The Slow Bleed: Plugging Your Financial Leaks
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401K 2012 Financial woes can come quickly from big events like a foreclosure, loss of a job, or health problems. These misfortunes, though painful, make a certain amount of sense. Clearly A caused B and led to C — however just or unjust A, B, or C may seem. But at other times, our finances suffer death by a thousand cuts. Harder to pinpoint, we can’t make ends meet or get ahead. We work, pay our bills, and live modest lives. (See also: Emergency Plan: Better Than an Emergency Fund)
Still, something is amiss. Somewhere in the complex system of our financial lives, resources are being drained dollar by dollar. If your otherwise healthy relationship with money still leaves you coming up short, maybe you have a secret financial slow-bleed. Here are six of the most common causes.
1. Interest on Consumer Debt
Interest is more like a gusher than a slow bleed. I mention it only because paying interest is so accepted and expected that we often don’t realize how much it can drain our wealth. Paying interest on everything from cars to cheeseburgers is insidious, and if left unchecked, it saps our resources and demands more and more of our budgets. What are you paying interest on? Were they wants or needs? Are the items appreciating in value, or depreciating?
2. Service Charges and Late Fees
We live in a world that’s bent on collecting your nickels and dimes. It happens when we pay a bill over the phone and incur a convenience fee, when we return a DVD and pay a late fee, when we need to speak to a customer service representative and get charged a service fee, or when we bounce a check and have to cover an overdraft fee. Unnecessary fees bleed our cash and though some are unavoidable, others aren’t. Defend your dimes and dollars and wage war on all fees that are within your control.
3. Lazy Money
Interest lost is income lost. Take a look at your savings accounts, and your 401(k) and IRA investments. Do you know what your average rate of return is? Is your money working as hard for you as you worked for it? Being mindful of your personal comfort level with risk, explore ways to boost the return on your money.
4. Contracts
Consumers have more power than they realize, and there are ways to score better deals on cable, cell phone plans, and other services if you’re courageous enough to push the envelope a little. Make a few calls to your service providers and let them know you’re shopping around for a better deal. You’ll be surprised how quickly those air-tight contracts get a bit more breathing room.
5. Membership Dues
Unused health club memberships are the monthly equivalent to using an exercise bike as a coat rack. We join a gym (usually around January 1 of any given year) with the best of intentions. Then we start the long journey of forking over $60 a month until we come to our senses and somehow manage to wriggle out of the contract. Do you have a membership that you’re paying for and don’t use? Add up how much it’s costing you per year (include interest if you don’t pay off your credit card every month). Explore selling your membership, renegotiating your dues, or paying a penalty to get out of the contract.
6. Hyper-Insurance and High Insurance Deductibles
Ignore this section if you’re accident prone or driving a brand-new Ferrari. Otherwise, consider this — as a product, insurance was originally designed to save folks from financial hardship and ruin. But over the past 15-20 years we’ve begun insuring our coffee makers, cell phones, and TVs. I call this phenomenon “hyper-insurance.” Granted, I’m not intimately aware of your financial situation, but I doubt that a TV tragedy is going to land you on the streets. Why are we insuring every electronic bauble we own? Is the risk/expense ratio really that compelling?
Similarly, folks are deathly afraid of the high-deductible auto insurance policy. We gladly pay more for low deductible policies and effectively buy insurance on our insurance. I know accidents can happen at any time, but take a realistic look at your driving record and accident history. Could you bump up the deductible and still be solvent in the unlikely event of a fender-bender? If so, it might be worth upping the deductible and lowering your monthly insurance bill.
When we focus our attention on the tiny leaks in our financial lives, we acknowledge one important truth — little things add up. Fees, dues, usurious interest rates, silly insurance products — they’re all born in a boardroom and survive only by our willingness to pay. Let’s agree to plug the leaks, bandage the slow-bleed, and save some serious cash.
Have you identified leaks in your budget? What did you do to plug them?
Tagged: Frugal Living, Banking, cancelling contracts, credit card debt, high interest savings, lower bills
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This article contains the best summary on the general attitude toward interest from debt that I've seen in such a short amount of space. It's not even the entire scope of the article, but this was a great wake up call for people who treat carrying a large balance on a card as an acceptable norm. Thanks for the tips!
I would rephrase #5 as "Find the most cost-effective approach to fitness and health that works for you". For some people that could be biking to work, for others it could be finding an exercise buddy and getting back into the gym and putting that paid membership to use. Good health is a good money saver. Those prescription co-pays for blood pressure and/or diabetes meds add up.
Great points but some things I disagree with slightly. For one, interest should not always be the focus point of your attempt to plug financial leaks. Say you have a mortgage with a 4% interest rate. Can you save money by paying it off early? Yes. What if you invested that money instead? With a long-term return for the market at around 8-10%, you're basically throwing away 4-6% additional return. Is there some risk? Yes, and the 4% savings from the home loan is guarantee, but if you take no financial risk in life you will likely never have that much wealth to worry about anyway.
Also, as far as gym memberships goes, a better way to go about it than canceling it is to start using it again. At $60 a month, if you keep actively going to the gym and you stay healthy, $60 a month is a BARGAIN compared to the health costs you'll have later on if you don't take care of your body.
Hi Tim, thanks for your comment. Yes -- the interest I was referring to was more focused on unsecured consumer debt, rather than a mortgage. It's tough to avoid mortgage debt (and the associated interest), but for some folks (in some situations) I do believe there's value in paying it off if possible.
Kentin, I definitely agree with you on interest specifically for things such as credit card finance charges. This can be insidious in the sense that it will pile up over time without possibly being noticed until it's a big problem.
As far as the advantage of paying off loans early goes, I suppose it really boils down to when the loan was made. If it was made recently, the interest is likely so low that the value of the loan payment will diminish over time to where the debt will be very cheap if you pay it off as you go due to inflation (which is a debtor's best friend and a creditor's worst nightmare). On the other hand, if the interest is pushing 6% or more, it's probably best if it's paid off as early as possible.
Good advice. I always make sure that I don't get hit with service charges and late fees. they are the worst.
I always have a hard time determining which is more worth the money; the service charge I'll accept to use the ATM closer to my apartment, or the money on gas I'll spend getting to my actual bank to take money out. I usually try to make a plan of when I'll be closer to my banks ATM, I hate accepting those stupid service charges!
Kelly, its great that you're analyzing a decision like that in the first place. I have to ask though, why regularly use cash in the first place? Why not just get a credit card and use it like a debit card? It's the same thing, you don't have to carry cash (which can get lost or stolen) and you just send a check at the end of each month for the balance. In fact, if you get a rewards card, you can even get free stuff out of it as well. Virtually every business accepts credit cards, and if they don't, they probably don't deserve your business.
The longest, relatively slow, high impact bleed of all is inflation. We are losing purchasing power every year that compounds year after year and it's on every dollar we have or will ever have. If anyone has any ideas for combating inflation (other than inflation indexed investments), I'm all ears.