Free From Broke

A Personal Finance Blog for Regular Folks

Glen Craig

What Is The Opportunity Cost?

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The term “opportunity cost” is thrown around a lot but many people don’t fully understand the concept.

Opportunity Cost can be defined as

the cost of something in terms of an opportunity forgone…or the most valuable foregone alternative (Wikipedia).

Basically, everything you do has an opportunity cost which is what you are giving up for what you are doing.  If you sleep late, the opportunity cost is whatever you may have done in the morning instead.  When you buy something the opportunity cost of the item is whatever else you could have done with that money (or even with your time shopping for the item).

Why is this concept important? Whenever you make a decision, be it with money, life, whatever, you should look and see what the opportunity cost of that decision is.  This makes you stop and think about whether what you are about to do is worth it.  Is there a better action?  Is my time better served?  Can my resources be better used?   These are questions that should cross your mind.

In terms of personal finance this is looking at what you do with your money and figuring out it’s true worth to you.  See, an important aspect here is what your values are.  Is it better for you to redo your kitchen or put more money away for retirement?   There isn’t necessarily a “right” answer for this.  The decision is yours.  You should be aware of what other opportunities you will miss when you make your decision.

Try to think about the things you do today and figure out the opportunity costs.  Will it change any of your decisions?

Let me know.

Emotions Got The Best Of Us At The Picture People – Review

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So this past weekend my wife and I took the kids to get their pictures taken at The Picture People at the mall. We had a coupon for a free 8×10 portrait and since we hadn’t had pictures taken of our children together we thought we’d go (the little one is an infant).  We figured we’d go in, get our picture and get out.  Far from it!

Baby pictures at The Picture PeopleThey have some marketing plan set up there! We got there and checked in.  When it was our turn we were brought to a curtained off area to take pictures.  The photographer is a young guy with a digital camera.  He took all sorts of pics with each child separately as well as together.  When the picture taking was over we told to wait a bit and we would be helped.

Here is where they get us:

  • They show you about 20 pictures, all which make you say “awwwww.”  Now we want all of the pictures.
  • The sales person says “wouldn’t this be nice” and takes out a large, vertical, black and white portrait already framed.   It looks amazing until we’re told it costs about $150. He also produces a large horizontal frame with three photos.
  • When we seem like we’re not so sure he tells us there’s a way he can get us the three pic frame as well as some others in a great package that will save money. Sounds interesting. Oh, the package costs $249!!
  • When we’ve finally decided what we want (much more than what we planned) and we’re ready to pay we’re told about a membership club we can join that will make one of our pics cheaper and entitle us to some free pics throughout the year.
  • They also ask for your email address so you can view your photos online. They encourage you to send the site to friends and family so they can see if there’s pictures they want to buy (you can put a picture on anything from a mug to a mouse pad or just order copies).

Suffice it to say we spent way more than we intended to. The pictures do look great (including the three picture frame we got) and they have everything done for you within an hour.

Pros and Cons About The Picture People

Pros

  • Convenience – We made an appointment and went to the mall. We didn’t have to schedule a photographer to come to the house.
  • Ease of Service – The people were friendly and you walk out with your photos within an hour.
  • Price – Although we spent more than we wanted to it would have cost more to hire a photographer.
  • Quality – The pictures really do look great!

Cons

  • Atmosphere – It’s a bit of a mad house there with all of the families coming and going, many with small children.
  • Price – Yes it’s relatively inexpensive but the photos and packages still come out to a hefty amount (at least to our liking).
  • Emotional Factor – It’s really tough to say no to all these great pictures of your children. You see them and want them all.   I jokingly told the sales person that it would be on his conscience if we couldn’t afford to put our kids through college.

Overall we’re happy with the product and we will be going back to get our free pictures (yeah we signed up for the membership). Since we now have some nice photos we won’t be needed large packages and we intend to only go for our promotional photo.

The big lesson here is that spending is emotional and we have to be careful not to let our emotions get the better of our budget!

Buying A Car – Know Your Credit Score And Get Financing Before Hand

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A few years ago I set out to buy my first car.

This was a big deal for me, it was to be my most expensive purchase as well as my greatest debt.  Thankfully I was able to get a lot of advice from the site The Motley Fool (check out their steps to buying a car).  Even if you don’t follow each of their steps I think you will find their information useful.

I don’t want to go into what my whole car-buying process was like.  That might be too long a post (there was much drama but that’s for another time).

What I want to discuss is knowing your credit score and getting financing before-hand.

I knew I needed to check my credit report and score before making a big purchase.

 

I purchased all three reports and my score online.   I was surprised at what I saw!  I expected to have a mediocre score due to past late fees and debt but what I found was that my score was actually very good.   I guess my efforts at reducing my debt and transferring balances to 0% cards helped.

With my credit score in hand my next step was to secure financing.

Included in my credit score was a description of how the score was determined as well as what kind of credit I could expect.  I applied for financing through an online bank and received a check to fill out when the purchase was made.  Due to my credit score my interest rate on the financing was favorable and below the average for a car loan.

Credit_report_history_225I don’t know how many of you have purchased a car but you may not know that you aren’t done negotiating after you have figured out the price of your car-to-be.

Oh no!

You spend your time and effort haggling over the car price with the sales person and maybe the sales manager and you finally come to an agreeable price and you let out a sigh of relief.  Finally, all I have to do is pay for the car and it’s mine!

