New Year's Financial Checkup
Simple Ways to Cut Expenses and Save More
Bill and Mary Staton
The Staton Institute
Special from Bottom Line/Personal
January 1, 2005
T he new year is a great time to put your financial house in order -- from expenses to investments. Here are our three steps to help you relax and take the anxiety out of your finances...
1. CUT NEEDLESS EXPENSES
People tend to forget about small purchases soon after they have made them, but these can add up fast. For example, a daily $3 cappuccino costs almost $1,100 over the course of a year. Game plan...
Jot down every purchase of more than $1 for seven days. Exclude unavoidable costs, such as utility bills and mortgage payments. At the end of the week, tally the cost of the items you could have skipped without significantly impacting your quality of life. Most people come up with between $50 and $100 -- that's $2,600 to $5,200 a year! Common money wasters...
Purchases made while shopping just for the fun of it -- not for things you need.
ATM cash-withdrawal fees of $1.50 to $3 at machines that are unaffiliated with your bank.
Big-bucks items bought because they were on sale, even though you didn't need them.
Late-payment fees from credit card companies.
Late-return penalties from video rental stores and libraries.
Set a savings goal based on your seven-day waste estimate. Have a fun use in mind for the money saved.
Example: If you waste about $50 a week, resolve to save $7 a day to fund a $2,500 vacation next summer.
Each week, put the money you would have wasted in a savings account or money market mutual fund specifically for this goal. Post a note on your refrigerator with the daily dollar amount you want to save so that you won't forget.
2. SHRINK BIG EXPENSES
Big expenses can't always be avoided, but they may be reduced. Game plan...
Eliminate credit card debt. The average American family owes about $8,000 in credit card debt. Assuming a typical interest rate of 18%, that's almost $1,500 a year in interest charges alone.
Paying off credit card debt should be your top financial goal. If you can't pay it off immediately, transfer balances to the card with the lowest rate. Or apply for a new card that has attractive rates on balance transfers. To compare card offers, visit www.bankrate.com.
Important: Don't take out a home-equity loan to pay credit card debt. Today's low rates may be enticing, but the risk is too great. If you can't make the payments, you could lose your home. That can't happen if your only debts are to credit card issuers.
Buy less car than you can afford. Vehicles are the biggest extravagance most families have. Yet all any car really needs to do is get you from one place to the next. You can get a perfectly nice, safe and reliable new sedan or minivan for about $20,000, not the $30,000 to $40,000 that too many people spend.
Examples: 2005 Honda Accord (starting at about $20,000)... Toyota Camry ($18,600)... Dodge Caravan ($19,000).
Negotiating tool: Before buying a new car, look up the invoice price at www.edmunds.com. If you shop carefully, you can expect to pay that amount or less.
Be smart about big events. The typical wedding now costs about $22,000. Parents don't like to scrimp on their child's big day, so they often borrow to finance a lavish celebration.
Better strategy: Set a limit. For example, tell your daughter that you're willing to spend up to $15,000 on her wedding. If she wants to spend more, she and her fiancé can pay the difference. If she wants to spend less, she can keep the remainder. Chances are that she will happily cut costs and pocket the difference. You will save money and give the newlyweds a head start on their nest egg.
3. Invest Very Thoughtfully
The easy strategy we teach is to invest only in shares of companies that have increased their dividends per share for at least 10 years in a row. We track these companies in our annual directory, America's Finest Companies. As reported in our directory, these companies have returned an average of 16.93% annually for the 10 years through June 30, 2005, versus 10.79% for the S&P 500 Index.
You can find a stock's dividend history in Value Line Investment Survey, available at many libraries.
Sell a stock only if the company fails to keep increasing its dividend or if another stock with a steadily rising dividend is a better bargain based on its price-to-earnings ratio (P/E).
Five great companies we like now...
Myers Industries, Inc. Myers makes plastic and rubber products. It is a major bargain at its current price. NYSE:MYE. Recent share price: $13.90. Yield: 1.4%.
NACCO Industries, Inc. This former coal company has diversified and now makes lift trucks and housewares. Investors have been slow to recognize the new businesses' value. NYSE:NC. Recent share price: $120.56. Yield: 1.55%.
Nucor Corporation. America's largest steel company had record earnings in the third quarter -- exceeding its earnings in any previous full year. NYSE:NUE. Recent share price: $66.23. Yield: 3.94%.
Pfizer, Inc. The world's largest research-based pharmaceutical company. It is behind such products as Lipitor, Viagra, Zoloft, Listerine, Purell and Sudafed. NYSE:PFE. Recent share price: $22.31. Yield: 4.20%.
Quaker Chemical Corporation. This company was hurt by the recession, but it has turned the corner. Lower oil prices would allow earnings to perk up even more. NYSE:KWR. Recent share price: $18.09. Yield: 4.75%.
Bottom Line/Personal interviewed Bill and Mary Staton, founders of The Staton Institute, a financial education and counseling center in Charlotte, North Carolina. They are authors of Worry-Free Family Finances (McGraw-Hill). www.billstaton.com Mr. Staton also publishes the weekly investment newsletter E-Money Digest/Guided Portfolio Service. $189.95 for print version ... $129.95 for E-mail.
Bottom Line Publications publishes the opinions of leading authorities in many fields. But the use of these opinions is no substitute for legal, accounting, investment, medical and other professional services to suit your specific personal needs. Always consult a competent professional for answers to your specific questions.
