Friday, December 29, 2006

Festival Under 30 Finances

This time Festival under 30 Finances is hosted by Beachgirl regarding resolutions for 2007. My post about my 2007 resolutions is included

Thursday, December 28, 2006

Giving money...

Okay I'm probably the one blogger who didn't yet discuss giving. I'm not much of a giver, at least not religiously. I giver sporadically to things, mostly whatever fundraiser a friend/neighbor is asking for. But I do not tithe. I wonder if instead of tithing, I shouldn't give to a set charity every month?

What do others do who are not religious? Do you have a set charity you donate to? Do you feel compelled to giver say 10%? Under what circumstances do you give to religious organizations? I have donated to the church mainly when I go in there to light candles for my family's health and well-being. This year I really need to go and light some candles.

Since it is the season of giving, I have given a small amount to charity. I do a lot of random giving, I have no idea why, but I enjoy it a lot. I also love tossing money into the salvation army bell ringers. It's a very strange thing. But all in all, I feel very guilty for not being a regular giver.

Is there some way around this for atheists/agnostics? Should we give back more? Less? And to whom?

Wednesday, December 27, 2006

Saving Saran Wrap?

Okay so I'm home, and I realized that the thirfty nature is inbreed in my genes. My grandparents were really poor which drove my mom and aunts/uncles to be super frugal.

So my grandmother used to wash saran wrap and place it on the refrigerator to dry. She would also wash and reuse ziploc bags. Pretty much everything she would recycle if possible including using rice bags and potato bags for clothes.

I know that a lot of this had to do with the choices they made with their lives. But it really shapes and changes your family to be forced to be so frugal. Are you frugal by nature, by choice, or because you learned it? I think I'm frugal because it was a learned habit, but slowly I'm losing it.

I won't wash and dry my saran wrap, I enjoy eating out, I want to live in a nice home and I'd like to drive a new car. But will this loss of frugalness cause me to raise my kids spendthrift?

Tuesday, December 26, 2006

Carnival of Personal Finance #80

Here's the newly posted Carnival of Personal Finances #80. My post about chasing returns on mutual funds was featured.

Monday, December 25, 2006

Merry Christmas

Merry christmas and I wish everyone a healthy and happy new year. May this year be fruitful and blessed for all.

I am so glad I am at home for reasons that cannot be held to a monetary price.

Sunday, December 24, 2006

Christmas Budget

I guess I never really posted my Christmas spending. I know most people blow quite a bit on Christmas, but I cringe at the idea of what my Christmas budget really is. Since I'm a non-budgeter, I sort of buy what I like for people. Looking at my credit card statement, I've spent thus far $500/year.

That includes gifts for people, going out to eat with family and paying, cards and postage, and other stuff. Now if you include our airline tickets home, kenneling the dogs, gifts I have to bring back from home for the neighbors, and just overall more eating out the weekend before we left, then I believe we're sitting easily at $3k/year. Okay I really want to shoot myself.

Last year we ran away on our honeymoon to Switzerland which cost us about $2500 for a week including airline tickets, hotels, food, skiing, everything. However I ended up mailing Harry and David to everyone so it cost me another $500 in gifts. So I can't say that it was any cheaper. However I did have a nice time in Switzerland.

Why do people spend so much at Christmas? Why can't we all get over and not buy presents for each other? Why do we even need to send cards? I feel this terrible guilt over cards and gifts, and this obligation to give people stuff because they are giving me something. I really just wish we could do nothing. I expect no presents and I hate shopping.

What would happen if I had the nerve to tell my family no more gifts? Would I be scrooge? I save a ton because I stopped exchanging with friends for about 3 years now. But my rather lareg and extended family is causing me heartache. I don't even have to do my in-laws. So why all this materialism?

How much do you spend on Christmas? Why can't you spend less? Do you want to spend less or would you rather be able to spend more?

Saturday, December 23, 2006

Scraping by on $150k?

