How To Fund Your Vacation – Without You Noticing

I’m back from the USA! In case you haven’t heard, I’ve been roadtrippin’ through the West Coast for the past 15 days: LA, Vegas, the Grand Canyon, Monterey, and San Francisco. Friggin’ awesomesauce, and definitely a much-needed break.

Memorable experiences:

1. Driving against the direction of traffic in the middle of the night because we made a wrong turn (and seeing my life flash before me)
2. Getting my ID checked every time I bought alcohol or tried to gamble, 6 years after I’ve passed the legal age. I shall be forever youthful.
3. Losing $30 bucks in 1 second on roulette in Vegas. Yeah, I know you’re jealous that I’m such a high roller.
4. Seeing the Grand Canyon for the first time (“Damn, that’s a BIG hole”)
5. Coming face-to-face with three T-Rexes, King Kong, a major flood, and Psycho killer Tim Bates in LA’s Universal Studios
6. Lying on the grass in San Francisco with a huge bag of chips and my new Kindle with the Golden Gate Bridge in the background
7. An amazing 5-course tasting menu at 1-Michelin Star Napa Valley restaurant Redd

yeah, we kind of overdid it with the Gangnam Style.

Costs: The Most Annoying Part Of a Vacation

Vacations are totally awesome and essential, but there’s just one annoying part about ‘em: Working out the costs.

Most people hate to think about vacation costs because it’s depressing to find out that their past year’s savings have been effectively wiped out. Kind of takes the fun out of it, doesn’t it? Vacations are kind of like prostitutes – they give you pleasure, but they can be ridiculously expensive (Yes, I just compared taking a vacation to seeing a prostitute. My mother would be so proud).

Funding a $5,000 trip, #likeaboss

There’s a better way to deal with your vacation finances. You can fund your entire trip, with no noticeable impact to your savings or lifestyle.

Let me explain. My entire trip, including hotels, food, travel insurance, airport taxes, fuel, car rental, etc for 15 days cost me S$3,503 (around $2,800 USD for my American friends). It’s a little on the low side because I have an employee benefit that gives me one free air ticket a year. For this exercise, we’ll add $2,000 to that sum for an air ticket, which gives us S$5,503 (I’ll blog a little in the future on how to cut this cost down even further).

But even if I added 2 grand to my expenses for an air ticket, my vacation expenses would still have made no noticeable impact to my savings or lifestyle at all. Why?

The answer lies in planning ahead. If I take an annual trip that costs $5,503, that works out to $450/month, or $15/day. $450 a month sounds like a helluva lot of money to save, but you can totally make arrangements to save towards it, without you even noticing.

Playing with the “Big Play” Account

The answer lies in segregating your savings and your vacation funds from your everyday spending. I have 2 separate bank accounts aside from my everyday spending account:

1. A Long-Term Savings Account, where I credit a fixed amount of “responsible” savings to every month, and
2. A “Big Play” Account, where I park the money I’m planning to use this year. (I previously called this my Guilt-Free Spending Fund, though I decided to rename it because “Big Play” sounds sexier)

Here’s how you can use both of these accounts to fund your trip WHILE staying true to your long-term savings goals:

1. If you’ve been following my blog, you should already have a Long-Term Savings account that takes care of your “responsible” savings (eg for your house, your retirement, your investments, etc

2. Next, estimate how much your trip is going to cost, and then add 10% to that figure. The travel industry is notorious for racking on additional taxes, surcharges and fees that would totally catch you off-guard. I know, because I work in it. 😉 Divide that figure by 12, and you’ll get the monthly amount you’ll need to save for your trip.

3. If you don’t have a separate Big Play Account, open one up and arrange for a standing instruction to automatically send the amount you decided in point #2 to it every month from your salary. I use POSB’s MySavings account because I can withdraw the money anytime I like without being slammed with a hugeass penalty.

4. When it’s time for your vacation, empty that account and spend the money absolutely guilt-free. That’s it!

Why This Works

“But Lionel,” I hear you say, “That’s just shifting money around. It doesn’t help me at all”. Hear me out – it’s not as lame as it sounds.

Segregating your money has a profoundly important psychological effect that can help you to spend more consciously. First, by segregating your “responsible” savings into a Long-Term Savings account, you’d have taken care of all the boring, responsible obligations to your family and to yourself, which frees you from worrying about them. That’s why it’s important to commit to this figure first.

Next, by segregating your vacation expenses into your Big Play Account, you’re planning ahead for your vacation while you’re rational and coolheaded. By viewing your vacation funds as a separate, independent pile of money, you’re consciously making a commitment to stick to a budget – because you cant spend anything outside of this pile of money.

