The Passive $100 (Part 4)

In Part 3 we left talking about how to make up for the $57 left to achieve a monthly passive $100. One thing I realized recently is that while we didn’t have any credit card debt (we pay our balance in full every month) we were still losing money using them. “How can that be?”, you might be asking. We’re not carrying a balance, so that means we’re not paying interest. In fact, we’re actually getting money back in some cases via rewards. So, how are we losing money?

Let’s first talk about the rewards game. Credit card rewards are fantastic when correctly applied. Just because you’re getting rewards back doesn’t mean you’re making good financial decisions to obtain them or good financial decisions when you use them. Let me explain with an example. I have a Visa Amazon Rewards card that offers 5% back on qualified Amazon purchases (*as a Prime member, don’t forget to factor in the yearly fee, although you do get more services with that so…), 2% back at certain restaurants, gas stations and drug stores and 1% back on everything else. Now, that being said it is very important we state one thing; none of that % back means anything if I carry a balance. I cannot stress this enough. It’s simple math. I am on the low end of the scale according to Chase (who knows how true that is) and my APR is ~15%. So, if I’m getting “rewards” at 5% back in the best case scenario and I carry a balance month to month that 5% back means nothing. Sure, it brings down my APR but in the end the credit card company is still taking money from me in the form of interest and I am paying more than whatever I am being charged for my actual purchase; purchase price + interest rewards is still > purchase price alone so don’t be fooled by “money back” gimmicks if you’re not planning on paying your balance in full every month.

So, all that being said, back to the original question; how am I losing money if I’m not carrying a balance on my credit cards? The biggest way I’m losing money is by misusing the card that I have. I currently carry the aforementioned Amazon rewards card. It’s great for Amazon purchases at 5% back for qualified purchases. Amazon purchases are not a very big expense for me relatively. Can you guess what our family’s biggest expense is? If you have a family of four also you probably guessed correctly; it’s groceries. Aside from our mortgage, groceries is by far our biggest expense every month and it’s a very close second. I’m talking in the neighborhood of $1200.00 per month. Now the elephant in the room here is, “why are we spending so much on food?”. I’d like to lower this expense and believe me we have, but one thing at a time. Right now it’s high time to properly buy groceries.

If you search online for “cash back card groceries” you’ll get some great results. One such card I found that was a great fit for us was the Blue Cash Preferred Card from Amex. (You can check out the link, I don’t get any referral fee’s from Amex so my review here is completely unbiased) What I liked best about this card was it offers 6% cash back on groceries up to $6000 in purchases then 1% after that. 6% back on purchases up to $6k, which we easily spend as a family of four, is $360 back. Thats an extra $30 per month on average!! That’s a huge leap towards the goal!

With an average of $30 back per month we only have $27 more to make up. Piece of cake! Stay tuned, more rewards coming in part 5!

The Passive $100 (Part 3)

In my last post I mentioned passive income. Passive income is described as income generated “without doing much”. That’s somewhat vague, I think. What I consider passive you might consider work and vice-versa. When I was a teenager I lugged foundation forms around for a whole summer. What I do now as a software engineer is comparatively “passive” with respect to physical effort but, I digress. What I consider passive in this context could easily be defined as effortless. In my last post I mentioned our Money Market account with Capital One generated around $15 in one month. That is truly effortless; that money made money while we slept. If I’m earning money while I sleep I couldn’t possibly put forth any less effort while still having a pulse.

In order to achieve my goal of $100 a month passively will take more, however. I just don’t have enough liquid cash to deposit in a Money Market to generate $100 per month in interest. In order to generate $100 of interest in one month @ 1.75% I would have to deposit around $70k. I would have to tap into my retirement or take out an equity loan to get that kind of money and both of those ideas would cost me way, way more than what I’d get back so, the MM alone just won’t cut it. But it’s a great start.

You may be thinking, “there are other investment vehicles out there that could generate that kind of return” and you’re correct. There are thousands upon thousands of financial products out there that could probably generate more than $100 a month for me. However, as we all know, with greater returns comes greater risk and there is one very important aspect of this endeavor for which I must account; I cannot risk losing more than 15% of our liquid cash asset. At least right now. That number might grow as our savings grow but as I’ve mentioned before this is not just my money, this is my families money. If 2008 like markets should rear its ugly head again I’d be in a very tight spot. I’m young enough to hold and weather the storm but I’d be constantly worrying about an emergency forcing my hand. So, for now, I have around 5 months of expenses in the MM or $20k @ 1.75% and I know that money is safe. The interest could drop but the current value of the account will never dip unless I withdraw. That makes me feel safer but I’d truly like to have 8 months worth of expenses in there which would be another $12k. If I can bring it to $30k I’ll be satisfied. That would be more than enough money accessible without penalty should we need it.

