When a $50,000 Salary Can Feel Like Minimum Wage.

How can $50,000 seem like minimum wage? According to the Social Security Administration’s National Average Wage Index, the national average income for the USA in 2011 was $41,673.83. That means that to half the country, $50,000 a year would be a $8,326 raise, and yet this woman says $50,000 feels like minimum wage !

Well, if you read her story it makes a lot of sense.

Basically, she went from working at home to a full time office job and once she totaled the change in her spending she realized she was making about $7.50 per hour.

Here are some of the things she attributes to lowering her effective income:

• Commuting costs – increased wear and tear on her car, the cost of gas, etc…
• Childcare expenses
• Eating out more – less time to prepare meals at home means eating out or buying take out more frequently, which is more expensive.
• Increase in clothing and personal care expenses (i.e. hair and nail care, proper office attire, etc..)
• Coping with stress by spending more on vacations, or entertainment.. buying more wants than needs.

Her change in lifestyle brought about a change in spending with no increase in saving. It happens to a lot of people and it’s not always easy or even possible to fix. She could do some things differently. She probably doesn’t need to spend $40 a week on clothes, and she could plan ahead to prepare more meals at home, but that takes work too.

This is the kind of situation my wife and I work very hard to avoid. We avoid debt whenever possible to keep as much of our income as possible. I work hard to secure a steady income, and she works hard (sometimes harder) to make that income go as far as possible.

She’s the coupon clipper and meal planner. She’s turned comparison shopping into a competitive sport. She scours thrift shops and consignment stores for children’s clothes, and puts a healthy low cost meal on the table every day of every week all year long.

It’s not easy, but it’s cheaper than if she went back to work full time. And we believe it’s better for the family. Living on a single income is not easy, but it is possible and I believe better in most cases for families. The key is twofold: 1) limit expenses as much as possible, and 2) increase income.

It’s really no different than what most people should be trying to do regardless of their employment situation, but as the Yahoo! article makes clear, it’s so much easier to lose control of your spending when both people work out of the house. Those little money leaks turn into an effective loss of income over time.

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• 7 Tips for Cutting Spending and Putting Cash Back in your Pocket. (video)

How to Find the Best Place To Put Your Savings.

The Federal Reserve has recently announced that it will be keeping interest rates that banks pay to borrow money at 0 – 0.25% for the foreseeable future. This is done in the hopes of encouraging borrowers and spenders, but punishes savers. This makes it harder than ever to find the best place to let your emergency fund grow. But just because it’s difficult to find a place to make your money work harder for you doesn’t mean you should let it sit idle in a low yield bank account!

While it’s easy to find places to stash your cash that pay more than the average bank savings account (currently 0.08%!), high yield isn’t the most important thing when looking for a home for your emergency fund.

The two most important factors to determining where to keep your emergency cash are:

1. Safety
2. Liquidity

“Safety” is a measure of short term risk. Putting your emergency fund in the stock market is foolish because stocks can lose money on any given day, and you need to be able to count on your money being there when you need it.

Certificates of deposit are safe. They are FDIC insured, so you cannot lose principal. But this is where liquidity comes into play. CD’s are safe, but you don’t want your emergency fund tied up in a 5-year CD when you need that money now.

Because of these two factors, the most common places to store your emergency fund money is in a high yield savings account and sometimes a short term certificate of deposit (CD). You could put some of your savings in a savings account, and the bulk of it in a CD. This way you have immediate access to what’s in the savings account, but the bulk of your fund would be in a CD earning higher interest.

Ideally, you’d put the money you would need for repair bills on the house or car in the savings account, and you’d use the CD for that part of your savings you would tap only in the event of a loss of income or some larger emergency.

In the current economic environment however, it makes sense to use only the high yield savings account and skip CDs. Here’s why…

High yield savings account vs. a 1 year CD.

A quick look at yields on 1 year CDs shows that the highest yielding CD (currently offered by Sallie Mae) only offers a tenth of a percent more that the highest yielding savings account, but you wouldn’t have access to your money for an entire year (without penalties). That’s simply not worth tying up your money like that.

So, on to high yield savings accounts…

How to Find The Best High Yield Savings Accounts.

First, head over to BankRate.com and check out their list of high yield savings accounts. Sort by APY (the yield you can expect if you leave your money in the account for a full 365 days), and work down the list. Be sure to read the details of the terms and look for a star rating of 4 or 5.

That star rating is Bankrate’s rating system which rates a financial institutions solvency and safety, not customer service or satisfaction. It’s meant to give an indication of the likelihood of the bank being closed by the FDIC.

For the record, neither of my banks is on the list (ING direct or HSBC)*, so it’s not the only resource you can use but it is a good place to start. If there’s a bank or credit union you’re interested in, you can search Bankrate’s safety ratings.

They also offer a checking account search.

* I’ve been a happy customer of both HSBC and ING Direct for over five years now. I’ve kept the bulk of my savings at HSBC direct, but they have recently decreased their rate. It’s still much higher than the average though. ING direct has been very good to me, and they still sport one of the highest rates and easiest to use website in online banking. They’ve recently been acquired by Capital One though, and a lot of people are not happy about that. I haven’t seen any changes yet though, so I’m taking a wait-and-see approach. Plus there’s the ever popular $25 ING Referral codes that give you an extra $25 free when you open an account with $250 . (that’s an immediate 10% return on your money, for those of you playing along at home)

Look for special deals.

