worked with. This puts me entirely in control of my work schedule, but allows me to earn some semi-fixed income if required. This is my safety net.

    I’ve now been out of the rat race for 3 weeks. I’m about to start a consulting contract next week with a larger company, but limited to a week as determined by myself. I’m working hard on my other projects. But, all of this work comes without the stress that I had in the rat race. It comes without the demands of the rat race. And, most importantly for me, it comes with the freedom which I did not enjoy when I was caught up in the rat race.

    Oh, and finally, wish me luck!

The Lazy Guide to Budgeting – 7 Ways to Make It Easier to Stick With

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The following is a guest post by Fanny Seto. She is the creator of Living Richly Budget Printables, a 20-page printable bundle and budgeting system that makes it 20-seconds easier to stick to a budget. She is also the Editor-in-Chief of Living Richly on a Budget, a personal finance blog. I met Fanny when I was living in San Francisco and she’s a smart, smart woman. I realize that printable budgets aren’t for everyone, but if you are going to go that route, I’d recommend picking these up. They are gorgeous.

Many people start budgets but they don’t seem to stick with them. Why is that? Because they’re lazy?

I think it’s because they don’t have clearly defined goals. Are you trying to pay off debt, save up for a house, or build a college fund for the kids? What is the exact amount of your goal?

Once you set your goals, then make it easier to follow through with budgeting.

Have you heard of the 20-second rule? It’s a principle from on the book “The Happiness Advantage.”

The idea is in order to make it easier to form a new habit, you make it more convenient for yourself by placing the tools you need within reach. Make something 20 seconds faster to get to and you’re more likely to do it.

For example, to make tracking expenses easier, you use a worksheet that has budget categories and the date already filled out so that all you have to do is fill in a number. Then you place it on the wall next to your desk or wherever it’s convenient for you to fill it out.

Use the 20-second rule for managing money so that you’re more likely to do it. Some of these are obvious but they’re good reminders on how to make budgeting and saving automatic.

Once your systems are set up, you can be lazy and not feel guilty about it.

1. Set up autopay for recurring bills and debt payments.

This is a no brainer. If a utility or other business offers autopay, do it! Not only will you not have to think about paying those bills every month, but you also save on checks and postage.

2. Automate savings from your paycheck.

Set up savings to be automatically be deposited from your paycheck, before you spend it. Otherwise you’re likely to spend that amount on something else.

3. Use a budget with categories filled out for you.

I like low-tech when it comes to budgeting. I use Living Richly Budget Printables, a budgeting system that I created. to stay on budget. With a printable budget, I can post this on the wall or fridge to remind myself to stay on target.

Even though everything is online nowadays, I don’t always have time to turn on the computer with my toddler running around. Having a worksheet on my desk, makes it 20 seconds easier for me to fill out and keep up with.

4. Track expenses with pre-filled expenses and date.

I used to use Mint. However, I found that since it’s done for you, when I check my expenses, it’s a little too late. What’s spent is spent.

What I mean is that when I actively write down my expenses, I tend to spend less. Since I know I have to record my spending, I am more conscious about spending. It’s a guilt trip thing that works.

Again, I like to do this on a worksheet, the Daily Spending Log (part of Living Richly Budget Printables) since it’s easier to access without having to turn on a computer. And the categories correspond to my budget so after the month is done, it’s easy to transfer the numbers to the monthly budget.

5. Keep a list of monthly and non-monthly bills and when they’re due.

Ideally, most of your bills will be set up on autopay already. It’s also a good idea to have them listed on one sheet with the day of the month they’re due. This way you can be prepared for them and you won’t have to dig through a pile of bills to figure out the due date.

6. Store credit card and bank logins in one place.

Managing multiple credit cards and bank accounts can be overwhelming at times. Put all of your login info in a secure place so that when you need to pay bills or check balances, it’s 20 seconds easier to get to.

7. Use cash.

There are some things I use cash for to really adhere to a tight budget. Groceries and eating out and get out of hand. With cash, you’re limited to what you have. Once it’s spent, it’s spent.

Other things I will use a credit card to pay for like gas. This way more convenient especially if you have kids.

The Rise of Fast Casual Dining

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The following is a guest post from reader Dave Clark. I’m getting interested in the franchise business space (though not likely food) and this article seemed appropriate. Personally, I love Chipotle. The wife is more a Panera person.

A new trend for eating out is emerging and beginning to attract the attention of consumers and investors alike. A shift can be clearly seen away from traditional restaurants and towards restaurants offering a fast casual dining experience. According to industry expert and NPD restaurant industry analyst Bonnie Briggs “Fast casual concepts are capturing market traffic share by meeting consumers’ expectations, while midscale places continue to lose share.” Openly acknowledging how fast casual food is gaining success at the expense of other dining experiences.

It is not just traditional dining experiences which are under threat from fast casual however; fast food is also suffering as a result. Over the last few years fast food has been suffering from something of a PR crisis anyway, the association of fast food with unhealthy food is leading companies to attempt to rebrand themselves as “Quick Service” establishments, although whether the public will catch on is doubtful. This rise in fast casual dining can only worsen the situation for fast food, as this is a new trend coming in with none of the bad associations. The growth of two of the US market leaders – Chipotle and Panera Bread – has outperformed that of McDonald’s. The growth of these two leaders’ top-line revenue has been 133% and 75% respectively over the last five years compared to McDonald’s 22%. This gives an indication of the increasing trend towards fast casual, while showing fast food is not growing as quick.

The reason why many people are increasingly going to fast casual dining establishments is that it is seen as the best of worlds. With better service than fast food and the lack of association with un-healthiness, it is also seen as a more affordable option than standard dining. This may be why in America visits to fast casual dining restaurants rose by 8% in 2013, while the year also saw an impressive 10% increase in spending when measured next to the 2012 financial year. There is also solid growth in the sector as shown by a 6% US increase in the number of fast casual units in 2013, it is clear that if business’ were struggling there would be cut backs, whereas this growth only indicates the promise which has been seen. This trend is also seen in the UK with two restaurants chains, The Giggling Squid and Wahaca, opening multiple locations across the south of the country; as well as companies such as McCain launching products especially for the casual dining sector.

With these factors in mind it looks like 2014 will see a continued increase in the size of the fast casual sector, with both the traditional and fast food restaurants suffering. While other factors may lead to this changing over the next year, indicators suggest that this will be a big year for the industry.