How To Use Your Cash Back Credit Card To Build A Rainy Day Fund

Cashback credit cards? Awesome. I’m personally so thankful that cash back cards are a thing because I utilize them to the full advantage. Or so I thought. Personally I have a Chase Freedom Unlimited card which gives me 1.5% back on everything I buy. Considering the fact that I graduated college recently and moved to a new city for my post grad life I got a lot of cash back during this move.

I try to use my credit card for every single purchase that I make because of the cash back feature. I know a lot of you will say this is irresponsible so let me quickly say I only expense things I can afford and will pay off every month. I don’t carry a balance and therefore I pay no interest on my card. So really, this cash back is just found money for me. When I was moving it was great because as I bought things that I would need in my new apartment my card gave me cash back to buy even more things I wanted but I didn’t consider essential to the apartment such as art or little knickknacks to make the apartment feel more like a home. Sadly, the plant I bought died but that’s neither here nor there. (I was devastated).

So getting back to cash back. If you are a responsible spender with your credit cards and not a frequent traveler I highly suggest going with the cashback option, but again you need to find a credit card that fits your lifestyle and personal spending habits. I know a lot of people around my age in cities like NYC or Boston that if they had excellent credit opted to go for the Uber credit card because of how it directly caters to those people who are very active in their social life. I also suggest checking out the Capital One Savor Card because of it’s great cash back on dining and entertainment.

I’ve talked to a lot of people about what credit card they use and why they chose that particular one. Most people take cash back and apply it to their statement balance so they owe less on their credit cards each month and I highly recommend doing this if you are carrying a balance from month to month. It will allow you to pay down your debt faster and get out of interest payments, if you have those.

Now that I carry a zero balance from month to month I don’t feel the need to apply my points right back into my credit card. Sure, I could go online and get some gift cards or apply them to travel but let’s be honest, I’m 22 and I don’t have time to go on crazy vacations and I try to curb my spending habits so that I can save more.

So I thought about this a lot. I wondered how I can best use my cashback. 1.5% sounds like nothing but it definitely adds up over the course of a year. As I was going through my options for my last point redemption it had an option if I would like to deposit the cash back into my checking account. Now I don’t keep my savings account with chase as you all know if you read my article on savings account, I use Marcus by Goldman. Some more digging allowed me to find that I can link any bank account up to my card and deposit the money there. Aha! A rainy day fund was created.

Sure I have my savings that I deposit a fixed amount in every month because I worked it into my budget, but I’ve never even thought about putting my cash back into a savings account. Even better, it’s an interest bearing savings account so basically I’m being handed money, putting it into an interest bearing account, and earning even more money on top of that. Think of it as a monthly allowance almost.

This is how I personally use my cash back but the more I thought about it the more I saw the wide range of possibilities this really has. Savings accounts offer low interest rates right now with the highest you’ll find hovering around 1.8% while the average market return year over year is 7%. So if you already have a rainy day fund and don’t feel the need to contribute more consider taking this cash back and putting it into an investment account, retirement or otherwise and letting it grow even more than a rainy day account ever would.

Make sure to subscribe to The Modern Piggy Bank using your email address and follow us on twitter @themodernpiggy2. As always you can email us directly at founders@themodernpiggybank.com with any comments or concerns you guys have. Have a topic you want to learn about? Shoot us an email and we’ll do the research.

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The Major Indexes Explained

If you turn on CNBC you’ll probably see and hear a bunch of talking heads screaming about how many points the Dow is up on the day or where the S&P 500 is heading.  It can be a lot to take in and even we learn new things about the major indexes from time to time.  So if you are confused about what these things represent you’re in the right place.

The major indexes include the Dow Jones Industrial Average, Standard & Poors 500 (S&P 500), and the NASDAQ Composite.  There are countless more you may have heard of like the Russell 2000, but usually the three listed above are the most talked about and usually can be used to get a quick snapshot of whats happening in the market.

The Dow Jones Industrial Average

^DJI_YahooFinanceChart.pngThe Dow traces its roots back to 1885 and was officially introduced in 1896 when Charles Dow calculated an average of 12 purely industrial stocks.   Surprisingly, it is not the oldest index as it is 12 years younger than the Dow Transportation Average.  It has come a long way since then and now holds 30 stocks with none of the original 12 remaining.  GE has the record for the longest Dow membership, but was recently removed for Walgreens amidst a series of financial blunders.  The companies are selected by a committee of experts with the goal being to select companies that together best represent the US economy as a whole rather than purely industrials for which it was originally intended.

