Archives for May 2008

Employer-Sponsored Group vs. Individual Life Insurance

I’m not an insurance or benefits expert, but while looking at life insurance I wanted to compare the coverage available from my employer vs. what I could buy on my own. As with most things insurance-related, there are big variations in group life insurance coverage, so I can only speak to what I have for the most part. We get a credit each paycheck for which we can spend on health, dental, life, and disability insurances.

Maximum Coverage
For my plan, I can only get up to $500,000 of coverage for myself and partner. So if I want more, my only choice would be to look privately for equivalent term life insurance.

Ability To Find Coverage
The best thing about group insurance from work is that your risk is spread across a big pool of people, so it should be easier to be granted coverage. But many workplaces still require you provide “evidence of insurability” once you increase your coverage limit past a certain amount. This may involve a simple questionnaire, or it could require a doctor exam and bloodwork. It seems unclear exactly how “healthy” you have to be in order to qualify for increased group coverage, but I’m guessing it would preclude major pre-existing conditions like cancer or heart disease. The limit where they start checking can also vary from $5,000 to $500,000.

Portability of Insurance
When you qualify for and buy a level term life insurance policy, you are guaranteed coverage for the length of that term (10, 20, 30 years, etc.). But if you rely on your employer’s group life insurance, usually the coverage stops when you leave the job. It’s almost like a 1-year term policy. My concern is, if you have you leave your job because you are seriously disabled, then you might end up both uncovered and unable to find new insurance.

However, looking around there might be some flexibility in certain plans. For one, you might have a “Waiver of Premium” benefit that continues the insurance protection through age 65 with no further premium payments should you become disabled. Or the policy may allow you to “continue coverage through an individual term policy without evidence of insurability as long as you continue to pay premiums”. Would this still be at the group insurance rates (minus employer subsidies)? A lot of this stuff seems to be left out of my Open Enrollment Guide, so I suppose an e-mail to the correct Human Resource person would be in order.

Cost
Many people get a certain amount of “free” life insurance from work, with the option to buy more. I think anything over $50,000 of coverage is paid with after-tax money, so I plotted out the monthly cost of my group plan vs. coverage levels below. I then went to Term4Sale and found the average of the top 5 quotes for both 15 and 30-year term insurance policy (rated A+ or better), for both the best tier of health (Preferred Plus) and the lowest allowable (Standard).

If you are youngish and in good health, even a long 30-year term policy is comparable to the group rates. Even if you are in average health, the cost of my employer group insurance is comparable to the premium on a 15-year term policy.

Summary
Again, this is only based on my plan, although I found my wife’s numbers to be similar. If you are lucky to have no-questions-asked insurance with high limits and you are in below-average health, it might be good to use your group plan. But if you are looking for extra coverage for a guaranteed period of time and are at least relatively healthy, it’s probably just as cheap if not cheaper to go with an individual plan. If you are an older worker, things may tilt back in favor to group life, but I haven’t run those numbers. In any case, it’s worth a comparison before your next Open Enrollment period.

We used to just buy some extra coverage from work due to the convenience factor, but why pay more when I could both save money and have a better, portable plan?

More Free Citi ThankYou Network Points

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DIY Installation of Floating Engineered Hardwood Flooring

I’m happy to say that our hardwood floors are fully installed! The bulk of the credit has to go to my father-in-law, who while he has never installed any hardwood flooring before, provided the peripheral knowledge and common sense that is need in doing such home projects. My wife and I basically served as unskilled day laborers. πŸ™‚ If you’re looking to install your own wood flooring, you might want check out my previous post on picking out what type of flooring to buy and how to install it. We had a concrete subfloor, and we chose to float an engineered hardwood flooring over it. This might not be the best choice for everyone.

Prepping the Concrete Floors
The first part of installation is to make sure you have a relatively level subfloor. A rough rule of thumb is that you want to see no gaps thicker than 1/8″ of space if you lay down a 5 ft-long straight piece of wood like a 2×4 flat on the ground. (Or 1/4″ every 10 feet.) This part is important in order to avoid squeaks and squishy spots, and lazy installers (both hired and DIY) will simply lay over anything remotely flat. If you do demand proper prep and your floor isn’t flat, this can add to installation costs when contracting it out (and therefore savings if you do it yourself).