Third, you won’t even notice that your money’s gone from your everyday spending. That $450/month is taken from your paycheque and deposited into your Big Play Account before you even get to see it. And if you can’t spend it, then you won’t miss it. I set aside more than $450/month for my Big Play expenses, and my lifestyle hasn’t changed one bit since I started.

Here’s how I see it – if you didn’t plan ahead, you’re going to spend that amount (and possibly more) on your vacation anyway. So you might as well split it up into some smaller, manageable chunks that are easier to deal with, rather than a whopping $5,500 bill after your vacation. It’s automatic, hassle-free, and has minimal effect on your lifestyle.

So try it out, and let me know if it works for you. Bon voyage! 🙂

How Credit Cards Could Nuke Your Finances (But Not in the Way You Think)

I’m back! Sorry for being totally MIA this week – work has been absolutely crazy, which left me almost no time to have lunch, blog, or poo. Yes, I just said “poo” on my blog.

So one of my top reads this week was Ramit Sethi’s Big Wins Manifesto which is a helluva long article but superduper highly recommended (If you’re too lazy to read the whole thing, go knock your head against the wall like 10 times cause you’re an idiot, but the summarized message is that you should be focusing on a few “big wins” that would give a disproportionate effect on your personal finances, rather than many different small “tactics” that could save you a couple of bucks here and there but wont really make a real difference. And wow, that was a long sentence.)

So Ramit talked about his 7 big wins of personal finance, which I simply loved. It’s kind of like an awesome to-do list. I’ve blogged previously on some of ’em, like 1. Automate your finances and 2. Start investing early, so I figured I’d blog a little bit about what I know about number 3, which is to improve your credit score.

The hidden cost (or benefit) of credit cards

So we all have credit cards, and we all love/hate ’em. We all know that they give us awesome perks like 1-for-1 drinks (woot woot!) and frequent flyer miles. We also know that they’re a pain in the freakin’ ass cause you have to check your statement every month and trudge to pay ’em off. (By the way, if you’re still doing that, first shoot yourself in the head, and then read my post on automation) We’ve also all heard the same tired arguments that you should pay ’em off on time, or we’d get charged a really high interest rate, yadda-yadda.

But did you know that credit cards could potentially cost you tens of thousands of dollars without you ever realizing it?

There’s a hidden cost of not paying your bills on time other than a couple of extra bucks of interest on what you owed last month – every late payment you make affects your credit score, and that has a bigger impact on your finances than you think.

This example from Iwillteachyoutoberich.com says it all: Consider 2 people, one has a great credit score, and one has a poor credit score. Both decide to buy houses which cost $200,000. “Simply by virtue of having different credit scores, the person with poor credit will pay over $68,000 more than the person with excellent credit.” (In Singapore, where houses cost easily 3x that amount, that difference is even larger).

For my Singaporean friends, don’t assume that this applies to Americans only. Credit Bureau Singapore states that paying your bills on time as far as possible is the number 1 way to improve your credit reputation.

Control your nuke

A lot of people don’t realize that credit cards are more than a cool way to pay for stuff – they’re a freakin’ nuclear weapon on your personal finances. Use them well, and you could boost your credit score and save tens of thousands on your house. Use them poorly, and they could erase your entire gains from investing/working your ass off.

So how do you maintain control, and not have them blow up in your face?

The answer: Automate your credit card bills, which will ensure that they’re paid off on-time, every month. How many times have we missed a payment because it was just too much of a hassle to remember to pay it off, not realizing that it could have cost us thousands of dollars in interest? Don’t leave it up to your own “effort” – you’re bound to forget sooner or later. Instead, check your statements when they come, and if there are no mistakes, let the system take care of it for you.

There are other ways to improve your credit rep, which you can read about here, but I won’t go into them for now. First focus on automating your bills, and notice how awesome life is when you don’t have to worry about remembering to pay your bills on-time. You’ll also be able to sleep soundly knowing that you’re quietly building your credit rep in the background and saving tens of thousands of dollars.

PS: anyone had any experience with the effects of credit cards on your housing loan? I’d love to hear from you. Leave a comment or drop me an email at cheerfulegg [at] gmail.com – I read every one 🙂

Starting to Save…. Tomorrow

Heya! Sorry for being gone for so long – work has been absolutely crazy lately. (But in case any of my employers are reading this, I love my company. Hugs and kisses, xoxo). Just spent the last two days on leave (or “time-off” as they say in the US of A), sitting at home… and crunching numbers for work. Yeah, you know I’m baller like that.

