Save More by Tracking Down Your Spending

It does not matter for what purpose you are saving money, it could be for college, for a new car, a house or to become debt free. What matters is that you want, at all times, to save the maximum possible amount. One trick to help you doing that is to have a tight control over your personal finance by knowing exactly how much you spend, for what reason and when.

The first time I actually looked at the numbers I was surprised by the amount of money I was spending in small things. A lot of small, cheap, things were adding up to a point that more than 40% of my spending was going “under my radar”.

Have all information in one place

Most of us have more than one saving or checking account, investments, multiple credit cards, cash holdings. With all that data spread through your financial life it is easy to get lost. Gather all data in a single location. The first time I did that I started an Excel sheet and started entering my balances for everything I had and then followed by all spending I did from that day one. Each time I reached a new month, I would open a new tab in my sheet, rollover the balance from the previous month, added my income sources (such as my salary) and continue the process.

Step by step:

1. Gather your balances in one place (preferably one that does calculations automatically for you such as Excel, Google Spreadsheets, Quicken, etc).
2. Each day update your sheet with your spending as a negative amount (bills you paid, anything you bought, etc), including the description. Example: Loan payment -$1500
3. Each day update your sheet with money you made as a positive amount (salary you received, lottery you won, etc ;)).
4. Do that until the end of the month and then roll the balances to the next month sheet.
   

Analyze the data you have

Add up each type of spending you have so you know how much you spend per month with it. For example, add up all car maintenance, car parking costs, and car gas so that you know much your car costs. Do the same for house bills, entertainment, debt payment and other minor spending (Starbucks, Netflix …).

The moment you do that you will probably notice a few things you could easily reduce, such as stopping buying coffee at Starbucks but doing it at home and saving about $50 per month.

Plan your changes

Before you go over the top with the frugality idea, use your sheet to project the impact of cutting down one or two things. If you believe the sacrifice is worth the benefits, go ahead! One good tool to do that is by calculating your crossover point (a.k.a. financial independence) and then revising the calculation with your changes.

Hot Money Making opportunity: Google Business Referral Representative

Google Business Referral Representative is a person collects data from businesses to send it to Google Maps. The type of data you would be collecting is: business hours, payment methods, picture from the place, etc. In Google’s own words:

As a Google Business Referral Representative, you'll visit local businesses to collect information (such as hours of operation, types of payment accepted, etc.) for Google Maps, and tell them about Google Maps and Google AdWords. You'll also take a few digital photos of the business that will appear on the Google Maps listing along with the business information. After the visit, you submit the business' info and photo(s) to Google through your Local Business Referrals Center, and we'll pay you up to $10 for each listing that is approved by Google and verified by the business.

All you need to be a successful Business Referral Representative is a passion for helping local businesses succeed, a love for the Internet (some knowledge of Google is great, too), and access to a computer and a digital camera.

“Why should I want to be one?”

Basically because Google will pay you cold hard cash to do that. For each business you collect data you will be given $2 once Google approves your work and more $8 once the business verifies the data you collected. That is $10 for 5 minutes of your day.

For those of you seeking a part time job, I couldn’t anything better. With a low estimate of just 5 entries per hour, you would get $10/hour from Google plus $40/hour when the business verifies the data you placed. Yes… that is $50/hour, you did NOT misunderstand me.

“I want in!!!”

Sign up for Google Business Referral Representative and start.

This Google product is available for US residents only.

An Easy Way To Justify Your Frugality

J.D. wrote an excellent article about choices you have to do in life to reach your big goals. He discusses a few “tools” you can use in order to persuade yourself into not buying something in order to save money, and I believe there is one small addition I could do to his list.

In a nutshell he lists the following tools:
Keep you goal in mind: Focus on why you need to save money and keep reminding yourself of that. “Do I need an iPhone or a million dollars?”, “Do I need a Wii or to become debt-free?”.
Boost your income: Self explanatory. Put additional energy into making more income in order to save more.
Be patient: Progress increases over time because you will slowly and gradually pay (or receive) less (or more) interest as you continue focused.

