My 1st Million At 33 – yes, you can do it too

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  • Two Must-Do Money Saving Tips

    Posted by Frugal on August 1st, 2006

    You may not want to clip coupons, or you may not go to discount stores.  But at least, you should follow these two effortless saving tips that will save you big money in the long run:

    1. Earning interest from idle cash: Open an Emigrant Direct Saving account at 5.15%, or HSBC or Capital One accounts that consistently pays a higher interest rate.
    2. Earning cash while you spend: Get a Citi Dividend Platinum Select Card to get 5% cashback on your gas/drug/grocery purchases, and 1% cashback on all other purchases.

    There may be other better banks or better cashback credit cards, but if you do the above, at least you have a very good start.  How much money you can save in the long term?  With #1, assuming that you have just an average balance of $1000 in the account, and let’s use the comparison of 5% in Emigrant Direct and 1% in Bank of America savings account (it’s probably lower), the difference in yield is 4%.  I’m going to use 3% for the yield difference to be more conservative, since the money market account won’t always yield as high as 5%.  Because of a consistent 3% higher interest rate, in one year, you can save $30 extra in interest money.  For the next 40 years or so, you can get $1200 interest money.  I’m using simple compounding because most likely you will spend those $30 right away every year.  And that’s just for an average balance of $1000.  If your average balance is higher, your extra savings will be higher.  Now, tell me how much time does it take to open an online bank account?  Yes, in about 30 minutes of one-time effort, you can probably earn $1200 in additional interest for every $1000 average balance.  You just get paid at an hourly rate of $2400/hr.  That’s a huge return on your time spent (using just $1000 average bank balance).

    Now on the credit card, it’s an even better return (well, for people who spend more but save less).  Monthly, let’s assume that your family needs to spend some $250 on gas, and $500 in grocery store, and another $750 in other expenses that you can charge on credit card.  Using the Citibank card, you can get ($250 + $500) * 5% + $750 * 1% = $45 per month or $540 per year (by the way, Citibank card has an anual limit of $300 rebate, so you will need to apply for two cards to split this $540.)  Now, multiply $540 by the next 40 years, and you will get $21600 in cash rebate in total, TAX-FREE by the way.  Again, how much time does it take for you to apply credit cards?  Half an hour or so, and you would have paid yourself at the rate of $43200/hr.  Now, if that is not good use of your time, then I don’t really know where else you can earn $43200 per hour, tax-free.  (Unfortunately, if you have some debt on your credit card, you may need to shop differently for a lower APY instead of getting cashback.  Now you know why credit card debts are not good.)

    Of course, the above scenarios assume that both the bank and the credit card continues their end of deal.  As far as I can see, and from my personal experiences too, there seems to be no reason that they will change their way of doing business.

    Please do yourself a favor.  When you have time, go to the links and open those accounts.  I’d rather see you get richer than big corporations getting filthy rich from scalping average people.

    For more information, you can read the following posts on credit cards and banking:

    1. Why I would choose EmigrantDirect over others
    2. How I Bank
    3. Comparison of Cashback Credit Cards for other good deals on credit cards.

     


    More related posts:
  • My investing advice if you only have $10
  • I will take the new 3% cashback credit card from Chase

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    8 Responses to “Two Must-Do Money Saving Tips”

    1. Freedumb Says:

      Great write up! I can’t imagine not taking advantage of the 2 musts you listed.

    2. John Says:

      If the broken logic of “spending more to get more cash back” finds any fertile ground in your mind, then there’s no sense in using a cash-back card. I kinda want one anyway.

    3. frugal Says:

      John, “spending more to get more cash back” is a broken logic as you said (and I didn’t say that by the way). Everyone has to spend to live & eat. So might as well getting back some percentages that the merchants pay to Visa/Mastercard as their cost of doing business.

      In fact, it’s almost stupid not to get some cash back while you can. Why would you want to pay cash, when the merchants incorporated the roughly 2% cost to Visa/Mastercad into their pricing model, and charged you for it?

    4. Mmm... Life... Says:

      At rates like 5.15%, people should also realize that they should NOT be putting money in CD’s that are earning the same (or barely higher) rates. The great thing about savings accounts is that you don’t sacrifice any liquidity while earning the same rate, so if a better opportunity comes along, you can start earning that better rate.

    5. frugal Says:

      Well, not necessarily. I think if you have spare money that you don’t need for a long time, you may want to put some into a CD right now at about 5.7% at IndyMac. Fed may start cutting interest rate towards the end of this year. At such time, all rates in money market and CD will be falling.

    6. My 1st Million At 33 Says:

      Replacement for Citi Dividend Platinum Select Card…

      Yes, Citibank Dividend Platinum Select card will no longer pay out 5% but 3% cashback on gasoline, grocery, and drug, starting October. I have found my replacement credit cards.
      I have planned to cancel my cards, and have applied & received the f…

    7. credit card rewards enthusiast Says:

      Yeah, well, actually it’s even a bit worse than 3%. The Citi Dividend Platinum Select now only pays out 2% cash back on gas stations, grocery stores, and drug stores (as of 10/13/2006).

      There are some decent replacement cards though, such as the Citi Driver’s Edge (6% for the first year), AmEx Blue Cash (5%), Direct Rewards card (5%), etc. Depending on the categories in which you spend money (e.g. restaurants, travel, etc.), it’s possible that other cards would pay you more cash back or that you would greatly benefit from a 2-card or 3-card combination. (I have 3 cards.)

      There is a free calculator tool at Credit Card Tune-Up: Maximize Your Cash Back Rewards (www.creditcardtuneup.com) that will calculate the best card and mixes of cards for your spending profile.

    8. Credit Card - Balance Transfer Reminder Says:

      It is worth checking out this website.

      http://www.balancetransferreminder.com

      It’s a free service that sends you an e-mail reminder before your 0% or promotional credit card, loan or mortgage rate ends. Credit card companies, banks and other lenders often offer 0% or promotional rates to entice you into using their products. However forget to transfer to another deal and you could end up paying lots of interest!

      Regards,

      Richard.