Anyways, that’s why I’m hoping you’d forgive me for blogging my Ted Thursday post on Saturday. Today’s Ted talk comes from Shlomo Benartzi, entitled Saving for Tomorrow, Tomorrow. I loved it because it pretty much espouses everything that I’ve blogged about on saving so far. (I also love his accent – still trying to figure out where the hell he’s from).

Here, he points out three problems we face in behavioral finance, and then gives you a simple solution that will solve all of them – the same one I’ve been preaching for the past 3 months. Yes, I know, all the ladies say I should totally be on TED. Anyways, in summary:

1. Present bias: We know we should be saving, but we don’t do it today. We’ll make all these resolutions that we’re gonna save more next year, next month, next week, whatever, but it never works. It’s always a lot more fun to spend more today, and put off what we know is good for tomorrow.

Quote at 6:47 of the video: “Self-control is not a problem in the future. It’s only a problem now when the chocolate is next to us.” 

2. Inertia: People are lazy. And don’t even think that you’re different from the rest of us, because you’re not. Even checking a box on a form, is way too much effort for most people, even if it means saving someone’s life. Germany has an opt-in program for organ donation where you would have to check a box if you would like to donate your organs. Contrast it to Austria, which has an opt-out program, where you would check a box if you don’t want to donate your organs. The result? 12% of Germans take up the program, while a whopping 99% of Austrians agree to donate their organs.

3. Loss aversion: We hate losing stuff. When it comes to savings, people amazingly frame this as a loss because they have to cut their spending today.

So where does that leave us? The trick to overcoming all of these problems is to (surprise, surprise) adopt an automated system that saves on a regular basis, and whenever you have any income increases. Since saving more tomorrow is easier than saving today (present bias), we first make the commitment to save a certain percentage of our income… tomorrow. Or next month. Whatever. We then commit to it by setting it up with our bank.

Once it’s set up, that overcomes our problem of inertia, because it takes a helluva lot of effort to cancel that commitment. So we’ll automatically be saving without any effort at all. And finally, by committing to save a fixed percentage of our pay rises, you’ll be taking care of loss-aversion by allowing yourself the luxury to spend part of your pay rise, while saving the other part of it.

In fact, if you’re way ahead of the game, Imma challenge you to save a higher percentage every time your income rises. Say you start off with an income of $3,000 and you save 10% ($300), leaving you $2,700 to spend. When your income rises to $3,500, up the ante to 15% ($525). You’ll still have $2,975 left over to spend, which is more than what you were spending on your original income anyway.

Random: There’s also a shoutout to Singapore at 16:47 of the video – apparently we hold the record for lottery ticket purchases. According to Benartzi, the average household in the world spends $1,000 a year on lottery tickets, while the average household in Singapore spends $4,000 a year on lottery tickets. WTF?! Seriously, what is going on here? Buying the occasional ticket is fine (and it’s helluva fun to trash talk in the office about handing in our resignation once we win our $10 million dollars), but throwing away $4,000 a year is just stupid. Fellow countrymen, try saving it instead 🙂

Why Personal Finance Is Like Brushing Your Teeth

This is the situation most people live by: They get their paycheck every month, and feel RIDICULOUSLY RICH for that day. They’ll hit the bars and order like 10 rounds, yelling “IT’S PAYDAY, BITCHES!!!” Then they wake up the next day, nurse their hangovers, and get on with life. They pay off their credit card bill when it comes in the mail, and go “What the hell – I spent THAT MUCH last month? Oh well. Shrug.” And then a friend’s birthday comes along, so they spend some money on dinner. And later on in the month, their phone bill comes, so they pay that off… and before they know it, it’s the end of the month. They catch sight of their balance while making an ATM withdrawal, and go “Crap, I spent THAT MUCH last month?! Oh well. Shrug.”

Most people have no freakin’ idea where their money goes every month. They live in an endless cycle of receiving a paycheck, spending, getting horrified at how much they spent, and shrugging in resignation. And the cycle repeats again the following month. It’s a modified version of the phrase “living paycheck to paycheck” – when you have absolutely no control over what happens to your money, never mind about trying to save and invest. Even if they do decide to save, it just involves checking their balance at the end of the month and going “oh awesome! I still have like $500 left over from my paycheck. I’ll save that.” (Not realizing that the following month, they go for a vacation and spend that $500 they just saved) Sound familiar?