The Dow is the most followed US index.  Whenever it passes a mile stone celebrations are in order and whenever there is a crisis people gauge the severity by how much the Dow has fallen.  Interestingly enough the index is price weighted.  This means that a company that has a greater price per share represents a larger portion of the Dow than a company with a lower price per share.

A table of all the components can be found here.

The Standard & Poor’s 500

^GSPC_YahooFinanceChart.pngStarted in 1957, the S&P 500 is a weighted average of the top 500 stocks in the US by market cap.  Unlike the price weight of the Dow the S&P 500 is cap weighted meaning that companies with a larger market capitalization represent a larger portion of the index.  For example, a price swing in Amazon would have a bigger effect on the index than a price swing in Campbell’s Soup.

This index is just as popular as the Dow and some might argue that it gives a more holistic view of the US economy since it is an average of more stocks.  Since its construction relies solely on market cap it does tilt toward certain sectors of the economy and individual companies.  Currently the S&P 500 tilts toward the technology and financial services sector with about 26% and 15% weighting respectively.  The smallest sector is telecom at just under 2% (I calculated these a few months ago so I apologize if they are not 100% accurate).  To take this a step further about 4% of the index is AAPL while smaller companies can be just fractions of a percent of the index.  Overall, the S&P 500 is a solid way to hold the US market, but its construction can sometimes cause it to lean towards what’s hot.  We are working on an article discussing this in more detail and hope to share it soon.

To see the full list of member companies click here.

The NASDAQ Composite

^IXIC_YahooFinanceChart.pngThe NASDAQ composite is a composite index of all stocks trading on the NASDAQ exchange.  If you haven’t heard of the NASDAQ exchange it’s simply a separate stock exchange from the NYSE set up in the 1970s as the first electronic exchange.  To put this in simple terms every trade on the NYSE gets cleared in New York at the NYSE.  The NASDAQ is different as it allows sellers to automatically connect to buyers in a decentralized manner.  For further details click here for an interesting Investopedia article on how it all works.

Although it is not a tech exclusive index the NASDAQ is notorious for being technology heavy.  The index dropped over 80% in value in the early 2000s dot com bubble.  As of May the index sits at about 46% technology stocks, but otherwise has a good mix of stocks from every sector.  Additionally, it is also market cap weighted like the S&P meaning larger market caps represent a larger portion of the index.  It differs from the S&P 500 in that any company that chooses to list on the NASDAQ exchange is automatically on the index whereas the S&P 500 is the top 500 companies by market cap that are based in the US regardless of exchange.  Over 2600 stocks trade on the NASDAQ and they are all represented in the NASDAQ Composite index although some fund managers might select the top 100 as it makes it easier to package into index funds and the like.

For the full list of companies click here.

The Bottom Line

The major indices do a great job of giving a snapshot of the US markets, but that’s about it.  The construction of these indices show inherent biases towards industries and even individual companies.  Owning the US markets has rewarded investors handsomely over the course of modern history, but it is important to know how indexes and funds are constructed so you can truly understand your investments.

The main takeaway here is to understand what your risks are.  I have no problem with index investing as it is easier for me to justify why a whole market may go up than try to place a value on an individual security.  If we can assess our risks and better understand our portfolios we can start thinking about if we want to hedge that risk out and at the very least we can understand why our portfolio is moving up or down to avoid rash uninformed decisions.

If you are interested in index investing some great funds and ETFs are offered by Vanguard and State Street.  They are extremely passive, have very low fees, and minimal tracking error to the indexes they follow.  As always it is important to read the funds prospectus and understand how it works before investing.

As always we welcome questions, comments, and thoughts at founders@themodernpiggybank.com.  Be sure to subscribe to this website and follow us on twitter @themodernpiggy2.

How To Decide Between A Bank Or A Credit Union

If you are looking to open a new checking or savings account or maybe even secure a small loan you are probably shopping around at all of the banks in your area.  You may not have ever heard of Credit Union’s before or have even give it much thought.  Well today I am going to walk you through the key differences between the two and why I ended up choosing a credit union for my daily banking.

On a very basic level banks and credit unions essentially offer the same services.  You can deposit money into a savings or checking account, open a business account, secure loans, and use ATM’s.  The difference lies in how they operate and how they are run.

Banks Explained

As you probably know banks are for profit institutions. They exist to make money not for their clients but for their themselves and their shareholders.  As a result you may experience things such as higher fees and lower interest rates on savings accounts.  Most commonly people say that going with a larger bank can feel like a very impersonal and sometimes robotic experience.