We were hoping preparation would just mean scraping excess carpet glue or drywall mud off of the subfloor. But we found that we actually had a good-sized area which was not flat at all. We tried using a hand grinder at first, but in the end we rented what they called a concrete planer in order to grind it down flat. It is a beast and we ended up with over 30 pounds of concrete dust everywhere. We had put up tarps, but it still got everywhere. This would have been horrible if we were already living in the house, luckily we weren’t. I think it cost about $250 to rent for a day.

Laying Underlayment
Next step was to lay down a thin blue foam underlayment on top of the concrete. The underlayment is designed as a moisture barrier between the wood and the concrete, reduces sound, and also adjust for the remaining minor irregularities in the subfloor. We just taped it down with duct tape. Some newer flooring products actually have this already on the bottom of the flooring.

Connecting The Pieces Together
Our flooring was tongue-in-groove, with glue applied in the grooves. Some other types allow you to simply click together, but we found this was mainly for laminate flooring. We put in spacers at the walls, as the floating floor has to be allowed to contract and expand with the seasons. Trim is added later to hide the gaps. You’ll need some sort of table or chop saw to cut the pieces to fit when you reach the other wall and at corners.

Trim and Moldings
Finally to make everything look nice, you’ll need to install moldings at walls, doorways, and transitions to other floor types. You’ll also have to cover up all the nail holes with putty so they don’t show. This all takes a lot of patience to do well, which can be tough when you’re tired of installing wood and you just want to be done already.

Final Verdict and Parting Advice…
We are very happy with the final product. I think anybody who is reasonably comfortable with tools and has the proper patience can perform this activity, the only question is if you actually want to. Either using up a week of vacation or giving up all your weekends for a month isn’t always fun, although I did learn a lot and lost some weight in the process. Oh, and there’s always the several thousand dollars in installation costs that we saved.

We do have some squishiness in the floor when walking on it, but it is not very prominent and we don’t mind. Of course it wouldn’t be there at all if we decided to do a glue-down floor, but I think it was still worth it to float given the time saved and the ability to easily fix any mistakes as we went.

As for parting advice… buy good knee pads! My father-in-law is old school and tough, and didn’t ever wear knee pads the entire time, so I figured I didn’t need them either. On the second day of installation, I started seeing red spots all over the underlayment. Did someone spill ketchup? Nope, my knees had blistered and were bleeding all over the place… Good knee pads are worth every penny. In general, it is worth it to buy the proper, quality tools for the job. If you’re doing this is as a weekend warrior type of activity, it takes a lot of determination to finish everything, so there’s no need to make things harder on yourself.

Are We Headed For Financial Armageddon?

Like scary stories? I usually stay away from the horror movies section, but I was intrigued by the idea behind of Financial Armageddon: Protecting Your Future From Economic Collapse by Michael Panzer. This is a book about why our economic system is in danger, how it will collapse, and the bleak future ahead. Keep in mind that this was initially published in March 2007, even before the peak of the subprime mortgage mess and current economic slowdown. The book is separated into four parts: Threats, Risks, Fallout, and Defenses.

Threats
Here, the author lays out a relatively convincing picture of how fragile our economic system really is right now. This is the best part of the book in my opinion, and what you should read it for.

Debt. Our nation is in huge debt. Many consumers are also in huge debt or living paycheck-to-paycheck. We spend and spend, and don’t save for a rainy day. Guess what? Neither does the government. Does this sound healthy?

The Retirement System. We all know that more people are on their own with plans like 401ks, for better or worse (mostly worse). The problems with Social Security are relatively well-known. After a few big blow-ups like United, we now know that many private pensions are underfunded. And you know what? Many public pensions are underfunded as well. This is what happens when you allow politicians who need to get re-elected every few years to make promises for the next 100 years. If you think municipal governments can’t go bankrupt, check out the City of Vallejo. In other words, the things we depend on in our old age are shaky as well.

Federal Guarantees. We all love the FDIC insurance for our bank accounts, since we can basically keep our money anywhere. But due to fractional-reserve banking, for every $1 in checking accounts a bank can make $10 in loans. In other words, if a real “bank run” occurred, the FDIC reserves would be depleted quickly. Imagine what would happen if FDIC insurance started getting revoked. He also picks on Fannie Mae and Freddie Mac, which are both allowed to do some crazy things because they are “government-sponsored” and therefore people assume the government will bail them out if something goes wrong.