Most people know they should be saving and investing, but very few people go out there and actually do it. Why is that? I think the number one reason is because it involves a huge amount of effort and willpower. It’s a helluva lot of effort to actively try to spend less, to consciously take money and save it, and to plan for investments. Personally, I hate effort. To me, personal finance is like brushing your teeth. It’s necessary, but I don’t really want to spend a lot of effort trying to remember to do it, or how to optimize my toothbrushes and toothpaste. It’s gotta be automatic, it’s gotta be routine, and even better, I’d like a robot to do it for me so that I don’t have to deal with it.

While technology hasn’t caught up in the area of oral hygiene, it’s entirely possible to have a robot take care of your personal finance. How? By creating a financial system that automatically does everything for you with no effort on your part. While I’ve previously blogged about how to automate your finances, I thought I’d give an overview on how everything works together to help you see what I’m trying to say. Check out this spiffy little diagram I created while chilling at McDonald’s this morning (Yeah, some people eat nuggets, some people check out girls, and I create awesome nerdy diagrams).

 

It looks really complicated, but it really isn’t. I’ll talk you through it. Let’s start with the orange box in the middle. My POSB account (for most people, this would be your checking or current account) acts as a central postman. It receives money from my salary and any other income, and then automatically shovels it into 3 categories: savings, investments, and expenses. Money doesn’t stay in my POSB account for very long – it gets quickly allocated into where I want it to go, so that I don’t even have to think about how much I should save, how much I should invest, how much I need to pay my bills, etc. Almost everything you see here is automatic – the only part that isn’t is my daily expenses, because I can’t regularly transfer money to my favorite chicken rice hawker stall. (Would be awesome if I could though)

Otherwise, my POSB “central postman” does all this for me:

1. Savings: It adds money to my long-term savings account for retirement and my short-term savings account for guilty pleasures. My CPF (sort of like a 401(k) for Americans) gets automatic contributions direct from my salary, as well as my employer’s additional 15% contribution. (Which is sort of like free money – so awesome!)
2. Investments: It wires funds into my brokerage account (you can use a variety of brokerages, but I use Standard Chartered for its low fees – more on this later) to invest in ETFs.
3. Expenses: My bills are automatically paid off when they’re due, so I never incur late payment charges.

That’s it! That’s my entire financial infrastructure, and it saves me countless hours of paying bills, allocating money to save, deciding how much to invest, etc. If you haven’t set up something like this, I recommend that you get started today, even if it’s just setting up one automatic bill payment. You’ll be amazed and how much time and effort this saves you. Setting the whole thing up will literally take you no longer than one afternoon, and you will never have to worry about any of this stuff anymore. And then you can start focusing on the awesome things in life. Try it 🙂

(Hat tip to Ramit Sethi for coming up with this idea – I know, lots of what I do here is totally inspired by him)

How to Automate Your Finances

I don’t know about you, but I hate dealing with the stupid administrative things in life. You know what I’m talking about: Like topping up your EZ-Link card (for non-Singaporeans – it’s this card Singaporeans use to ride the subway / bus), paying off your bills, insurance premiums, etc etc etc. Seriously, nobody gets up in the morning and goes “Oh yay! I’m totally gonna pay my phone bill today! Woot woot!”

Why personal administration sucks ass

Each individual task doesn’t really take up that much time and effort, but add them together and it’s a helluva pain in the ass. Think about it – say you receive your credit card bill on Monday, and you want to pay it off at the AXS kiosk on Tuesday, but the line is way too long so you put it off till Wednesday, and then you realize that you have to top up your EZ-Link card, which you do, making you late for work anyway. And on Wednesday night you receive your phone bill, so now you have to remember to pay that off, but after paying off your credit card bill you get really busy so you forget about the phone bill, so the phone company sends you a reminder letter to pay last month’s bill…

Add insurance premiums, magazine subscriptions, gym memberships, charity donations, investment contributions, savings contributions…. and you get a freakin’ pain in the ass. What’s even worse – forgetting to pay off last month’s balance on your credit card will cause your credit card company to charge you interest. They could also lower your credit score and either make it harder for you to get a loan or increase the interest on your mortgage, potentially costing you thousands of dollars over your lifetime. Not fun.

Relying on “willpower” to remember to do all these annoying administrative tasks just doesn’t work. Your life is only going to get busier. Besides, having all these items on your to-do list just breaks your flow – you may be working on an important career-changing presentation, or starting up a side business, or raising a family – you don’t wanna have to deal with crap that just distracts you from the really important things in life.

