Have you ever gone to the mall and impulsively bought something you hadn’t intended? Have you ever gone to the grocery store and walked out with a couple things you didn’t plan on getting? Sure, we all have. I’ve gone to the supermarket for some chicken, eggs, and yogurt only to return with coffee filters and a package of pork ribs because both were on sale (coffee filters are never on sale, probably because a package of 100 only costs $2 anyway and you can conceivably use it for 100 days!). It’s called impulsive buying and here’s a close cousin of it that is very powerful but less often used: impulse saving. Here’s one great way you an impulsively save:

Impulse Saving & Debt Paydown

Get a yourself a six-sided die (or more sides if you prefer) and roll it. Take that number, multiple it by ten, and put it in a savings account or pay down a debt. Do it every single time you get a paycheck and learn to live without the money in your budget.

If you don’t have a die, figure out another way to randomly generate a number. If you truly can’t afford to save up to $60 a month without feeling great pains, multiple the number by $5 so the top impulse saving amount is $30. If you truly can’t afford to save up to $30, you need to re-assess your financial situation, but for that’s a topic for another time.

To facilitate impulse saving, electronically link up your bank accounts or set up electronic bill pay. This lets you quickly and easily save or pay down debt in a handful of clicks. Without electronic means, the transfer of savings or pay down of debt is made less efficient to make smaller transfers and payments.

Why Do This?

Saving money and paying down debt is hard and any little trick you can take advantage of will be to your advantage. I think impulse saving is a lot like snowflaking (an idea and term first coined by PaidTwice, someone please clarify if I have this wrong). With snowflaking you generate more income through various means and put it towards your debt. With impulse saving, you force yourself to spend less of the unplanned “noise” in your budget by “spending” it first on savings or debt. The ideas are close cousins but slightly different in where the funds come from.

So, why should you do this? Because we impulsively buy stuff all the time. No matter how disciplined we are, there is always noise in our budget that we simply cannot account. Rather than fight it, take advantage by spending it before you get the opportunity to spend it. If you impulsively save it first, then you are less likely to impulsively spend it. This won’t prevent you from impulsively spending but if you do, the impulse savings are cutting down your debt. It’s like improving your worst case. (worst case is nothing, you spend but already paid down by that amount; best case is that you pay down debt)

How Good Is This Idea?

Let’s take an example to illustrate how powerful this can be. If you have $8,000 in credit card debt at 19.99%, it would take 11 years and 1 month of $400/mo payments to clear the debt. By paying down an additional $30 a month, (less than the average impulse save of $35, but you get the idea) it takes only 10 years and 2 months, a difference of eleven months. If eleven months doesn’t sound like a lot, remember it’s eleven months of $430 payments, or $4,730! If you combine this idea with some debt consolidation by way of 0% balance transfers or peer-to-peer lending marketplaces, you can do some serious damage to your debt.

So, if you have some debt, consider some impulse saving, it’s the latest thing in debt busting since snowflaking!

When I was younger (starting around 2nd grade), my mom said that for every 100% I got on a weekly spelling test, I’d get a dollar as my reward. The spelling tests started all the way back in the first grade but really got going in second and third grades, but I’d routinely get a hundred in part because I was brilliant and in part because they told us the set of words ahead of time (my mom knew this). There would be maybe fifty words and then ten or twenty would appear on the test, it was a cinch to get a hundred and anyone who didn’t simply didn’t try or didn’t care. Anyway, as I grew older, the 100s were harder and the prize was made larger until I was in high school when it would be $10 per 100. By high school, though, I didn’t get 100s unless it was something trivial like a health test or something meaningless, so I never went to collect. Anyway, I ended up being a decent student, in part because of the incentive my mom provided, but this is a issue that’s a hot button topic for many parents. Should they “bribe” (or “reward,” as the proponents would say) their children for performance?

My opinion is that you can and should bribe or reward them for performance because that’s how the world works. You get a good SAT score, you are rewarded with admittance into a good college or university. If you get good grades in college, you’re rewarded with a good job. If you perform well at your job, you’re rewarded with more money (maybe!). Giving children incentives for strong academic performance isn’t going to ruin them for the world because the world rewards strong performance with money as well.

What prompted this Your Take post was an article from the New York Times where students were being paid to perform well academically.

What’s your take on this?

The contest has ended and the winners have been notified.