The problem with this is that such government guarantees encourage such financial institutions to take huge gambles. *cough* sub-prime mortgage loans *cough*. Indeed, many banks believe themselves to be “too big to fail” because they are so critical to the system. This is how we ended up with Bear Stearns being sold for $2/share. Indeed, Bear Stearns was too big to fail, so the government tried to make the bailout as painful as possible.

Derivatives are the final threat, and are instruments designed to manage risk. The problem is that corporations believe that because they are “covered” by a myriad of derivatives, they can take on some huge bets. But these “no-risk bets” are all based on complex mathematical models, and we all know models and reality are not necessarily the same. You could safely bet that the Cubs won’t win the World Series for last 99 years, but you never know…

Risks and Fallout
Inevitably, all of the these threats are weaved into a saga in which we fall into Financial Armageddon. Economic recession and then depression. Companies faltering. Stock prices plummeting. Bonds defaulting. Real estate prices dropping further. Banks and insurance companies failing. Government guarantees being removed. Skyrocketing unemployment. Entitlement programs are cut due to the lower tax revenues. Rising crime and gang activity. The government tries to print more money, leading to hyperinflation, with the prices of food and other commodities doubling every few months.

Planning
This is the most disappointing part of the book, especially since it offers to “protect our future” on the cover. So what do we do to prepare for Armageddon?! Stop spending so much and save more money for a rainy day. Okay… What about all these dropping stock and bond values? Unfortunately, there is just some vague advice about having to be “smart” and “quick” to make money from the volatility. For the rest of us, we should simply sell everything and buy physical gold because our paper money will be inflated until it is worthless. The old “buy and hold stocks” idea is useless now. We should also buy all the physical goods we can with our cash before hyperinflation hits. Perhaps this really is the best plan, but I was hoping for something more substantial than what I call the standard “buy gold and stock up on Spam ‘n toilet paper” strategy.

Summary
Panzer points out that not one recession in the past 50 years has been predicted in advance by a majority of top economists. While this is supposed to scare you, all it did was remind me that predicting the future reliable is pretty much impossible. I enjoyed reading the first half of this book, because I do think that such a scenario can happen at least to some degree, and the books does a good job of pointing out many of the weaknesses in our financial system. Moreover, it is simply a good “doom and gloom” story that is entertaining to read. Indeed, some of it has already happened! However, I did not find much insightful information in this book on how to actually protect myself from such a collapse.

Peeking Inside The World of Financial Advisors

Have you ever considered becoming a professional financial advisor? You can read about one man’s story in this article Evolution of an Investor from Conde Nast Portfolio. Blaine Lourd started out as a stockbroker, and found out he was really good churning accounts for his own profit:

“It was amazing, the gullibility of the investor,” he says. “When you got a new customer, all you needed to do was get three trades out of him. Because one of them is going to work. But you have to get the second one done before the first one goes bad.” […]

It wasn’t exactly the career he’d hoped for. Once, he confessed to his boss his misgivings about the performance of his customers’ portfolios. His boss told him point-blank, “Blaine, you’re confused about your job.” A fellow broker added, “Your job is to turn your clients’ net worth into your own.” Blaine wrote that down in his journal.

Although he kept at it and became rich and successful, Lourd eventually got tired of picking investments for his clients based on whether it made him richer and not them. When he tried to change his investment recommendations in a manner that followed his conscience, the large brokerage firm he worked for fired him. (A.G. Edwards, now Wachovia Securities) Now, he is a fee-only financial planner who makes less money advocating passive investing, but sleeps better at night. (I doubt he’s eating Top Ramen, however.)

His job, as he now defines it, is to tell investors that the smartest thing they can do is nothing. He acts as a brake on, rather than an accelerator for, their emotions. For that, he takes between one-half of a percent and 1 percent annually, which is more than they’d pay if they simply bought index funds on their own. “I tell them, ‘Look, if you can control your own emotions and you want to go to Vanguard, you should do it.’ And every now and then, someone asks the question, ‘Why do I need you, Blaine? What are you doing?’ And I say, ‘Howard, be careful or I’m going to send you back to Smith Barney.’ And they laugh. But they know exactly what I mean.”