Automating your admin

The key to this is to create a system – a system that automatically takes care of actually doing all this stuff for you, yet allows for you to go in and check that you aren’t making any regular contributions to the Nigerian royal family. And you can set it up in a couple of hours. If you’re Singaporean, here’s how to automate your:

Bills: Set up a GIRO arrangement for your credit card and phone bills. Once it’s set up, the system goes into your bank account once a month and then pays off your bills in full, which means that you never have to worry about late payments. All you have to do is make sure that you’ve got enough money in your bank account (I personally keep about a month’s salary in my account, which provides enough buffer for any potentially huge credit card bills).

Now, I don’t know why, but people get really nervous whenever I recommend setting up GIRO for their accounts. They’re incredibly frightened that some random dude is going to clone your credit card and charge like $5000 bucks on hookers or something.  Let me assure you: this will not happen to you if you check yo’ statement every month! Honestly, it’s not as hard as it sounds. Every month, I get a paper statement about 2 weeks before my bill is due (If you prefer, you can also arrange for an SMS/email notification from most companies, which will also link you to your online statement). I’ll glance through the statement and make sure there’s no entry with the word “HOOKERS” and a charge for $5,000 on it. If everything’s fine, I don’t have to do anything further, and my system automatically pays off my bill for me.

If there is a weird expense that you didn’t incur, then you have 2 weeks to report it to your credit card/phone company. Well-known secret: your credit card company is even more nervous than you are when it comes to these potentially fraudulent charges. Once you call them up and notify them, they’ll reimburse you and launch a full-ass investigation, just to get their money back. There are some credit card companies that are so nervous, that even if you use the credit card overseas, they’ll jump in and cancel the card right away unless you notify them beforehand that you’re going to be using your card abroad. So I’m pretty sure that even if some scammer did try to buy drugs with a clone of my card, it’ll be taken care of as long as I check my monthly statement. Besides, how often has that happened to you anyway?

This system works the same way for any other recurring expenses you might have: insurance premiums, magazine subscriptions, gym memberships, etc. In fact, most companies would LOVE to offer you the option of automatic payments, because that means that they never have to chase you for payments. And while you should review this list regularly to make sure that you’re not paying for things that you don’t need, this system automatically takes care of all the admin for any necessary expenses.

EZ-Link cards: Set up automatic top-ups with EZ-Reload every time your card value goes below zero. This can be done through GIRO or through your credit card, and EZ-Link charges like $0.25 for each top-up. My card gets automatically topped up twice a month, incurring me a grand total of $0.50 for the convenience. And believe me, $0.50 a month is a freakin’ negligible amount to pay for never having to glance at your balance, never having to line up at those infernal top-up machines, and automatically tracking your transport expenses through your credit card bill.

Savings and Investment: I’ve blogged at length about how you can set up automatic savings to both your guilt-free spending account (for holidays, weddings, etc) and your long-term savings account. But you can also automate your investments: First, decide how much of your salary you would like to invest. Next, arrange to automatically transfer that amount to your investment account every month. This can be set up through internet banking within a couple of minutes.

Your investment account works in 2 ways: it can either invest directly in unit trusts (mutual funds if you’re American) or index funds, or it can accumulate a certain amount before you go in a couple of times a year to invest the funds in various ETFs (more details on that in another post!) Either way, the result is clear: you will be regularly investing a portion of your salary, without fail, with no effort on your part whatsoever.

Putting it all together

All this can be a little overwhelming, so I’ll give an example from how I automate my own finances. I get paid on the 21st of every month, when my salary gets credited into my POSB current account. On the 22nd, my system goes in and deposits a portion of my salary into my long-term savings account, another portion into my investment account, and a third portion into my guilt-free spending account (this is one example of the “Pay Yourself First” principle). A week later, my credit card and phone statement arrives and I check it to make sure there are no fraudulent charges. If everything’s fine, my bills get automatically paid off around the 10th of the following month. All this while, I’ll be enjoying Singapore’s mega awesome public transportation system, with my system watching my EZ-Link balance for me and taking care of the top-ups whenever they are needed.

Notice that everything here is beautifully automatic. My involvement is limited to simply checking my statements to make sure nothing’s amiss, which literally takes up 5 minutes a month – probably faster than how long it takes for most people to pay their bills at the good ol’ AXS machine. With all the annoying administrative crap out of the way, you can actually focus on the good and important things in life – like being awesome.

Credit: I got this idea from Ramit Sethi, the author of I Will Teach You To Be Rich. Check out his post for a great overview and more details on automating your finances.