One thing I do to keep my goal in mind is to calculate a comparison multiplier: I take the estimate time until I reach my goal (for example 10 years) and then I compound the interest I receive in my investments for 10 years. If I am getting 10% / year that means to multiply what I have by 1.10 after 1 year. After 10 years that means 1.10 ^ 10 = 2.59.

Now when I see a fancy new iPhone for $500 I ask myself: Do I need an iPhone or to be $1295 closer to my goal?

If your goal is to be debt-free it is even better. Interest on debt is generally a lot higher than interest you receive in investments. Let’s take J.D.’s credit card interest, which is 19.8%/year and calculate his multiplier for 10 years: 6.09! Does J.D. want an iPhone or to be $3045 closer to be debt free in 10 years time?

I know my personal answer. What is yours?

Calculating how long you need to achieve financial freedom

This article was submited to the #112 Carnival of Personal Finance. Complete list of entrants can be found here

Financial freedom may be the dream of most people. What is financial freedom?

In my opinion, it is the freedom to do whatever you want, financial-wise. Great… How do we get there?

Crossover Point

Let’s assume you have a steady job with generates income, you spend part of your income and invest the rest. Someday your investments will be so big that they will generate more income than your full time job. When that happens, you have reached the Crossover point (a.k.a financial freedom).

It is easy to calculate when, approximately, you will reach your crossover point. Open up MS Excel (or similar) and reproduce the following spreadsheet on it with your own parameters such as your income (in my example $60k per year) and your current age. (click to enlarge the image)

When placing the cells with formulas, such as Savings column or Investment Interest, make sure to place “=” before the values you see in the image (i.e. =C8*$E$2 should be placed in the first row of Savings column). The spreadsheet on excel should look like this: (click to enlarge the image)

Now select the row of age 31 (or your own personal age) and then drag it down 20-30 lines. (click to enlarge the image)

You should have a table similar to this. Using that table you will be able to make graphs on excel, such as Income and Interest vs age.

The red circle in the graph below indicates the Crossover point, somewhere between 55 and 56 years in this example. This means that, after 56 years old you can simply walk away from work and you will keep the same income you had with zero effort. You could focus your time into activities that you enjoy more or simply go spend your money.

One thing that is important to note is that the income from your job grows 5% per year, part of it is due to inflation and the other part is because of promotions or other bonuses you eventually get along your life. So this calculation takes into account potential increases in lifestyle. (click to enlarge the image)

You are welcome to play with the Savings (%) and check the impact it has in the crossover age and then leave a comment with your findings.

Marketiva Investment Funds - Constantine

I was surprised today to see that 80% of my visitors coming from Google have keywords asking “How much interest on a million dollars”, or similar. I thought “how to get a million dollars” would be more popular.

Marketiva Corporation provides some investment funds for their customers. Even though there are few options, most of their funds perform really well. Here are the funds they provide and their interest for the past 12 months: Brasillion(53%), Yangtze(49%), Asiasset(35%), Indiamond(25%), Constantine(7%), Columbus(7%) and Nippon(7%).

For those of you who wanted to know how much interest you could get on a million dollars, I would say a safe bet would be 7% / year with Constantine. That is $70k interest.

Constantine aims to maintain a fixed interest by investing in safer investments, such as bonds, etc. For those of you who are adverse to risk, that is highly recommended. The other funds mentioned invest in stocks from regional markets such as Brazil, China, etc, and get higher profits, however they involve more risk.

How to Make Debt Your Best Friend

There is a taboo that debt is bad. That is WRONG.

Before you start attacking let me clarify: debt taken from bad consuming habits (buying more than you can afford) is bad. Debt taken to leverage profitable investments is your best friend.
When you leverage your investments you are also leveraging your profit, so the more debt you can get, the greatest it your profit will be.

Here is an example:

If you spend $200k to buy a house and rehab it, and then sell it for $220k, you are making $20k profit, which is 10% of your investment (20/200).