The comments on the article seems to focus primarily on the whole active vs. passive investing debate, which is valid but I think misses the bigger point mentioned above that one way happened to make him a lot more money. Even if you believed in active investing, you could still avoid things like promoting high-cost, in-house mutual funds, trading in and out excessively to generate commissions, and selling unnecessary insurance products.

I also enjoyed this article because it reminded me of my idle fantasies of becoming a financial planner. Wouldn’t it be cool to help people manage their money better on a 1-on-1 basis? Unfortunately the reality seems to be that most people starting in this field have to put in at least a few years in a commission-based brokerage firm making cold calls and aggressively pushing whatever products they say to push. Otherwise, with no experience and no big recognizable company name behind you, it will be impossible to get any clients.

My own idea was to join some firm with low entry requirements like Ameriprise or Edward Jones, but only sell products that I felt were appropriate like index funds or term life insurance. I wonder what would happen? I suppose that I would be fired quickly for not meeting quotas. Even Mr. Lourd, who was still making lots of money for his old company even while advocating index funds, got fired for not following the company line. Still, it would be fun to try.

Weekend Links: College, Jobs, and Junk

ISPF of GradMoneyMatters ponders whether parents should influence their children’s college applications. It’s a tough question, even if the parents refuse to pay, it’s not easy for a kid to simply “pay for it themselves” because the current financial aid system assumes the parents will cover a certain amount.

Patrick at CashMoneyLife quits his job and is about to start a new one, but is faced with a counteroffer from his current employer. Tricky situation, but it must be nice to be liked so much.

JD of GetRichSlowly reminds us that college students throw away some sweet crap when the semester ends. I’m sure I threw away some good stuff in my day. When I moved into my first apartment, we bought all the furniture inside from the old tenants for $50. That couch ended up lasting me 10 years…

NCN of No Credit Needed discussed his $100 a day rule to control impulse buying (and the resulting accumulation of junk). $100 a month is more like it for me… unless it involves tasty hole-in-the-wall international food. πŸ™‚

Too late? Got junk? Trent of The Simple Dollar talks about the process of selling everything you don’t want anymore. I think I need to move about three more times, and that will force me to get rid of the last of my idle things.

Finally the New York Times had an article about voluntary simplicity and a family trying to minimize their stuff. Mentioned and via Unclutterer.

Weekend Activity Idea: Estate Sale Treasure Hunting

There’s always the weekly garage sales to dig through, but if you are after some higher quality furniture, antiques, or collectibles, this Money magazine article about estate sales suggests another option. Estate sales are similar to garage sales, except the process is more formal and many times everything in the entire house is marked with a price tag. You walk in, snoop around, and pick up what you want. Everything often must be sold within the 1-3 day sale. It’s usually after a death, but there might be a number of other causes.

The article has a bunch of good tips, including:

  • Call head to find out what specific items are available beforehand, so you can do your homework.
  • Arrive either really early to get the best selection, or really late for the best haggling.
  • Bring tools like a big tote bag, bubble wrap, a flashlight.
  • Use the internet or phone-a-friend to prices things instantly while browsing.

To find a sale, there are newspaper classified ads, Craigslist, and local liquidator firms. There’s also EstateSales.net, which if you are in the San Francisco Bay Area there is a sale of the contents of four model homes Friday-Sunday in Discover Bay. (Wonder if this indicates good or bad news?) I like the idea of good furniture at steep discounts! I hope it’s better organized than this picture from another listing in the area:

Also, I found that it’s actually better to use the “Find Companies” section of EstateSales.net and look for local liquidator firms; they usually provide a link to their websites. I have found several estates sales which are only listed on the individual firm websites. Anyhow, although I don’t think I’d be a good antique flipper on eBay, I still think it would be interesting to go to one of these. Anyone have any good stories?

I Suppose I Should Buy Life Insurance Now…

Up until now, there are two reasons I don’t have any privately-bought life insurance. For one, as I’ve mentioned nobody is actually dependent on my income. Wife is doing fine, don’t have any kids yet. We also have 1x annual salary’s worth of life insurance as a benefit from our employers, and she’ll get all my retirement account funds if something happens to me. The other reason is that I know that life insurance is priced based on tiers of health, and I’ve been secretly thinking that I can back into my high-school swim team physique and get the absolute cheapest level of life insurance.

