Black Friday and Bad Fees

Black Friday Shopping

With Halloween in the rear-view mirror and the cold weather setting in, the holiday season is officially here. You can’t get by this time of year without discussing Black Friday, but Brian and Bo are adding in another topic up for discussion today — fees.

We’re Done with Fees!

Brian’s taking a stand on the absurd amount of fees that we all encounter in our daily routines. From ATM fees, to the fees we get charged when upgrading our phones, to foreign transaction fees… isn’t it time we stop paying for them?

The guys think so, and cover a few ways to avoid paying the worst of bad fees:

  • What banks give you access to millions of ATMs, so you don’t have to worry about fees when withdrawing your money.
  • What cards don’t have foreign transaction fees associated with them.
  • How to sweet talk customer service agents on the phone into dropping fees they shouldn’t charge in the first place.

After the guys talk fees, they shift their focus to getting the most you can out of Black Friday deals.

Making the Most Out of Black Friday

Wait — what’s a tightwad doing talking about spending money for the holidays? Don’t worry, Tightwad Nation. The guys discuss this retail “holiday” as an opportunity to buy things you actually need and at a much lower cost than any other time of the year.

In order to have a successful Black Friday, you must have a game plan. Take inventory of what you need and create a shopping list to take with you. Brian suggests using the TGI Black Friday app to keep track of items and deals you want to score on.

Additionally, the guys recommend using Ebates or Upromise to save even more on top of those Black Friday deals.

You should also look to shop at certain stores that offer discount cards (like Target using their REDcard for 5% off), or take advantage of the credit cards that offer quarterly bonuses if you shop at certain stores.

Another tip to make the most of the money you plan to spend is to shop through your credit card company’s website. There’s usually a shopping portal you can go to, and they’ll offer cash back as well.

Challenge yourself to stretch your dollar as far as it will go this holiday season, and listen in for more tips on how to save.

The Difference Between Good Debt and Bad Debt

Good Debt and Bad Debt

Debt is often shunned by most financial professionals, and for good reason. Many people go into debt for the wrong reasons, and end up spending more money in interest than they would have if they had just paid in cash.

However, that doesn’t mean that all debt is bad for your financial situation. Debt can be leveraged to build wealth when used correctly. Used poorly, and it can set you back quite a bit.

There’s a difference between good debt and bad debt — and it’s important to understand what that difference is.

How Debt Can Help You Build Wealth

Let’s start off with how you can use your debt as a wealth building tool.

Good debt means investing in things that create ongoing value for you. The focus should be on purchasing an appreciating asset (such as a home), or purchasing something that will generate income (a rental property).

In both of these examples, you’re getting something in return for your investment. Other examples of good debt include:

  • A mortgage for your home
  • Student loan
  • Business loan
  • Charges on credit that are paid off monthly
  • Residential rental property
  • Commercial real estate

All of these examples come with the potential for generating income down the road.

There is also something to be said for having a good banker when it comes to taking out a loan. We once read a great statement about debt and bankers: borrowing money from a banker is one of the few business examples where you come up with 10% of the money for the venture, and yet the bank allows you to have 100% control and 100% of the profit less interest.

That’s not a bad deal!

How Debt Can Wreak Havoc on Your Finances When Used Poorly

Debt can become troubling when it is not used to build wealth. Unlike those who leverage debt to buy assets and generate additional income, you’re not getting anything in return for your “investment” by making purchases you can’t afford on depreciating assets.

Here some examples of bad debt:

  • A luxury car that you wouldn’t have been able to pay for without debt
  • Designer handbags or expensive watches
  • Clothing/shoes/accessories
  • Lavish vacations
  • Going overboard on gift-giving during the holidays

Would you really call any of these an investment in your future wealth? No. All of these examples share the common theme of buying material goods to make yourself look wealthier than you actually are.

Except you’re doing the exact opposite. Unless you can afford these items, each of these purchases is taking you further away from wealth. Faking wealth at the expense of your financial future is a bad idea.

Remember, looking rich and being wealthy are two different things.

Doubtful that debt and consumerism are actually a problem? Have a look at these statistics, which are from September 2014:

U.S. household consumer debt profile –

  • Average credit card debt: $15,607
  • Average mortgage debt: $153,500
  • Average student loan debt: $32,656

In total, American consumers owe –

  • $11.63 trillion in debt (increase of 3.8% from last year)
  • $880.5 billion in credit card debt
  • $8.07 trillion in mortgages
  • $1,120.3 billion in student loans (increase of 11.5% from last year)

These are all hefty figures, and a prime example of how we’re throwing money down the drain, as most things purchased today will depreciate in the future. (New cars lose 11% of their value once you drive them off the lot!)

Wouldn’t you rather focus on appreciating assets that will be worth more than what you purchased them for?

Bottom Line: Debt Is Debt

Debt can be a great tool when used responsibly, but it often takes discipline and understanding of your financial situation to use it to build wealth. A good rule of thumb to keep in mind is that you should keep your debt to under 35% of your gross income, so long as you are putting 15%-20% of your gross earnings toward savings and retirement.

Don’t be tempted to finance things you can’t afford right now; save up for them instead, and focus on your future. Though there is good debt and bad debt, at the end of the day, debt is debt. Take it on with caution and try to limit borrowing money to situations where you’re leveraging it to acquire appreciating assets.

How to Prioritize Financial Goals

Here's how to prioritize your financial goals

The guys got a great listener question a few months ago – from a husband and wife team who listen to the podcast together! — and are taking it on for this episode.

The question: how much should you save and invest if you have debt?

This is a good one to cover, because it’s difficult for most people to get through life without taking on any debt at all. Most of us don’t have over a hundred thousand dollars lying around in cash to put down on a home, or that same amount again to pay for higher education costs.