But how close to the goal of $100 a month will $30k bring me at a rate of 1.75? The math says about $43.00. That’s not bad. That’s almost halfway to the goal. I need to find another way to generate $57.00 a month. I think I know an easy way to get a good chunk of that $57. I’ll cover that in part 4.

The Passive $100 (part 2)

I was sitting on my couch one evening, heads down on my laptop half listening to a baseball game looking at our bank transactions. These days with the available technology, I’m aware of every action North of $100 via text message concerning our accounts, but I like to peruse frequently just in case there was something I missed. Often in a meeting my phone will vibrate and I’ll acknowledge in passing that a debit of 100-some-odd dollars was posted via automated payment; “probably the cable bill” I’ll think to myself. You get to know what bill is what just by the amounts.

On this night in particular one comparatively minute transaction caught my eye. It was a credit for 62 cents. It was by far the smallest deposit for that month as you can imagine. I’d be hard pressed to go through the process of depositing $0.62 even remotely. This transaction really bugged me. It wasn’t that it was out of the ordinary it was that it was so insignificant with respect to the reason for its existence. The reason that amount was credited to my account was because I parked literally thousands of dollars at my credit union. In this case we’re talking upwards of $10k. I put $10k in their hands for a month and they give me a whopping $0.62. We’re talking about 0.05% or 5 basis points. A bank wouldn’t loan money to themselves at that rate. They certainly wouldn’t loan money to me at that rate even if I gave them the opportunity to call the note in full at anytime. It just wouldn’t be worth it to them. So why is it worth it for me?

 

Now you might be saying aloud, “what do you expect, it’s a checking account?” and you’re right. Unfortunately that’s kind of the norm. Checking accounts are fundamentally horrible places to keep money but they are a necessity for most of us. I’m not aware of any high interest savings or checking account that allow you to make dozens of transaction each month without charging you exorbitant fee’s. I have found better but nothing that comes close to keeping up with inflation. There are some out there that pay 4% up to $2500 and 2% on ‘X’ after that but they’re all banks I’ve never heard of and they all have “minimum debit purchases”. Sometimes as many as 20 point-of-sale debit purchases. So, in order to get the 4% I have to park my money in a bank I’ve never heard of and use my debit card a certain number of times in person to qualify. I’m trying to curb spending not increase it. I also avoid going to stores at all costs. There’s really no reason to and retail outlets are designed specifically to separate you from as much of your money as possible; I don’t fault them for this, it’s just business. However, there is a reason why malls are dying. It’s because everything is available online, it’s often cheaper and I don’t have to add miles to my car, waste gas, deal with traffic, find a place to park, risk an accident, etc…. So, suffice it to say, a minimum number of point-of-sale debit transactions, for me at least, is a non-starter. So far, I have some guidelines for a checking account.

  • It must be a main-stream bank (Uncle Al’s Savings and Loan 2500 miles away isn’t going to do it for me unless they’re guaranteeing 15%) and, of course, FDIC.
  • A minimum number of POS purchases is unacceptable. Essentially, this account is to server as a hub to pay my bills and little more
  • “Free Checking” is a given. I’m not paying fees including ATM (in or out of network) and/or minimum balance fees. We’ve already stated that a checking account is bad place for money so I’m looking to keep “cost of living” in this account at best.
  • Better than my current Credit Union’s APY (which is %0.05) but I’m under no illusion that this account will generate more than enough to buy a small cup of coffee every month. At this point it’s just a matter of principal.

According to the above criteria my Credit Union wasn’t cutting it. So, I began my search via Google looking for “high yield checking accounts”. As I’m sure you can imagine, I got a lot of results. Most of the “high yield” checking accounts were banks I’d never heard of. One of them was called, “Bank of Internet” which to me sounded like it was probably run by Somali pirates. There were others as well that just didn’t sit right with me even though they were offering higher interest rates than most. But, as I was not planning on parking a whole lot of money here I was more inclined to do business with a bank that I knew and had a good track record. One bank in particular caught my eye that felt familiar; Capital One.

I had seen the “Capital One 360” commercials but never paid much attention to them. At that time I thought, “a checking account is a checking account, right?”. But this did check off the first bullet in my list; it’s a main-stream bank. O.K., one down. So, I looked to see if they had a minimum POS transactions per month; they do not. Great! Two down. Bullet three; was this free checking? Yes, it is fee free. Do I require a minimum balance? No, I do not. Are there ATM fees in or out of network? No, there are not (this excludes vendor fees or “ATM Owner” fees but ATM visits for us are extremely rare, anyway). The last bullet should have been extremely easy to beat. Does this account offer better than 0.05% APY and, of course, it does. On the balance I plan to have in there it will earn 0.20% which is 4 times what I’m getting now. I felt this was sufficient and decided I will open a checking account with Capital One. However, something else caught my eye.