However, I’m starting to think both of these reasonings are flawed.

I used to think that there was no need for life insurance if nobody needs your income. But perhaps I should amend this – You need to weigh the chances that someone will eventually need your income. For example, if I fully plan on having kids within the next 2-5 years then my income will probably be needed at that time. And as someone else mentioned in a comment, life is a funny thing and you never know when my wife might just get pregnant unexpectedly.

So the question is, do I really gain anything by waiting until the last minute? The risk I take is that in the meantime my health deteriorates and I become uninsurable. You might find out you have cancer, fight bank and end up in remission, and lead a long life. You develop a heart condition have it under control, and be perfectly functional. But in either case, nobody will be issuing you an affordable policy.

(This argument has also been used by an insurance salesmen telling me to insure my kids starting at birth with a whole life policy, but I think that is stretching things a bit.)

What about trying to get healthier first? The fact is that if I’m young and even slightly healthy, term life insurance is still going to be relatively cheap, whether or not I manage to stamp out my love of ice cream. One easy-to-use site to do some quick comparisons on is Term4Sale.com. Currently, it says I can get $500,000 of 20-Year Term insurance (non-smoker) for about $25 for the highest Preferred Plus tier. But the lower Preferred tier is only $5 more, and the even lower Regular Plus/Select tier is only $10 more per month. The site estimates that I can have both elevated cholesterol and raised blood pressure and still land in one of these groups.

I would say if you’ve been harboring this desire to get healthy for more than 6 months or so and haven’t made significant progress, it’s time to give it up and pay the extra $5 per month. πŸ™‚

Finally, the current cost of term life insurance is still historically low, so there is not much incentive to wait for better overall rates. Here is the general trend over the last 10 years for 30-year term (click to enlarge):

Yet another thing that reminds me that I’m not getting any younger…

Useful Information From Your Social Security Statement

I recently received a nice greenish pamphlet from the government, my Social Security Statement! I thought it would tell me how much to expect from them in retirement… instead it just says is that I haven’t accumulated enough work credits to get Social Security benefits. Gee, thanks… *toss*. But wait, a few recent events have shown me other ways that it can be useful.

How Do I Get A Copy? If you are 25 or older, you should automatically receive it annually about 3 months before your birthdate. Otherwise, people of any age can request a copy to be sent to them. Here’s a sample statement.

Use #1: Find Out How Much Money Have You Earned In Your Lifetime
One of the books I am currently reading is the much-praised Your Money or Your Life. In it, one of the first exercises is find out how much money you’ve earned in your lifetime. Under the Your Earning Record section of your SS statement, it will break down all the (taxed) income you’ve ever made by year. Add it all up, and you should have your lifetime income. Besides breaking out your old Quicken files or tax returns, this is probably the only place all this information is easily available.

Why do this? For one, you may be surprised by how much money you have been able to earn, and this should boost your confidence. Second, if you compare this number to your current net worth, you may also be surprised by how little you’ve actually kept so far. Hopefully this will motivate you to waste less money.

…Or it could be cool just to know how much money you’ve ever made. πŸ˜‰

Use #2: Life Insurance Planning
I’m also (slowly) doing some research on life insurance. In calculating how much life insurance you’ll need, you may want to consider what sources you already have. Many people don’t know that Social Security offers survivorship benefits if you have kids, or spouses of retirement age. In fact, about 20% of all Social Security benefits are paid out to those younger than age 62.

Under the Your Estimated Benefits Section, there is information for your estimated survivor benefits if you die. Currently, it says that my child would get over $1,100 per month if I died, and my spouse caring for the child would get over $1,100 per month as well. Over $26,000 a year? Really? This is much more than I would have imagined. As far as I can tell, this until the child turns 18.

There are also disability benefits listed, but usually privately-bought disability insurance only covers up to 60% of your original income, so I would still try to buy all I could get.

Use #3: Realize The Whole Thing Might Be Wishful Thinking
Finally, there’s a happy message snuck in at the bottom:

Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2041, the payroll taxes collected will be enough to pay only about 75 percent of scheduled benefits.

Ask The Readers: Wedding Gifts – How Do You Decide How Much To Give?