So we take out mortgages and student loans. (Or we just don’t yet have good money management habits and end up overspending on the credit card.)

Whether it’s good debt or bad debt, chances are you’ve had a little bit of it — which means you’ve had to juggle multiple financial goals, too.

We need to save and invest wisely for retirement, establish an emergency fund, repay debts (be it consumer credit card debt or a car loan or a mortgage),and more.

The Basics of How to Prioritize Financial Goals

Brian and Bo go over some of the basics that we can all abide by when it comes to prioritizing financial goals:

  • Pay yourself first: That means taking care of your retirement needs first. You need to be able to take care of yourself financially (now and in the future), so this should almost always be at the top of your priority list.
  • Have an emergency fund: Again, this goes back to taking care of yourself. That emergency fund will help safeguard you against unexpected expenses that could push you into debt.
  • Get rid of debt: Once you’ve secured your savings, it’s time to look at aggressively paying down any debts you may have.

The exception to this order? When you have high-interest rate debt. Usually associated with credit cards, debts with interest rates over 8% or so are your financial emergency, and need to be addressed immediately. That doesn’t mean sacrifice savings entirely — but it does mean making room in your budget to pay down debt.

Ideally, you’ll be saving 15% to 20% of your gross income for your retirement. But that may change depending on your debt situation. Again, it all depends on that interest rate.

Avoiding Money Wasters

Prioritizing your goals will get a lot easier if you can avoid some financial pitfalls that many Americans succumb to. The guys took a look at a list republished by J. Money at Budgets Are Sexy to see what average people wasted the most money on.

One of the biggies was no surprise: credit card debt. This is a huge waste of your hard-earned money and a great reminder of the importance to live within your means and avoid spending more than you can truly afford.

Others that Brian and Bo point out are deal websites (with a great quote from another financial blogger, Frugalwoods) and fees (along with a tip on getting out of them from time to time).

What Should You Do With Unexpected Income?

Unexpected Income from a Financial Windfall

What would you do with unexpected income received from an inheritance or insurance policy — or even a big year-end bonus at work?

While it’s not wise to rely on windfalls as part of your financial plan, you need to think ahead and understand what steps to take should this ever happen. Without a plan, it’s easier to use this extra, unexpected money irresponsibly or wastefully.

In order to plan on a windfall (without depending on it), you need to:

  • Find a trusted professional to work with
  • Establish a sensible, rational mindset
  • Take care of any pressing financial issues (or fund a financial goal)
  • Build your financial team

Let’s break these steps down into more detail.

Take Care of Tax Obligations

This is your first priority when dealing with significant amounts of unexpected income — like money from an inheritance or something like winning the lottery.

There are tax laws and codes around financial windfalls that may look a little different than what you’re used to. It’s important that you protect yourself (and your new money!) by working with a trusted, qualified CPA.

Your CPA can outline what kind of obligations you must now meet, and can provide advice on how to manage your money so you’re not slammed with a larger-than-necessary tax bill.

Get Your Head in the Right Space

Suddenly coming into a good financial situation (read: lots of money) can positively impact your net worth, and very negatively affect your mindset. You need to avoid impulsive decisions and remain rational.

Many people feel elated and excited upon receiving a financial windfall. Others feel anxious, paranoid, depressed, and stressed because of this new burden.

In either case, avoiding making decisions can help after you’ve taken care of any tax-related issues with your CPA. Give yourself space — in the form of time — from this event. Don’t suddenly decide to make big changes to your money management habits, spending, or life in general until some time has passed.

You can also help establish the right mindset by educating yourself.

Read books on personal finance, investing, and sudden wealth. Learn all you can about money and how it works. Check out financial blogs. Ask questions; seek answers. Knowledge is power.

Fund Financial Goals, or Fix Financial Problems

Once you can think about your finances in a calm, reasonable way, it’s time to think about what to do with this money. If you’re in the red, your first priority is to use extra and unexpected income to get out of debt.

No debt or financial issue to solve right away? Use your unexpected income to create a larger emergency fund. The general rule of thumb is to keep three to six months’ worth of living expenses socked away in a liquid savings account.

If you receive a windfall, however, consider providing yourself with an even larger safety net. Bump up your emergency fund to six to twelve months’ worth of expenses. Remember, just because things look great now since you have extra money does not mean nothing will ever go wrong again.

Your emergency fund can still protect you from a job loss, serious damage to your property, or a big medical bill. Don’t neglect it! Take advantage of having more cash than usual on hand to fully fund your savings for a rainy day.

Build Your Financial Team

When you start increasing your assets — especially when it happens suddenly — you need a reliable financial team to help you take care of all aspects of managing your money and wealth.

In addition to a CPA, you’ll want to look for a fee-only advisor to provide you with professional financial advice. You also want to have a lawyer who can develop an estate plan for you. (No, that’s not fun to think about. But it’s important, even if you’re young.)

When searching for financial professionals to help you, keep the following in mind:

  • Look for fee-only advisors who don’t charge commissions on financial products they sell
  • Ask about their professional credentials and their experience to ensure they can meet your needs
  • Make sure any professional is willing to work with you as a fiduciary

And Yes, You Can Splurge (Just a Little!) After Receiving Unexpected Income

It’s important to take care of practical needs whenever you receive extra money. You need to proceed with caution so that you don’t act impulsively or make financial decisions you’ll later regret.

But you are allowed to have a little fun, too!

After doing the responsible stuff listed above, create a wish list of things you’d love to buy or experience. Then take 5% of your unexpected income and pick a few things to enjoy from your list.

Have you ever experienced a financial windfall? Do you have a plan in place in case you do?