As you may recall I mentioned I had about $10k in my current Credit Union’s checking account. I also had a decent amount in my Credit Union’s “savings” account (I’m sarcastically using quotes around “savings” because it was basically just another low-yield, rusty bucket for my money to rot in while losing value to inflation). As I was visiting Capital One’s website for information on 360 Checking I happened upon their Money Market account or the “Capital One 360 Money Market”. At the time they were offering 1.65% on balances over $10k. Score! There’s one important factor that, up until now, I haven’t mentioned regarding money; liquidity.

Liquidity refers to how easy you can get your hands on your money or, perhaps more important, how quickly. Remember, I have a family of four and I am a homeowner. Sometimes the unexpected happens and we need relatively quick access to our money without having to pay enormous penalties. Certificate of Deposit’s or CD’s, for example, have a higher interest rate than a Money Market account but if I need my money immediately I could face a penalty of up to 12 months of interest. Too risky. Right now a Money Market account looks like a good fit. At the end of the day it’s really about what fits for you, your lifestyle, your level of acceptable risk and your family. For me I always have to remember that there are three other people, two of whom are under the age of 7, that rely on me for financial security.

So, now I have decided to open two accounts with Capital One; a checking account and a Money Market account. The checking account will serve as a hub through which all of our bills will be paid and the Money Market account will be used as a savings account through which we will earn higher than average interest compared to traditional savings accounts and that money will be available within three days should I need access to it in the event of an emergency. Much Better!

So, now I started doing some math to see what sort of “returns” we would get from this Money Market account. Since I opened the account the APY had actually gone from 1.65% to 1.75% on balances greater than $10k, so, via an online Calculator I punched in the numbers on $10k to see what one month would bring us. It came out to be $14.58. We’re not retiring early by any means but compare that to the $0.62 we were getting just a month ago and that is reason to celebrate!!! This is where I had an awakening. By doing a little research from the comfort of my own home and transferring our money from one institution to a better institution I increased our return 2251%. To me that is incredible and that is where I asked the question; could I find a way to passively generate $100 per month? To some out there this might seem like a low number but I felt it was a realistic goal for someone like myself. Someone with no financial education beyond what life has taught me thus far. Perhaps some of you out there might be thinking this is a difficult task. Perhaps it is. But I think it can be done. But what does passive mean? I have some thoughts on this we can discuss during part three. Stay tuned.

The Passive $100

Until roughly 5 years ago finance wasn’t something I gave a second thought. I grew up in a home that was not poor but nowhere near wealthy, either. Money was for bills, food, an occasional vacation and little else, mostly because there was little of it. My father reminds me that when we were children we rarely asked for money. We didn’t really need it as there was plenty to do without it. It wasn’t until I was 14 that I got an actual job that produced a W2 and the only reason I got that job was because I wanted my own vehicle. The sad part of all this is not the $1800 I spent on a late 80’s Monte Carlo with checkerboard rims. The sad part is that while I started earning at a very young age I never actually learned the basic principles of personal finance. Truth be told, I still don’t know them all but I’m learning. Also, full disclosure, that Monte Carlo was great and of all the cars that came later, that’s the one I miss the most.

I’m at a point in my life now where I have dependents. My wife and I have two young children for whom she cares 80% of the time while I make a living as a software engineer. While she easily has the more difficult job I am the majority of our income. My wife does work part time at a salon and does considerably well for the hours she’s actually able to be there. However, as you can imagine, with two small children she’s not able to be there very much; it’s definitely a part-time gig that is great extra cash but I think it’s more important for her to get out of the house and interact with adults 12-15 hours a week; helps keep her sanity, you could say. When she and I were planning our future we knew we wanted children and we didn’t want them raised in daycare. Don’t get me wrong, daycare is fantastic. It’s great for single parents or partners who both earn high incomes that justify what you pay for the service. For my wife and I the extra money my wife could generate while we paid for daycare wasn’t enough to justify the expense. More importantly, my wife just wanted to be there everyday, every moment while they grew through those toddler years which I always loved and respected. Kids can be exhausting! The amount of energy they have is seemingly endless.

As I aforementioned, my income is really what our family survives on. Until recently, we had what I thought was the correct version of an “adult” financial framework; a checking account, a savings account and contributions to a 401k. Growing up the only real financial advice I can recall was, “put money in the bank”. To be fair, at that time, interest rates for a savings account were an astronomical ~5.00%, compared to today so putting money in a savings account actually meant something. Sadly, these days, you’re lucky if your savings rate keeps up with inflation; in most cases it does not which means putting money in savings costs you money because the dollar you put in there today has less buying power than the dollar you take out a year later but, we’ll get to all that. Right now it’s probably easiest to explain my motivation here by stating that I was tired of losing money while doing what I thought was the right thing. So, I decided to do something about it for the sake of my family and this is how I began.