How to make smart money moves in new year

The Savings Game

Nobody wants to spend more money than necessary for services or products. Here are some tips that should save you some money in the new year.

Subscriptions: My wife and I subscribe to many publications. I recently noticed that I was charged $32 on one of my credit cards by Vanity Fair. I went to the magazine’s website to determine how much it would cost for a one-year renewal; it said the cost was $8.

I called Vanity Fair and asked how long my subscription had been renewed. They told me that I had requested an automatic renewal, and the $32 covered one year.

I cancelled the automatic renewal and then renewed for $8. Many publications charge their customers in this way for automatic renewals. Don’t be taken advantage of. Find out if it is cheaper to avoid automatic renewal for your subscriptions.

Credit cards: More than 40 percent of credit card users do not pay their balance in full monthly, incurring interest charges as a result. One way to reduce interest charges is to use another credit card for new purchases and pay those charges in full each month. Otherwise you will pay interest on your new purchases.

Another way to reduce your interest costs is to ask if you are eligible for a lower interest rate on your balances. Financial institutions earn a large percentage of their income on interest from credit cards. They don’t want to lose customers who maintain balances each month.

If you regularly make payments on your account each month but maintain a balance, don’t hesitate to ask for a lower interest rate. You have nothing to lose by asking.

Mutual fund fees: Many investors don’t realize that annual costs vary significantly among mutual fund families, even for index funds. For example, if you invest in Vanguard’s S&P large cap index fund, the annual cost can be as low as 0.04 percent/year.

If you are investing in a similar index fund from a different provider, determine if you are paying a higher annual cost. For example, if you are paying 0.08 percent/year, in five years, with a $500,000 investment, the additional cost would be $1,000, not counting the income or capital gains from the additional earnings from the fees you saved.

401(k) investments: Unfortunately, many people don’t contribute the allowable maximum investment in order to obtain matching employer contributions. If you are not contributing the maximum, the employer match is lost forever.

Even if you have to borrow money on a short-term basis to make the additional contribution, it makes economic sense. For example, suppose you make an additional $1,000 investment in order to obtain a $500 employer match. If you borrowed $1,000 at 6 percent interest for five years, your interest cost would be $300.

In 12 years, the value of the employer match would be worth $1,000 if your investment earned a 6 percent return. In addition, your additional $1,000 investment in the 401(k) would be worth $2,000.

An additional advantage is that the earnings on your investment would increase on a tax-deferred basis.

Conservative investments: Too many families continue to keep too much money in “safe” investments, such as money market accounts and CDs that earn practically nothing.

If you are holding more than six months of living expenses in investments earning less than 1.5 percent, your returns do not keep up with inflation. Even an investment in an intermediate-term corporate bond fund or municipal bond fund will earn more income without a great deal of risk.

Even with stock market levels at current high levels, it still makes sense to make dollar-cost average investments in diversified index funds if you are investing for the long term.

Investing only in conservative investments earning 1.5 percent or less is a losing strategy if you don’t have a short-term need for the funds.

Elliot Raphaelson welcomes questions and comments at raphelliot@gmail.com.

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