It’s wedding season again, and we have a variety of weddings coming up from a mix of close friends, not-so-close friends, relatives, and co-workers. This is probably not polite conversation, but hey, I’m all about discussing otherwise taboo financial topics. So, when deciding on how much to spend on a wedding gift, what factors do you consider?

How Close Are You?
This is simple – do you give more to your closer friends or family? Or are all weddings equally beautiful?

How Fancy Is The Wedding?
This the “at least cover your meal” philosophy. With all this talk about frugal weddings vs. monster weddings, it is clear (after paying for our own wedding) that some weddings have cost about $50 per person, while others will have cost $200 per person. As a guest, do you feel obligated to give a bigger gift when you know the food and setting are more extravagant?

I’m kind of mixed about this philosophy. So if you have two equally close friends, and one decides to throw a mega-bash destination wedding with filet mignon while the other friend has a small gathering in their backyard, you are supposed to give more to the former couple? This also would suggest that if you are not able to attend, then you can give a smaller gift. Hmm.

Your Financial Situation?
Now that we are labeled as a “successful professional couple”, is there more pressure to give a bigger gift? If a person is currently going back to school, are unemployed, or have chosen a career path with a lower assumed salary, do you feel that they should be able to give less?

What factors affect your wedding gift size? (Check all that apply.)

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Poll: Two Housing Petitions, What Is Your View?

I couldn’t help but notice that two mortgage crisis petitions that people have sent me info about recently are pretty much in direct opposition of each other. Of course, both claim to represent the average middle-class citizen.

No Intervention
First up is the petition at AngryRenter.com. Their general message is that they are tired of both the borrowers and lenders who have contributed to these inflated housing prices. As I understand it, they think any intervention will simply keep housing prices artificially high, preventing existing renters (32% of households) the ability to buy their own home. Many are those that could have gotten no-doc, interest-only, zero down loans, but did not. They want no governmental intervention or “”bailouts”. I thought this chart was interesting:

7% of folks are either delinquent on their mortgages or in foreclosure? That’s seems like a lot, I wonder what a “normal” percentage is.

Lots of Intervention
The next one is by the Neighborhood Assistance Corporation of America (NACA). They place the blame squarely on the mortgage lenders, and want lots of governmental intervention to borrowers with adjustable-rate mortgages. They are very angry at the money being spent to keep Bear Stearns afloat. Specifically, the want the government to:

  1. Stop any future interest rate resets.
  2. Reduce the current interest rates to the initial rate.
  3. Impose a moratorium on foreclosures.
  4. Require restructuring of all troubled mortgages to an affordable long-term mortgage payment.

I am guessing they want the lenders to cover the cost of doing all of this.

Which Petition Do You Agree With?

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Small Rewards Programs For Grocery Shopping

GroceryMiles
If you shop at Safeway or one of their partner stores Dominick’s, Vons, Pavilions, or Genuardis, you can get 125 United Airlines Mileage Plus miles per $250 spent. I’ve probably earned thousands of miles over the last few years. You simply have to go to GroceryMiles.com and register your club card. Today, I got one of those “Catalina” coupons that offered an additional 1,000 mile bonus if you sign up by 6/30. Although there seems to be no mention on the website, here is a scan of the coupon:

UPromise
Mentioned previously, there are a bunch of different ways to accumulate money at Upromise. The main one is as a cashback site like eBates. But there are two additional ways to earn some money through UPromise without changing your buying patterns. For one, if you link up your grocery club card (Safeway, Albertsons, and Publix are examples) you can get free cashback when buying certain brands.

Next, if you link up your credit card, if you shop at a qualified brick-and-mortar store you can get a rebate (1% at Bed Bath and Beyond, 3% at Eddie Bauer, etc.). You can also link your credit card to a dining program that automatically gives you a rebates when you dine out at participating restaurants. I never look at the list of restaurants, but occasionally I’ll get a couple bucks by chance. Right now if you sign up with UPromise and make a purchase through their cashback portal you can get a $10 bonus. (Also an $10 bonus for cashback portal eBates.)

Now, none of these programs will make you rich. But if you are bored just sign up, link up the appropriate cards, and forget about it. Just continue to spend as usual since they will just credit you automatically. With UPromise, supposedly the money is for college or student loans, but you can also request a check to be sent to you.