Is Inertia Costing You Money?
February 23, 2012Let’s face it. We human beings are generally creatures of habit. We tend to do the same things over and over even if we aren’t always thrilled with the result, something Albert Einstein called the definition of insanity.
This can be especially true when it comes to our finances. After all, most people don’t enjoy thinking about things like taxes, budgeting, and debt so they put it off as long as possible (a tactic I’m very familiar with myself). As an example, our own company recently discovered that we weren’t getting the best deal with our HSA (health savings account) custodian since other custodians charged lower fees, paid higher interest rates, and provided more investment options. Our current HSA custodian may have been a good deal when it was chosen years ago but not now. In fact, it’s a local credit union in San Francisco, where the company used to be based, but no one in our company lives or works there anymore. Needless to say, we’re switching to a new custodian.
You might want to review your own financial arrangements to see if they still make sense. Here are some places to look:
Tax withholding: If your family situation has changed, you’ll need to update your tax withholding on your Form W-4. Otherwise, you’ll end up having too much withheld and giving Uncle Sam an interest-free loan or having too little withheld and possibly owing tax penalties. The IRS actually has a nifty withholding calculator to help you decide how many allowances to claim.
Health Insurance: If you have enough savings to cover out-of-pocket expenses, you may be better off with a lower cost plan with a higher deductible or co-pays. Just be sure to maintain those savings, preferably in an HSA if you’re eligible. Reviewing your health insurance can also be a reminder to take advantage of some of the benefits. In my case, that meant an overdue trip to the dentist for a cleaning (remember what I said about putting certain things off as long as possible.)
Savings: 401(k) contributions and other forms of automatic savings are great ways to make inertia work FOR you. I like to challenge myself and see if I can save a greater percentage of my income each year. Check to make sure you’re at least getting your full company match since many employers changed their formula during the recession and that you’re saving enough to reach your goals based on the current size of your nest egg. Note that contribution and income eligibility limits for certain plans have also increased this year.
Investments: It’s a good idea to re-balance your portfolio at least once a year or use a target-date or balanced fund that will re-balance for you. For example if your target is 60% stocks and 40% bonds and your portfolio is now 50/50 after a rocky few years, you’ll want to move some money out of bonds and into stocks to bring it back to 60/40. This will help you manage your risk and possibly enhance returns by forcing you to buy stocks while they’re relatively low and sell while they’re relatively high (also known as the Warren Buffett strategy). In addition, see if there are better funds to choose for your portfolio. Remember that when comparing funds that invest in similar things, low cost is a better indicator of superior future performance than past performance.
Banking: Too many people are earning nothing in their bank accounts or are paying outrageous fees (Bank of America wasn’t the only one with those debit card fees). I’ve written before about the particular benefits of rewards checking accounts. The main problem is that the interest rates keep changing so the top-paying bank one year may be near the bottom next year. For this reason, I actually use 2 accounts. One is attached to my brokerage account and is where my direct deposit goes and where all of my automatic payments are deducted from. I then have one automatic payment go into my rewards checking account each month for my other expenses. This makes it very easy to change banks since I only have to change the one auto payment.
Credit Cards: You could be paying more in interest or losing out on cash back and other rewards if you don’t have the right credit cards. Check out sites like creditcards.com and nerdwallet to find credit cards with lower interest rates or higher rewards based on your particular credit score and spending habits.
Auto Insurance: Do you ever get those offers for auto insurance in the mail? It can’t hurt to give them a call and see if they can beat your current premiums, especially if you’ve had a ticket or claim or had an old one fall off your record since insurers treat them differently. The company that gave you the best rate before that accident, might give you the worst rate afterwards. Sometimes 15 minutes really can save you 15% or more on your car insurance. Just make sure you’re comparing apples to apples in terms of coverage.
Cell Phone: If your contract is up, consider staying contract-free and saving some money with a prepaid plan. I switched from paying over $100 a month on Verizon (after getting my bill, I actually returned my phone and canceled it before being locked in the contract) to Virgin Mobile, which charges me $25 a month for 300 minutes and unlimited texting and data on an Android smart phone. It uses Sprint’s network and I haven’t had any problems with coverage despite doing a lot of travel all over the country. If you talk a lot on the phone, you can get similar good deals on national networks with unlimited smartphone minutes from companies like Boost Mobile (also Sprint’s network) and Simple Mobile (uses T-Mobile’s network).
Entertainment: The Internet is making a lot of “old media” increasingly obsolete. In fact, I dropped my print and cable media subscriptions years ago. Instead, I read a ton of newspapers and magazines for free online (as my poor Facebook friends have learned from my frequent posting) and can watch two of my favorite tv shows, The Office and The Apprentice (wow, that sounds really work-obsessed), for free on NBC’s web site with fewer commercials. You can also get a lot of tv shows for no or low cost on sites like Hulu and Netflix and use a tv antenna for local channels in HD.
Exercise: If you haven’t set foot in a gym since your first attempt at fulfilling your New Year’s resolutions, you probably won’t. You’re better off saving your monthly membership fee and jogging or working out at home. You can buy as-good-as-new exercise DVDs and equipment for pretty cheap on ebay or Craig’s list. Remember, the best exercise is the one you’re going to do and if not having to go anywhere makes you more likely to work out, all the better.
When you start looking at habits that have become outdated, you might be surprised by much you can save with little or no sacrifice. Any other ideas? Post them in the comments section below.