One of the PR firms representing H&R Block sent me three USB keys loaded with their TaxCut software and I’m going to give you all a chance to win them. I know April 15th is coming upon us soon, less than a month away, so this contest will only be running until this Friday. Some quick requirements if you want one:

• Please don’t enter if you already did your taxes or you can do them for free.
• Please live in the US (I know it’s obvious but sometimes people don’t realize it, this is for tax prep in the US!)
• Then, please leave a comment with your favorite Laffy Taffy joke ever, and/or,
• Sign up to receive these posts via email from Feedburner.

To sign up to receive the posts on Blueprint for Financial Prosperity via email, enter your email address below. All you will get are emails from Feedburner (and then one from me when I select a winner for this contest and potentially future contests), otherwise you will receive no other emails.

On Friday I will select the funniest joke, one email subscriber, and then one at random from both lists; email them, and hopefully mail out the keys on Saturday.

Good luck!

With the price of a barrel of oil around $100 and the price of a gallon of gasoline inching towards $4, you’ve probably got fuel on the brain this year. If you also have a new (or new to you) car on the brain as well, you might want to know the top 10 fuel efficient MPG cars of 2008 right? Well, if you scour the EPA fueleconomy.gov website, you’d get the following list of top 10 (with ties) cars.

But, before we hit the actual list, here are some interesting, but not surprising, points worth noting:

• All vehicles have 4 cylinder engines.
• All mileages are based on the new EPA MPG testing guidelines.
• The average is a weighted average based on 55% city driving, 45% highway driving.
• A lot of Toyota’s and Honda’s on the list but there are some American cars on the list like the Ford Escape Hybrid and Mercury Mariner.
• The first seven cars on the list are hybrids, three of those are SUVs!
• All of the cars are capable of going over 30 MPG.
• The number #1 vehicle, the Toyota Prius, has a starting MSRP of $21,200 (but you have to get on a waiting list!).
• The number #10 vehicle, the Honda Fit, has a starting MSRP of around $13,950 - very reasonable for a 30.2 MPG (if that truly is important to you).

Curious about what #11 was? Not too exciting, it is the Automatic transmission version of the #7 car, the Toyota Corolla.

That’s right, we recently received a $1,075.98 check from Citi to go with our $532.45 check last month, all part of the greatest cashback plan in the world. Okay okay, I’m only kidding, it’s probably not the greatest cashback plan in the world but the Citi CashReturns card but it certainly softened the blow of paying for a wedding and honeymoon.

For those of you keeping score at home, and motivated enough to divide 1608.43 by .05, the cash back rebate included not only our wedding and honeymoon but almost all the spending of the last three months as well… but weddings are pricey.

So, how do you leverage a 3 month 5% cashback program as best as possible? Don’t apply for it unless you know you have a large capital expenditure in the next three months! This is perfect for big family vacations, weddings, home improvement projects, or anything else that’s expensive. I think that if you’re thinking about spending $10,000 or more ($500 cashback), then applying for this card is a smart move. If you don’t have anything on that scale, don’t apply! You want to save it for when you will have a big expenditure.

One other great thing about this card is that they automatically send you the rebate check, you don’t have to request it. I think it’s ridiculous that all cards don’t do this.

The Fed did what everyone expected this past week, cutting the federal funds rate by 75 basis points to 2.25%, a little less than what the market wanted (they wanted a full 100 basis point cut down to 2%). The federal funds rate has gotten a lot of press lately and many people have started to understand how the Fed Rate personally affects them. Some have been confused between the federal funds rate and the federal discount rate, which I tried to explain in the past, and wanted to learn why the fed rate affected the stock market, but overall I think it’s relatively well understood. The other popular rates that aren’t as well understood are the Prime Rate, the London Interbank Offered Rate (LIBOR), and the 11th District Cost of Funds Index (COFI).

Prime Rate

What is it? The prime rate is a generic term but in the US it primarily refers to the the Wall Street Journal Prime Rate. It is “the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks.” [Source: Wikipedia] Usually you can expect the rate to be about 3% higher than the Federal Funds rate so when the Fed drops its rates, you can expect the Prime Rate to fall as well (but not always). WSJ prints this rate about once a month.
Why does it matter? The Prime Rate is often the rate you see associated with credit cards, car notes, and all other types of consumer debt. For example, a card may have their variable purchase and balance transfer APR pegged to the Prime Rate plus 4.99%, so that rate will be the Federal Funds rate plus around 8.99%. Since the Fed cut the rate by 75 basis points, you should expect a similar fall in your interest rates. The Prime Rate is published by WSJ so it will lag the Fed by a little bit, so you might not see the lower rate for a little while.