On the flip side, it’s really nice to have access to ATMs across the country and more branches in more places. And very important to most millennials, most banks are investing heavily in technology to make their online banking and other services more convenient.

Credit Unions Explained

A Credit Union is actually a non-profit institution.  It is technically member owned although there usually are some executives to run the day to day operation.  As a result, lower fees and higher interest rates on savings accounts are used to get customers in the door.  Credit unions usually cater to a smaller more exclusive customer base but there are quite a few that have massive membership numbers.  For example, lots of large corporations have credit unions for their employees and the credit union I use requires your address to be within a certain distance of the nearest branch.  Although, I am sure you will find a credit union to fit your needs.

Aside from the lower fees and higher interest rates on savings accounts credit unions are known for the high quality customer service they provide. Most people who use them say the bankers they interact with really go out of their way to understand your financial needs and help you plan to achieve your goals. This all ties back to the customer owned non-profit status that they hold.

The big downside is the lack of branches and ATMs. Since most Credit Unions serve specific areas or companies they are regionally located and don’t have a national network of branches. However, even though your individual ATM network is usually limited, your credit union may give you access to the CO-OP network which boasts over 30,000 ATMs.

Summary

It really comes down to what you are looking for in a financial institution.  If you are looking for a convenient place to deposit and withdraw money I would say the bank is the superior option, as they are more nationally present and have quick automated processes in place.  If you want to save a little more and the customer service experience is important to you go with the credit union.  These institutions come in all shapes in sizes so my best advice is to shop around.  You might be surprised with what you find.  For example, a small bank might be personable like a credit union with a larger presence and a large credit union might be able to give you lower fees and high interest savings with many of the benefits of banks.

My Experience

I ended up going with my local credit union and here’s why.  Their checking account yields 2% interest on balances up to $10,000 and all I have to do is have at least 1 direct deposit a month and swipe my debit card 12 times a month.  I get direct deposit through work and the 2% interest will pay for my months worth of coffee and then some.  Additionally, they offered me a credit card specifically for those who are new to credit and looking to build up their credit score.  Additionally, my credit union does participate in a CO-OP network and will even give me a refund of up to $20 worth of out of network ATM fees.  It was a perfect setup for my specific situation.

The bottom line is keep an open mind, shop around, and ask questions.  Everyone’s situation is different and could be better suited to a variety of different options. If you need help deciding feel free to reach out to us and we can walk you. Through more detailed differences.

As always you can reach us at founders@themodernpiggybank.com for questions comments and concerns.  Follow us on twitter @modernpiggy2 and please subscribe!

How To Sharpen Your Skills For Free

After I graduated I was looking for a way to keep some of the skills I learned in college sharp and maybe even add some new ones to my tool belt.  There are countless websites out there that will charge you a lot of money for a product you know little about.  For example, one of my clubs in college offered DataCamp for free to dues paying members. DataCamp is a premier resource for learning programming with data science applications in a web environment.  It was a great tool and a great product, but I could not justify paying $30/month for it.

So I tried out a website called edx.com, it is a non profit run by universities offering college level courses many of which are free.  The most popular subjects offered are Computer Science, Language, Data & Statistics, Business & Management, Engineering, and Humanities, but don’t be fooled there are tons more course offerings.  Courses are either self paced or instructor led and provide a sample syllabus outlining lesson plans, software packages, and how much time is recommended to be devoted to the course per week.  In addition, they have professional certificate programs although these are paid features.  I am planning to sign up for the Introduction to Python series to refresh my skills and learn the new features of Python 3.

In addition to edX, there is Coursera where I found a great instructor led course on Wind Turbines that I am looking to complete.  Also, there is lynda.com which has partnered with a lot of universities, such as our alma mater Penn State, and libraries to offer similar free courses.

Whether your looking to learn something completely new or just sharpen your skills there is no harm in taking a free course at one of these sites.  They are great resources for almost all popular subjects and will help immensely in your personal development and the best part is that it won’t cost you a dime.

Would You Rather Have Starbucks Or $700?

Choose right now… Starbucks or $700? Not Coffee or $700. Just Starbucks. Choose. Now.

Starbucks is in the news a lot. They are either opening their first store in Milan (highly suggest clicking on that link, the pictures are crazy), having trouble in Philadelphia, or boosting their stock price due to another great quarter. At one point there weren’t enough Starbucks stores in the United States to serve the demand for their coffee, and that was only last summer!