However if you use $20k to do a down payment for a $200k house and to pay for the rehab, you can later sell it for $220k. You are, again, making approximately $20k profit (you will pay some interest while doing that). This time, however, your profit is 100% (20/20).

The example above illustrates just 1 example where you can use debt to leverage your profits.

Please keep in mind that the same way that debt leverages potential profits, that also applies to potential losses.

What can developing nations can teach us about Personal Finance

I’ve recently come across a great post in getrichslowly.org. The idea of their blog seem to be pretty much the same as mine, however I admit I haven’t gone through it to confirm that.

The post I linked above points out a few things people from developing nations do that helps them save more money. While the article contains more information, I will highlight only two which are easier to implement in your day-to-day routine.

1. Driving to work: driving alone in your car to work is highly inefficient. Taking a bus or even using a motorbike is far cheaper. (Also a lot better for the environment)
2. Living with your parents: in developing nations it is socially acceptable to live with your parents if you are single. By doing so, you are saving a lot of housing costs.
   

What do you think about that? Would you be prepared to live with your parents longer to achieve financial freedom faster? Would you give up the comfort of driving to work to save on gas and car maintenance?

3 tips to make your time more productive

Rumor has that time is money, and I couldn’t agree more. Time is money because all wasted time could be spent making money, and therefore there is an opportunity cost of time associated with it.

In accordance to my blueprint on how to make a million dollars by saving monthly, this tip will help you to save time and, therefore, money.

• Audio books: Use the time you would be stuck in the traffic to listen to audio books and learn new things, especially things that will make you money. Recent researches show that average U.S. citizen wastes 1.1 hours per day driving. Use that time to learn something new! If you think you already know it all in your niche, try learning a new language, such as Chinese, which will probably be a superpower in 50 years time. Do that and you will increase your productive time in almost 7% (1.1/16, where 1.1 is the time you are gaining productivity and 16 is the amount of hours average person is awake per day).

• Information overflow: There is so much information in the internet that you could spend your whole life browsing and not have time to read it all. It is easy to fall for it and spend countless hours research a money making opportunity and never take action. It does not matter how much you know unless you ACT!

• Boring events: If you, for any reason, are required to waste some time in a boring event, such as a useless class, family gathering, etc, try using that time to be creative. Think new opportunities, analyze your current projects in light of improvement.

Just as an example, this article was written at 11,000 meters, while I am flying in my holidays.
This article may ultimately generate money since my blog makes me money through adsense.

Blog Project: My votes

As i said I took part in Blog Project Three. You can find my post about 3 things no one told you about web monetizing here, and the full list of contest participants here.

Here are my votes for best articles:

Top 3 Reasons Why You Have to Work from Home by Alfa

3 Costly Internet Business Mistakes to Avoid by John

My three best traffic generators by Johan

Good luck everyone!

How to travel for free: Quick arbitrage opportunity

Today I am travelling abroad and I will be away until next week, so please excuse me for the lack of articles.

While planning for my trip I have noticed a foreign currency exchange (Forex) arbitrage opportunity. I have checked exchange services in both my home town and my destination, to exchange my home currency into my destination currency, but the rates were to not very promising. It would be at least 8% more expensive to exchange using those services than interbank rate. (Foreign currency is valued at 8% higher price than interbank rate)

Most people would stop there and take that loss, however that can be converted into profit. I consulted my bank and they have ATM machines where I’m going, and their fee for the service is a $6 flat fee, and their rate is interbank rate.

I am going to withdraw the money needed for my holidays from an ATM at my destination and use it in my holidays, when I am about to come home I will withdraw all my remaining checking account balance, use an exchange service to exchange it to my local currency again and then deposit back into my bank account.

In summary: ATM withdrawal at Interbank rate + exchange it back to my local currency using a rate that is 8% better (8% more value) + deposit into my bank account. My profit will be 8% - $6 (fee).

If I had a fat enough balance I could travel for free doing that.

How to choose an investment fund based on the benchmark

I have previously discussed investment fund’s benchmarks however you need to understand how to use benchmarks to choose the right investment fund for you.