It’s also a good idea to check out online forums, like the FatWallet finance forum and see what people are saying about various banks and account offerings. You can also search for discussions on high yield savings accounts and learn about the most recent perks for signing up with various banks. Sometimes they offer introductory rates that are higher than normal, or cash back when you open an account. Public forums like FatWallet’s are a great source for getting the experience of real customers, instead of marketing execs.

Please share any tips, tricks or experience you may have in the comment section below.

Happy Saving!

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7 Tips for Cutting Spending and Putting Cash Back in your Pocket. (video)

The beautiful Farnoosh Torabi is at it again. This time, she stopped by the CBS Early show to share some tips for managing through your own personal cash crisis. Here are the highlights:

• The average American spends 6-12% of their annual income on gas & electricity. She talks about ways to lower that, especially for seniors and low-income households. If someone in your family has lost their job during the recession, you may now qualify.
• Cut back on cable or ask for freebies. I did this, and saved $40 a month. It’s not that difficult, and really only takes some time so why not try it?
• Medical bills. Medical bills are often times negotiable – and you may not have to go to the extreme that Farnoosh did when she saved $400 off her dental bill!
• College tuition – lost income can mean big discounts, but you need to use the “special term” mentioned in the video when dealing with the financial aid office.
• Refinancing – interest rates keep hitting record lows, if you have the equity you could save $200 per month. My wife and I were lucky enough to have enough equity to do this a few months back, and now rates are back down to where they were then so consider this your second chance if you missed the first one.

Watch the video for all the details (it’s only 4 minutes long)

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How to Waste Your Money in 15 Easy Steps.

I came across a Yahoo! finance post the other day that highlighted 25 different money leaks. Some were OK, some were pretty lame. I decided to pick some of the better ones and add some of my own for this list. These are 15 items I think most people probably waste at least a little bit on now and then. Mostly this list should get you thinking about were and how you waste money regularly, so that you can stop and pocket that money instead. This list is by no means meant to be one of items people should never spend money on. Rather, it is a collection of things we often spend on and may have never considered a cheaper alternative.

Here we go… 15 money wasting leaks.

1. Credit card debt. Carrying a balance – however small – in an excellent way to leak cash from what could otherwise be your savings. Even a modest credit card balance will cost you hundreds of dollars a year at a rate of 10% or more. Do what you can to Get out of credit card debt.
2. Excessive car maintenance. Premium gas, and unnecessary oil changes are just a couple of the car maintenance costs you can save money on .
3. Unhealthy habits. Cigarettes are costly, and spending the evening at the bar adds up quickly. You’ll not only save costs, but also save your health by cutting back if not quitting.
4. More cell phone than you need. Many people find themselves locked into a monthly cell phone contract costing the thousands. That’s all well and good if you really need those features and use the service, but many people simply do not. I was one of these people, and gave up my Verizon bill for a pay as you go Tracfone years ago and have been pocketing the savings ever since.
5. Buying name-brand instead of generic. Whether it’s clothes or groceries, many name brand products are identical to the generic, but you pay a lot more.
6. Not asking for a discount or cheaper alternative. Hey, it never hurts to ask. Right?
7. Not buying beverages in bulk. Soda is cheaper when you buy a 2-liter bottle than a 20oz. bottle. The same is true for many drinks. And snack food to come to that. If you like some chips with your brown-bag lunch, why not by the big bag and bring a few every day in a sandwich bag. You do bring your lunch to work instead of buying, don’t you?
8. Paying for something that’s ‘Free’. Why spend money when you don’t have to? You can get software for free and your credit report for free among other things, and yet millions continue to pay . Don’t be one of them.
9. Getting a tax refund. Loaning your hard earned money to the government for nothing in return is one of the most senseless money mistakes going. Yet every year we see stories about the millions who do, and what they’re going to do with their “extra money”. Do yourself and the country a favor – put that money in a saving account instead. You’ll earn interest on it and you’ll still have the money come tax time next year.
10. Stashing your savings in a low (no) interest checking account. While we’re on the topic of saving money, there are dozens of high yield savings accounts out there, pick one. I recommend ING and HSBC Direct , but there are many other options to choose from.
11. Paying late fees. This is just a result of poor planning. I know – I’ve done it! Get whatever system works for you in place so you don’t do it again. Either use personal finance software, or a cheap calendar to write due dates on, or get a planner. For Pete’s sake – do something!
12. Paying ATM fees. This is also because you didn’t think ahead. There is no other reason to pay ATM fees other than poor planning, plain and simple.
13. Shopping without a list. Be it grocery shopping, or clothes shopping. There’s a reason retailers love you to window shop – you spend more than you would have with a defined list of items. They love it because it’s money in their pocket. Keep money in your pocket instead. Use a list.
14. Paying for things you don’t use. Sometimes it’s poor or no planning that leads you to that splurge on that spur of the moment purchase. Other times it’s product packaging that forces you to buy more than you need. Case in point: Cable Television. Well, I cut my bill by $40 a month, and so can you! By the way, this is another example of “just asking” for the discount too, albeit there was a fair amount of negotiation with the asking.
15. Buying a new car, instead of a used one. I know a lot of people argue that a new car is worth the money for the peace of mind that comes from being free from repairs, but take it from me - buying a new car can be costly experience!

Feel free to leave any quick money savers you may have in the comment section!

Related Posts:

• How to Find the Best Place To Put Your Savings.
• 7 Tips for Cutting Spending and Putting Cash Back in your Pocket. (video)
• 5 Small Sacrifices to Save Big.
• Living on a Single Income: 7 Years and Counting.
• When Saving Money Can Cost You.