You’re probably saying that’s crazy because if you live in a major city it seems like there are multiple Starbucks on every block. You’d be right.

Now, we’ve seen a lot of the articles about how millennials could have so much more money or even be a millionaire if they cut out all their “trendy” food items such as avocado toast. A certain Australian millionaire even said the reason millennial aren’t millionaires is because of their avocado toast addiction. We saw some articles where the math was done and we even did it ourselves and found the idea a little far fetched. But it did get us thinking. Is there anything about our consumption habits that really do mess with our personal finances?

Absolutely. Besides the fact we rely so heavily on credit cards and think when something is on sale we “saved” money when in reality we really just spent less but our caffeine habits really do damage our personal finances. I’ll be the first one to admit I got Starbucks and Dunkin or whatever coffee was available to me in college almost every day. That was on top of my Keurig or Mr. Coffee (depending on what year I was in college) that I would make most days. Looking back, I wasted so much money on coffee.

I read recently that the average Starbucks order is $2.75 in the US and in NYC it’s $3.75. Most people I know stop for coffee at least once a day, usually on their way to work, every weekday. So 52 weeks in a year means 260 work days, we’ll be liberal here and say you get 15 vacation days you take full advantage of so 245 working days a year. We’ll go even further beyond that and say at least another 15 of those you’re running late and don’t get to stop to get your caffeine fix, now we’re at 230 days a year. Sounds like a lot but it’s pretty common for coffee drinkers to have at least a cup every day, specifically every morning, if not more than that. So some quick math of 230 days x $2.75 for an average order and you get $632.50 a year that you’re wasting on over priced, over roasted coffee.

Now I get it, if you’re addicted to caffeine like I am when you need coffee, you need coffee. Most likely your work has a coffee machine somewhere that you can get for free so let’s discount the entire working day and only focus on your mornings.

I personally bought a Mr. Coffee very similar to this one and use it every single day. The Mr. Coffee shown above costs $35.96 or just around 13 cups of coffee at Starbucks. Now for anyone who is going to say that they don’t have time to wake up and make coffee, I wake up at 4:50am and program this wonderful machine the night before to start making coffee at 4:45am, so not only do I have a fresh cup of coffee right when I wake up, I also get to wake up to the smell of freshly brewed coffee and honestly there’s nothing better than that.

I don’t even buy filters, my Mr. Coffee like the one I referenced above comes with permanent reusable filter that I just rinse out every night and put right back in. And you can pick something up like this Byron Stainless Steel Travel Mug for less than $10 and now you’re in business. Total outlay so far: $45.96 or less than 17 cups of coffee at Starbucks.

The last thing you’re going to need is coffee and this is where the real savings kicks in. You can do what I do and drink Maxwell House Original Blend Ground Coffee which sells on Amazon for $6.93. There is 240 6 fluid ounce cups in this thing! Conveniently happens to be just around the amount of cups we estimated the average person to need to go to work. That’s so much coffee. That’s less than 3 cents per cup of coffee! If you want to follow the famous Shark Tank Invest Kevin O’Leary you can take your $2.72 in savings and invest them.

Adding all this up that’s around $53 a year for your coffee addiction in the first year and it only goes down from there. Drink more than one cup a day at home? Raise your cost by $10 to $20 depending on what type of coffee you choose to order.

Some of you are going to say that all of this isn’t worth it. The daily expense is minimal on a daily basis and you don’t notice the overall sum you spend. I get it. Like I said before I have been there. But once I realized what was happening and how much I was spending my habits completely changed. The small daily expenses truly add up and turn into major expenditures. Don’t let this happen.

Take that extra $700 or more every year and invest that money or put it into your savings account and let that money grow. You’ll still be having your coffee fix every day, but you’ll be getting it in a way that allows you to minimize your expenses and optimizes your savings.

Make sure to subscribe on our website for all the latest personal finance and investing news and advice and follow us on twitter @themodernpiggy2. Have a question about personal finance you’d like answered or have comments or concerns or just want to chat? Email us at founders@themodernpiggybank.com

Buy A House Not A Home

If you are like me, home ownership is probably a long ways away.  However, I recently read a white paper called “The Rate of Return on Everything, 1870-2015” published by the Federal Reserve Bank of San Francisco.  Theres a lot of good facts and data in there and I strongly encourage you to read it (or skim it like a certain Modern Piggy Bank Founder did… looking at you Will).  But if reading 123 pages of economic data and commentary isn’t your cup of tea I’ll spare you the burden and tell you what I found most interesting.