Here is a step by step:

1. Define your goal: You need to define if you want to protect your money from inflation, to secure your principal, to seek capital growth, etc
2. Define the risk you are willing to take: Do you accept to risk having negative return on investment? Do you accept risk of losing everything you invested?
3. Define the amount to invest: you need to define what you will invest upfront and how much you invest monthly (if any).
4. Define the estimated time you will keep the money invested.
5. Compare points 1, 2, 3 and 4 with the benchmark of the funds you have available: If you seek to protect your money from inflation, you want to have a benchmark that has strong relation to inflation, for example. You don’t want to go into a stock’s fund if you are not willing to accept negative return on investment or to have longer investment timeframes (2-3 years)
   

When you do that, you will have ruled out almost all funds, leaving you with few options. Simply compare the past performance and you will most likely know in what fund to invest.

Understanding Funds Benchmarking

Each time you are considering investing in an investment fund you should carefully go through past performance reports, as well as other resources such as investment strategy, top holdings, market outlook, in order make an informed decision. While you are doing so, you will often see performance comparisons with a Fund’s benchmark.

Benchmark is a standard by which something is evaluated or measured and, in the case of investment funds, it is an economic index by which the performance of the investment fund is evaluated. In simple words: if the fund outperforms the benchmark, it did well. If the fund underperforms the benchmark, it did not do well.

It is important to have benchmarks to keep the performance analysis less intuitive and more technical. A stock’s fund that has a 15% year return in the U.S. may be seen as good fund while the same performance in emerging countries may not be good. This happens because S&P 500 had a 13.6% high in 2006, while Brazilian stock exchange (IBovespa) had a high of 48.4%.
When I compared the fund performance with the respective stock index I used the index as the fund’s benchmark.

The image above is an example of Fund performance report. The red bar is the fund's actual performance in 2006, the middle grey bar is Benchmark 1's performance in 2006 and the right dark grey bar is Benchmark 2's performance in 2006. As you can see, the fund in question overperformed Benchmark 2 but underperformed Benchmark 1.

1 Million Dollars by Saving per Month

I was browsing around and found an interesting video from Brian Armstrong about how to calculate how much you need to save per month to make 1 million dollars at a certain age.

You may remember I did some estimates of savings in an earlier post, when you needed about 2 thousand per month in savings. The video’s calculation example comes up with a much smaller value (7 hundred). The reason behind it is because the time you will be saving that in the video is 25 years, and in my original calculation it is just 15 years.

Therefore, this only emphasizes how important it is to start early and to get the best interest rate possible in your investments.

Investment Funds – Let your money work for you

Ok I saved Money, now what? Let your money work for you.

You will need to invest it so your money will grow through compounded interest.

Here is how compounded interest works:
Startup investment: $1000; Interest: 10% per year. You get $1100 after 1 year, $1210 after 2, $1331 after 3, $1464.10 after 4. Please note that each year the amount earned is growing, because you also receive interest on previous profits (compounding).

This reasonably well known fact is what I call to let your money work for you: you will be making profit, which grows every year without any effort. Meanwhile you can focus into saving more money to speed up the process of achieving your financial freedom.

Just to give you an example of how powerful this mechanism is, when you owe money to a bank you pay compounded interests to your bank. That is how banks make their money!

The same banks that earn money from you also offer you the opportunity to do the same, by offering you investment funds products, savings accounts or even paying you interest on your checking account balance. Generally the interest paid in checking / savings accounts is smaller than the one from investment funds.

There is a wide range of different funds available in almost every bank in the world, however different funds are tailored for different risk profiles. For starters I suggest funds that try to keep a steady interest or, preferably, those that you know, beforehand, how much you are going to earn. This means, in practical terms, to stay away from investment funds where the underlying investment is stocks, index or futures. US Bond investment funds should be a good option, or simply finding a savings account which offers you a decent interest.

Eventually I will lay down a few funds available with detailed information about them, in a separate post.

More on Web Monetizing

After my rather premature start with web monetizing lets discuss it more in depth.