London Interbank Offered Rate (LIBOR)

What is it? The LIBOR is “a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market).” [Source: Wikipedia] In other words, it’s the Fed funds rate in London. Some other notable differences are that it’s a daily rate, announced after 11 AM by the British Bankers Association, and is an average of rates on inter-bank loans of up to 1 year with contributor banks. It’s a lot like taking a snapshot of the crowd at a sporting event, you get close but it’s obviously a continually moving target. Another difference between the two rates is that with the Fed funds rate you’re talking about the target that the Fed is trying to hit by adding liquidity. With the LIBOR, it’s the actual rate being charged and not a target. While it is an academic difference, it’s a difference nonetheless.
Why does it matter? Some adjustable rate mortgages are actually linked to the LIBOR, such as LIBOR + 2.75% or LIBOR + 2.0%; so when the LIBOR moves around, it can affect what your ARM is adjusted to.

11th District Cost of Funds Index (COFI)

What is it? Last but not least, we have the 11th District Cost of Funds Index (COFI), an index I never heard of before researching this article. The COFI is a little more complicated and is “computed from the actual interest expenses reported for a given month by the Arizona, California, and Nevada savings institution members of the Federal Home Loan Bank of San Francisco (Bank) that satisfy the Bank’s criteria for inclusion in the COFI (COFI Reporting Members).” [Source: FHLBank San Francisco] Like the Prime Rate, this rate is reported on a monthly basis but two months behind (so the January value is reported in March).
Why does it matter? Again, it’s an index used to adjust mortgages and other loans and it’s popular because it lags the market and is a stable measure. This means that it’s good when the rates are increasing, since it lags, but not as good when the rates are falling, since it lags. The reason why its stable is because it includes more factors such as loans from savings and checking accounts, CDs, etc.

Hope that clarifies things just a little bit more…

Late last year, when there was blood in the streets, a well known discount broker (Company A) was said to be on the verge of bankruptcy and the stock tanked 50% in one day. Not only did it tank 50% but the prognosis on the street, at least perpetuated by mainstream media, was that company was hosed and that they were going under. They didn’t have a rich history of being able to fight off adversity, they were relatively new in the financial business and lots of people figured they’d collapse. SIPC insurance would have to be initiated to save accounts and it was going to be yet another one of the casualties of the sub-prime mess. Would you have sensed that the market had panicked and bought shares? Or would you have joined the bandwagon and watched the shares fall into oblivion?

Now consider this scenario. Several months later, an 85 year old investment firm (Company B), well known throughout the world, looked to be royally screwed as traders were concerned that the firm wouldn’t be able to fund future transactions. Their lifeblood, capital, appeared to be bleeding out as investors were pulling out their funds in the firm. Until their last quarter, they had never posted a loss. That’s 85 years worth of straight profits. On a Friday, their shares fell 10% to a five year low of around $57. By Monday, they closed at $30 on those same credit concerns. Did you see this as the market offering a huge discount on a valuable commodity? Or did you see it as the end of pretty good eight-five year old run?

Well, if you guessed, based on the setup, that Company A recovered and that Company B didn’t… you’d be quite astute. You’d be more astute if you made those determinations as the events were unfolding, rather than right now. Company A was E*Trade, which was the impetus for a topic focused on what would happen if your brokerage went bankrupt. Company B was Bear Stearns. JP Morgan Chase recently announced that they’d buy the firm for $2.30 a share, with funding from the Federal Reserve. While the ink isn’t dry yet on that deal, it was announced this past weekend in conjunction with a weekend 25 basis point cut by the Federal Reserve (an event almost as rare as Halley’s Comet, the last weekend rate cut announcement was October 6th, 1979).

The moral of this story is that you shouldn’t even buy individual stocks based on (emotionally-charged) news. The broader corollary to that moral is that you shouldn’t buy individual stocks without careful inspection of its fundamentals, but avoiding emotionally-charged news is always a great first step.

For the record, I thought E*Trade was going under and Bear Stearns would be fine. I didn’t buy shares of either because I’ve been burned (and rewarded) in the past about ignorantly buying on bad news (now I stick to index funds like a good boy!). In the past, I bought Enron because I thought people were over-reacting but one can never underestimate the pervasiveness and severity of outright fraud. I was rewarded when I bought shares of Xerox in 2000 when it was in single digits because I figured a firm with that storied a history probably was going to make it (or at least be acquired). Though it’s like they say, tell your kid that the stove is hot won’t sear in the message quite like actually touching it.