Well at this point the sales person brings you into the office of the finance manager!  Sitting in the manager’s office, he looks over my forms and tells me I can get financing for X percent and goes into what I need to sign (it’s in his interest to give me a loan with as high a rate as possible).   “Whoa,” I say.  “I know my credit score can get me better financing” I tell the manager (keep in mind I already have financing in place).   The manager looks at my credit report and tells me I do have a good score and offers me a lower interest rate.  This rate is still higher than my outside financing!  It’s then I tell him that I already have financing so I don’t need to finance through the dealership.  Wanting to have my debt through his dealership he then offers me a rate about half a point below what my outside loan was.  I accepted the new rate and was finally able to buy my new car.

If I didn’t have a loan already and didn’t know my credit score before hand I would have paid significantly more for my car!

It would have been very difficult to negotiate at this point without those two pieces in place.   Having my credit score and a loan in place allowed me this:

  • I knew what kind to interest rate to expect.
  • I was able to get a rate lower than the financing I already had set up.
  • I saved money.

Finally

Remember, the price you negotiate with the sales person is not what you are paying for the car (unless you’re paying in full of course).  You have to add in the cost of your loan.  When you go into a major purchase you need to have as many tools and as much information as possible because you can be taken advantage of and you might not even know it.

Make sure to check your credit score and know your financing options before-hand!

How AMEX And ING Gave Us A Wedding Gift

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My wife and I have been married for almost two years now.

When we were planning our wedding (which we planned in three months) we didn’t want to get too extravagant and end up in debt because of the wedding (not a good way to start a life together). Still we knew there would be some hefty expenses to cover.  Luckily for us I got an offer for an American Express credit card with 0% interest on charges for a year.

I know, some of you may be thinking “Uh-oh credit card debt!”

Well yeah but look at how we made a new credit card work for us:

  • We charged what we could on the card. This included not only wedding expenses but also the honeymoon and many other charges over the course of a year (we would have charged more but some vendors preferred cash or check).
  • When the monthly bill came we paid only the minimum. I know, another red flag – Never pay just the minimum. Stay with me it gets better.
  • We took as much of the remaining monthly balance as we could and put it in our ING account and labeled it AMEX. This money would only be used to pay the Amex bill once the 0% offer was over!
  • Fortunately we already had money saved for the wedding so we were able to add money to our ING “AMEX” account. Essentially we could have covered the credit card bill at any time but let it sit since we weren’t being charged interest.
  • At the end of the offer we paid our bill in full. We continue to use the card paying off the statement in full every month.

Basically what American Express did was give us a free loan for our wedding! On top of that we were earning decent interest in our online high-yield savings account for money that could have paid off the card. AND for the charges we made on the card we were earning rewards points as well. The points translated into a nice gift certificate to the Pottery Barn! Thank you American Express and ING!

Understand, we had to be disciplined to do this. At no time did we go crazy making charges we couldn’t already pay off. We had a plan and stuck to it.

This shows you that credit cards don’t have to be bad if they are used correctly. Money can be saved and earned in all sorts of ways. We just have to be open to how it can be done.

Let me know what you have done creatively with a credit card or online bank account!

Start Saving and Let That Money Build Itself

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So we all want to save more money right?   What can we do to increase our savings?

Many of us were told by our elders that if you want to save money the best place to put it is in a savings account at the bank (remember that old question of whether it’s better to put it under your mattress or in a savings account?).

This was good advice back in the day but the problem with it now is the average bank savings account barely gives you any interest on your money.  Truth is, for most people you are probably losing money since your interest rate is lower than the rate of inflation.

Yup, all that conventional wisdom about putting your money in a savings account is losing you money.

So what do you do?

A savings account is still a good idea but you need to find one that actually gives you a decent interest rate.  A good place for that is an online bank savings account like Capital One 360 Savings.

I’ve been using them for about four years or so and it has been great (there are other online banks out there but 360 Savings has been pretty good to me so far).  They have no minimum and no account fees.  Many other banks offer higher rates but you have to start with a good amount of money (doesn’t it seem likes it’s easy to make money when you have money?).

Go over there and start saving.

Here are some tips to start saving up money that will build itself:

1. If you don’t have to put a lot in, start with something small like $20.  Now you aren’t going to get rich with this but you will see your money growing.

2. Set up an automatic deposit for $5 a week.  We can all scrape together $5, can’t we (you can even start smaller if you need to)?  After a few weeks you’ll see your account growing.

3. As you feel more comfortable try to up the dollar amount, maybe $7 or $10?

4. Once you’ve saved for a bit ask yourself if you can afford to put away some money that you will absolutely not touch for six months.  It doesn’t have to be a lot just something you won’t be needing.

Really, don’t touch the money!  You don’t want to use this money.

Now take this amount and open up a 6-month CD, or Certificate of Deposit (Capital One also has no minimums for their CD’s).  This will give you a slighter better interest rate than your savings account.  Remember though, you shouldn’t need this money for at least six months (12 months CD’s are even better but that’s up to you).

When your CD matures (the six months are up) see if you can open up a new CD maybe with more money.

If you have specific goals to save for you can set up different accounts within your account and fund them differently.  For example, if you need to save up for the holidays set up a holiday account and put a few of your dollars in their every week/month, etc…

You should be seeing your account growing now both due to the money you’ve put in as well as the interest you’ve earned.  It’s actually kinda fun to look at my account and see how much interest I’ve earned this month.

I didn’t mention it but you will need to have a checking account already.  This will be where you transfer your money from into your 360 Savings account (and vice versa).

This in itself isn’t going to get you rich but it can help you to start saving more effectively.  The hardest part is putting those first dollars in there and keeping up the discipline.

The journey of a thousand miles starts with the first step.  The same idea holds true with savings and wealth – it all starts with that first dollar!

Let me know what you think and if this works for you!