The paper looks at major asset classes over the time period 1870-2015 most notably bills, bonds, equities, and housing and analyzes their return statistics.  Believe it or not housing was on par with equities with average return of 7% a year.  In the post World War II era, equities have taken a marginal lead, but the investor has also needed to take on more volatility and is subject to the ups and downs of the business cycle.  Where as the housing market has been much steadier over time.  Additionally, housing does not correlate heavily to the global markets i.e. a bear market is less likely to have a significant adverse affect on housing prices.

Now home ownership has been seen as a rite of passage in America and a sign that someone is financially well off.  Unfortunately, situations like the 2008 financial crisis show how a house can sometimes not be a wise investment especially your primary residence.  I’m currently looking to apply for my first credit card which I will talk about in a later post, but I find it concerning how the Federal Government insured home loans leading up to 2008 and will loan teenagers with no grasp of the concept of credit hundreds of thousands of dollars to achieve higher education because it’s a “good investment” while private credit institutions want new credit card owners to have $200 spending limits.  Anyways, I digress.

Back on track.  You will always need a dwelling, it will always be an expense.  I will even go on to make a controversial claim that a mortgage on your primary residence is nothing more than an expense.  If you weren’t paying it down every month you would be living in an apartment paying rent.  When you go to upgrade homes you will now have a higher monthly expense with the total offset by the profits on your past home sale.  Furthermore, theres property taxes, utilities, home improvement/maintenance, etc.  Your primary residence will probably not produce a dollar of cash flow.

Enter the rental home market.  Instead of adding to your expense column you can invest your money into a home for tenants.  Sites like airbnb have made this incredibly easy for vacation spots.  Some people even rent guest rooms in their own homes to offset their housing costs.  For me, it makes sense to invest in an asset that tends to increase in value over time, although this is not always the case, while I can put it to work and pay off its expenses and maybe even a little extra.  To take it a step further the white paper previously mentioned suggests that the lower volatility will protect my downside in case things go wrong as opposed to the equity markets which are heavily correlated across the globe.

If you can fit it into your budget and are willing to do the due diligence consider investing in a rental property.  I mean not to discourage you from home ownership because it is something incredibly rewarding that I look forward to one day.  I mean to challenge your thinking so you can minimize your expenses and optimize your savings.

Whether you like what I said or hated it feel free to reach out at founders@themodernpiggybank.com and follow us on twitter @themodernpiggy2.

Trade Like A Quant

Sometimes dubbed the rocket scientists of Wall Street the meaning of quantitative analysts often takes on a broad meaning.  Quant is a fairly broad term honestly, but roughly means someone who takes an extremely mathematical approach to the markets.  While some quants use Einstein level math there are some practical lessons you can take away to use in your own portfolio.

More than anything quantitative analysts apply a rigid rules based approach to the markets.  They have specific buy and sell signals that they adhere to religiously and consistently.  This is where their great returns come from(if their algorithms are correct).  While some get blamed for things like the flash crash where the DOW dropped 9% in minutes it would be wrong to say that it was the strangest thing to ever happen in market history.  A signal for a quant could be something as simple as the 200 day moving average or as complex as analyzing S&P 500 futures contracts volume and expiration and placing an order nanoseconds before the futures expire and pocketing the spread, which is the high frequency trading world.

So how can you apply this? Well a buy and hold strategy sounds great in theory, but its harder to stick to in practice.  Sure its easy to say when the market has not had a down year since 2008, but it would have been really hard to hold onto your portfolio is 2008 when the US equity market shed about 40%.  If you haven’t experienced a massive drawdown like that imagine draining half of your savings.

So if you are someone who can’t weather massive drawdowns, and we don’t blame you if that is the case, consider taking a rules based approach.  It is great to have an investment plan that you can stick to and might even help you sleep better at night.  Here is a simple rule to get you to start thinking about what you might want to do:

Apply a short, medium, and long term moving average to your portfolio.  When conducting your rebalancing, best done once a year for tax benefits, tilt most towards the assets in upward trend above the moving averages, more towards the one that are not trending as strongly above one or two of the moving averages, and least towards those in a downtrend under the moving averages.

Note: This can be considered a trend following approach and is a popular investment style that may or may not suit you.  Over time strategies go in an out of favor so its often wise to pick a strategy that you understand and believe in and stick with it over the long term.

Building wealth takes strong discipline and taking your emotions out of investing by applying rules to a strategy that works can often help mitigate bad decisions.