Author Topic: LifeHacker - Tips on automatization of savings  (Read 4068 times)

Insanity

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LifeHacker - Tips on automatization of savings
« on: May 30, 2014, 07:15:16 AM »
http://twocents.lifehacker.com/how-to-automate-your-frugality-and-save-money-without-m-1582362714?utm_campaign=socialflow_lifehacker_facebook&utm_source=lifehacker_facebook&utm_medium=socialflow

There are some interesting tips in here, and I'm wondering what others think about it.

The one that I wanted to ask about was the "prepay your auto insurance".  Forget about cars being anti-mustachian, the question that i have to ask is:

Do you pre-pay your premiums to avoid the monthly fees or do you pay each month and hold onto the cash to invest?

CarDude

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Re: LifeHacker - Tips on automatization of savings
« Reply #1 on: May 30, 2014, 07:23:08 AM »
We pay in 6-month increments. To me, the idea of holding on to minimal amounts for investment opportunities is a little too money-focused / "busy."

agent_clone

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Re: LifeHacker - Tips on automatization of savings
« Reply #2 on: May 30, 2014, 07:42:33 AM »
I pay for my car insurance yearly.  It is due around about the same time as the registration anyway...

I think yearly is standard here unless you can't afford it.  In which case it is usually montly.

catccc

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Re: LifeHacker - Tips on automatization of savings
« Reply #3 on: May 30, 2014, 08:40:01 AM »
The standard for our car insurance (with progressive) seems to be every 6 months.  For the sake of automation, I have an amount scheduled to ACH to a short term savings account, which covers most of our expenses that are due annually or biannually.  (all insurance- car, life, renters, etc.)  It just smooths things out and makes cash flow more predictable.

frugaliknowit

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Re: LifeHacker - Tips on automatization of savings
« Reply #4 on: May 30, 2014, 08:59:52 AM »
Generally, you should not pay any convenience fees.  However, if you want to analyze each one, here is a way:

Let's say your Auto Insurance (or whatever) charges $2.50 per month convenience fee on top of paying $600 for a 6 month policy.  This means you will pay a total of $12.50 in fees (well, technically you will pay a stream totaling $12.50 such that the cost of the earlier payments is somewhat lower than the cost of the later ones, but since these are small amounts in a low interest rate environment over a short period of time, the difference is minute).

Option 1:  Pay $600 policy is paid

Option 2:  Month 1 $602.50, Month 2 $602.50, Month 3 $602.50, Month 4 $602.50, Month 5 $602.50, Month 6 $602.50
For a total of $612.50.  Back of the envelope calculation (not precise but close enough):   $15/600 * 2 = 5.0%

More precisely:

To keep things simple, I will annualize:

Option 1:  Pay $1200

Option 2:  12 payments of $102.50 totaling $1230.

Plug this into the appropriate calculator at (http://www.easysurf.cc/vfpt2.htm#rrm):

Annual Interest loan interest compounded monthly

Annual Interest loan interest compounded monthly
Principal = dollars you want to borrow
Enter principal: 1200
Enter term, in years: 1
Enter Monthly Payment: 102.50
Annual interest in percent is 4.59%

This means you are effectively borrowing money at 4.59% (after tax) for the convenience of making monthly payments.  The question to ask yourself might be what is my after tax rate of return on my savings?  If my tax rate is 25% federal and 5% state or 30% and my savings deposit rate is 1%, then the after tax return on my savings is 0.7%.  In this example, you could argue I am borrowing at 4.59% to lend at 0.7%.  If I am a bank and I do enough of this, I would quickly become insolvent!!

lisahi

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Re: LifeHacker - Tips on automatization of savings
« Reply #5 on: May 30, 2014, 03:39:37 PM »
I have my auto insurance through USAA and pay it monthly, but I pay no convenience fees or anything extra to do it. The only difference is they divide my 6-month premium by 6 and I pay it over 6 months rather than a lump sum payment. There's no financial advantage to me paying bi-yearly over monthly. If there was, I would pay my premium bi-yearly.

Now, USAA isn't the most mustachian insurance. It is more expensive than other companies. However, I've found the service USAA provides to be excellent and honest, and that is worth the extra money to me.

ender

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Re: LifeHacker - Tips on automatization of savings
« Reply #6 on: May 31, 2014, 04:30:20 PM »
I have my auto insurance through USAA and pay it monthly, but I pay no convenience fees or anything extra to do it. The only difference is they divide my 6-month premium by 6 and I pay it over 6 months rather than a lump sum payment. There's no financial advantage to me paying bi-yearly over monthly. If there was, I would pay my premium bi-yearly.

Now, USAA isn't the most mustachian insurance. It is more expensive than other companies. However, I've found the service USAA provides to be excellent and honest, and that is worth the extra money to me.

Huh, I also have USAA but just assumed I was getting a discount for paying in a single lump sum :)

And I agree, though considering my insurance is above $700 a year now I'm considering alternatives.

Latwell

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Re: LifeHacker - Tips on automatization of savings
« Reply #7 on: May 31, 2014, 04:59:11 PM »
Progressive has a discount for paying in full. Soooo yah, I don't believe in paying monthly.

However, someone else mentioned they out certain expenses away in another account for annual/semi-annual expenses.

I also do this and definitely feel that it smoothed things out and allows me to have a predictable cash flow. I've estimated all of my monthly expenses/bills and divide them accordingly and add them up. That's the number that is taking from my paycheck every single paycheck. A lot of times I have left over or extra money at the end and I move the extra into my savings.

arebelspy

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Re: LifeHacker - Tips on automatization of savings
« Reply #8 on: June 06, 2014, 11:02:40 PM »
I get a discount for paying in full, so I do that.  I'd probably do that even if I didn't, just for the hassle factor (even if tiny for setting up a monthly automated payment) versus potential savings (opportunity cost on $500 every six months - say $15 a year?). 

Plus paying it in one chunk forces me to review it when it comes due again - monthly automated it'd just keep getting paid over and over.

If I was tighter on money and was running lean, paying monthly is a short term acceptable idea, but I'd want to get out of that hole as quickly as possible so I had the choice.
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