Web monetizing is simple: to make money from your website. To do that you will need a website, content, traffic and an advertising campaign. I will assume that you can take care of the website and content by yourself. Google Blogger may be a good place to start.

Once you have a website you will need people visiting it (a.k.a traffic). Brian Armstrong is currently running a marketing challenge targeted to get more people to visit your site which should be worth following.

For startup sites it may be quite difficult to get advertisers, however there are companies which provide such services. The most popular one is Google Adsense.

Darren Rowse has an excellent website on how to blog for money, where you can find a series of Adsense Tips for Bloggers.

3 Things no one told you about web monetizing

For those who were following my posts chronologically, this post may seem out of place, and it is. I am posting this now to join a competition in Daily Blog Tips .

There is a huge fuss everywhere on the internet about Web Monetizing, however there are costs associated with it that I was not able to find anywhere. This post discusses 3 major costs of web monetizing and how they can contribute for your website to incur in a LOSS, instead of making you money as intended. For the sake of simplicity all my examples will be based on a blog.

Opportunity cost is the cost of something in term of an opportunity forgone (and the benefits which could have been received from that opportunity), and a blog is full of them! Here are the top 3 opportunity costs for blogs:

1. Opportunity cost of capital – Regardless the size, a blog requires some spending in order to work. You need an internet connection, a computer, webhosting, domain name, advertising budget and paid writers. Some of those are optional, such as webhosting and paid writers, however you definitely need a computer with an internet connection.

One may argument that he already has a computer and would already pay for internet connection however you are allocating part of your available computer lifetime and internet connection for blogging, thus you are using such resources for that purpose and incurring costs.

All that money could be used for a different opportunity, such as real estate investing, paying your debts, starting your own business or deposit into a savings account. It simply does not matter what you could do with your money. What matters is that such money could be generating profit in another opportunity and because it is allocated in blogging your blog has such opportunity cost of capital because you have given up making money elsewhere to have a blog and try to monetize it.

2. Opportunity cost of time – Behind a blog there is always a person, the blogger, that spends part of his time running the blog. Posting, designing, reading related blogs, managing ad and affiliate accounts are just some of the activities behind a monetized blog, and all those activities take considerable time if you add them up.

That person could better use his time for a different opportunity. He could be spending extra hours at work, starting his own business or managing investments elsewhere. Again, it does not matter. All those activities could be generating money from the time spent with blogging, thus that time has an opportunity cost of time.

3. Opportunity cost of space – Last, but not least is the space inside your blog. Each pixel you use for placing an ad has a cost associated with it. With that space you could be placing a different, more profitable ad or simply content for your blog which would add value to the blog itself and thus increasing the profit of your other ads. Therefore, even though it seems “free”, placing a Google Adsense ad block in your blog has an opportunity cost associated with it.


Those 3 costs should be added up to your tangible costs, such as your webhosting fees, advertising budget, etc for the total cost of your blog. Subtract that total from the income your monetize blog provides you and check how profitable it really is.

It’s important to say that those costs will not make it impossible to profit from a website, however web monetizing should be more carefully looked upon than it usually is.

Goals

This blog has a goal, a million dollars; however you may have a different goal. What is your goal, money-wise?

It is very important to know what is your goal and how long can you afford to wait before you reach it, because you need to have that in mind when deciding which investment strategy to adopt. For example: If your goal expires in 5 years, it will not be good to have a HTM (Hold Till Maturity) bond which matures in 10 years.

Another plausible reason to have a goal is to calculate, approximately, how much you need to save per month to reach it. In my post about my teenager dream I have presented some possible saving goals but it is up to you to decide how much is your savings goal, and to make sure that is a realistic one.

It is a mistake to try to save a lot of money per month, compared to the money you make, because it’s not possible to accomplish, in most cases. Banks that offer mortgages in Brazil, for example, do not allow you to agree to pay more than 25% of what you make monthly. That threshold may be slightly conservative because it depends on your spending structure, which will vary drastically if you compare the spending structure of a university student who lives with his parents with a 30-year-old person who is steadily employed, married and has kids.

