Question: What are the three tenants in the field of personal finance?
Aaron Patzer: So, there are always exception to the rule, but the reason that I came up with those three tenants is the field of personal finance is, I think, very confusing and overwhelming to people. If you look on Amazon - if you do a search for personal finance, there are literally 20,000 books written on personal finance and there's no real reason for it. I mean, personal finance is pretty simple. You see content on the Internet, whether it’s CNN Money, the Motley Fool, even, you know, the Mint blog in some ways and fundamentally it can all boil down - all those books, all those articles - to three basic principles which you named. Spend less than you earn which means basically save money, make the money you have work for you which means invest it and then be prepared for the unexpected which means, you know, protect your downside with the right types of insurance, with diversification of your investment.
And so, the first aspect is save it and the best thing to do there is to set a budget on your problem categories. If you’ve lost your job than saving money shouldn’t be your primary concern. It should be finding another job and making ends meet. The other thing that you can do to save money without really changing your behavior is to optimize your financial accounts. So, most people seem to have the checking and savings account that they set up when they were 16 or 17. You went into your local bank with your mom and you set up a checking account and you’re not being paid any interest and if you have a savings account from City Bank, Wells Fargo, Bank of America, and of the big name banks, I guarantee that right now you’re being paid between 0.1 percent and 0.2 percent interest which is ridiculous because you can make 2 percent interest right now and if interest rates go up, the Fed changes the rates, you could make 3, 4, 5 percent interest. You’re going to be earning a fifth to tenth as much at most of the big banks as you could either get at a credit union or an internet bank like ING or HSBC or Emigrant Direct Bank or Ally which is the old GMAC actually pays the best interest rates around right now. I’m a big, big fan and they have accounts without any fees.
So, if you optimize your financial accounts, get a high yield savings account and put your deposits in there. Get a credit card that, if you're paying interest on your credit card, is at a lower rate. If you pay your credit card off every month, get a rewards card. One that gives you airline miles or that will give you 1 percent cash back at least on every purchase. Some of them will still give you 3 to 5 percent back on restaurants or groceries or gas or whatever that type of card is. I use an American Express Blue cash card and after you’ve spent about $6000 on that card it’ll give you 5 percent on gas and restaurants and I mean, it’s - I've made so far this year about $500 cash back. It’s great.
And then, you know, consolidating your student loans or finding even a brokerage account if you're an active trader that you’re going to spend less on your cost per trade. All of those things don’t really require a change in your day to day behavior; they just require being a little smarter about which financial accounts you should have.
Recorded on November 2, 2009