If you are unsure, start with 25% of what you make and have strong discipline about it. The more you save in the beginning, the more compounded interest you will receive throughout the lifetime of your investment.

Paying less for what you usually buy

This post falls into the category "How to spend your money correctly", as said here.

Money is like mass, energy and many other conservative entities, which means that you can write a money conservation equation:

(money you save) = (money you earn) - (money you spend)

This equation tells us, basically two things:
1) money does not disappear.
2) to save more money you can either earn more money, or spend less money. Each $1 you earn more, or that you spend less, has the exact same impact on your savings.

That said, lets work on spending less money. The easiest way to spend less money is not to spend money, a.k.a do not go out, do not buy things, do not pay for anything, but that is not possible. There are ways with which you can spend less money buying the same things.

First, research prices before buying. Look for 2-3 suppliers of what you are buying and check the best price. It does not matter if it is a mobile phone service, a car or a can of soda, each $1 counts. An example of a very good price finder is Google Product Search. Or Price Watch for computer-related products.

When buying, choose the best payment option. This one is more complex. The best payment option is the one that has the lowest net present value.

The net present value is a number that means how much all the money you will pay is worth now. $1 today is not worth $1 in month from now, because if you had $1 today you could invest it and make it be worth $1.01 or even more. So lets look at this through an example:

Payment option 1: You can pay in cash $100 today.
Payment option 2: You can pay by credit card $100 and your credit card bill needs to be paid in 30 days.

At first a look both seem the same. But if you look closer option 1 is more expensive than option 2, because in option 2 you could just take your $100 cash and invest for a month, pay your credit card bill and then have a residual profit. In other words, option 2 has smaller net present value.

Does it really make such a difference? If what you are buying is valued at $100, we may be talking about $1 or less. Try repeating that calculation when you are buying a house or something with considerable value.

For more complex payment structures, where you have an upfront payment and then monthly payments you will need a financial calculator (HP 12C), MS Excel or similar. Wikipedia has a great article explaining, in depth, how to calculate it.

$1,000,000.00 - My teenager dream

This blog is inspired in one of my teenager dream: to make a million dollars before 30 years old. It may surprise you such an ambitious dream for a young person, however it is maybe in that stage of life that we have our most ambitious dreams.

Is that possible? Yes. Here are a few simulations of how it could be achieved starting at 15 years old:

Saving $3,300 per month, investing it at 7% yearly interest; or
Saving $2,000 per month, investing it at 13% yearly interest; or
Saving $1,700 per month, investing it at 15% yearly interest; or
Saving $1,100 per month, investing it at 20% yearly interest;

...

I could spend the whole day making simulations to prove my point. It is easy to notice that the higher is the yearly interest (or yield), the less you need to save. Two basic questions may pop in your head when you read this: How to save that much money? and How to get so much interest?

I will not give you an easy answer to neither of the questions, because there is none. In general, to save money you need to make money and to spend less than you make. To do so, we will have to discuss how to make money and then how to spend it correctly. To get so much interest you will need to know a couple of complex different investment alternatives, which include, but are not limited to, bonds, index, futures, stocks, real estate and, naturally, starting your own business.

I hope to be able to share a bit of what I know about each of those.

"Hello World!"

Back in the day I was trying to learn programming, each and every book I read about any programming language started by teaching me how to make a simple script / executable / page that would print "Hello world!". Since this is the very first post of this blog, I thought I would start by saying hello and explaining a few things.

In this and every post I will try to share with you some things I know about money, especially how to make money, using online and offline opportunities, how not to lose money and how to increase your overall financial intelligence.

You have probably heard the term financial intelligence. If you haven't, you should read Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not!.

Financial Intelligence is what makes you take always the best choice on your day to day financial decisions. It does not matter if you are buying a book, a car or going into Real Estate investing, you should always select the payment method which is most profitable for you, based on net present value, which shall be discussed in a separate post. By doing that you will be paying less for the things you buy regularly, and thus creating greater savings to add up for your first million.

I hope you enjoy your stay here while we dig our way into our first million dollars.