I read this article a week ago about a family in Nebraska unable to live on $150k/year in Omaha, Nebraska. This sounds crazy to someone who makes a bit less than that and can save for retirement living in the ridiculously expensive Northeast. Sure they have 4 kids, but I know a lot of people out here living on less with that many kids. They are "barely" scraping by but at least have no CC debt.

Sure they lost the husband's income of $84k/year but that should have been purely saving money, in my opinion. They have cut all extraneous spending, but have a horse. Which costs around $200-$300/month. That's not a huge deal to force them to live paycheck to paycheck.

What really is causing pressure is carrying to rental properties without tenants. There affordable primary residence mortgage + two rental properties probably put them way over the 28% PITI mark and is what is causing the real hardship. But the family refuses to face up to the fact that they aren't landlord material. The carrying costs of homes without tenants is huge.

The reality is that they would be rolling in the dough if they dropped both rentals. They could easily afford luxuries because their mortgage and fixed costs are not high. But they choose to scrape by because they are unable to let go of the dream of landlording. They are not successful in their business ventures, yet they don't cut their losses and bail.

This seems to be the problem for many people. Facing the reality of their debts. For this couple I think facing the money loss solution is even tougher because the husband lost his job and is trying to make a new career of landlording. I wonder how they shall fare in 6 months?

Friday, December 22, 2006

Living without a budget

I am a terrible budgeter, I just can't do it. I am unable to track every penny spent, and I hate doing it. I hate collecting reciepts, itemizing purchases and seeing whether I really have the money for it or not. I tried to get DH on board, but it doesn't seem to work either. I say lock down no spending, he doesn't spend a penny. He just spends whatever I tell him. Right so maybe he should run the budget? But he seems equally incapable.

He refuses to use coupons to shop, he hates eating what's on sale and is only learning to compromise. He prefers we plan out meals we want to eat and stick to it, whether the meat/produce is on sale. That's his way of budgeting.

Actually we're both this way. It's probably why we're together. We start with our gross income, build in all savings like retirement, ESPP, IRA, then taxes and see what we have left. From there we decided on our home payment, insurance, etc. Then the rest we sort of spend freely.

I trialed both Microsoft Money and Quicken this week, but it's impossible. I don't know if it's me or our method of living. I can't seem to reconcile our spending habits at all. Our accounts never seem to balance. We supposedly live on a zero based budget, but I'm starting to think not. I think we just sort of live paycheck to paycheck, whatever money is there we spend.

I'm not sure if I should attempt to break this cycle. And if I do, will DH kill me? No we don't have CC debt, no car loan, only a student loan for $8500 (he just accrued) and we are cash flowing more tuition. So debt isn't a big deal for us, we're not huge spenders. But I can't figure out where the rest of our money goes? We do save a substantial amount of our income 30-40%, but it's so frustrating.

I think I'm pretty computer savvy, but I just can't use a budgeting software. And we can't follow a budget. How do people do it? Should we give up the CC? Should we just do cash? Which by the way, I think DH would rebel against...

Thursday, December 21, 2006

2007 Financial and Personal Resolutions

I am not a huge fan of New Year's resolutions. Mine never inevitably stick. And I usually don't do the financial resolutions, because I'm not a budgeter, but instead I live my life without a budget.

In 2007, I resolve that we will save the maximum $23.5k/year into retirement accounts if we are still eligible for the Roth IRAs. I also hope that we will save $20k into the ESPP, I think it is maxed at 15k, which we are currently funding.

I also hope to get life insurance in May 2007 (after I finish my weight loss) in preparation for our child. Our goal is to start trying December 2007.

My one challenge to myself could be that I will pay for DH's school in cash and not take out another $8500 Stafford loan. I'll be able to determine this probably in February.

Wednesday, December 20, 2006

Are pensions gone?

If you are under 35 and work for a private company the chances of you having a pensions are 1 in 20. If you work a government or state agency then your chances are 1 in 2. However many state pensions are undergoing reform as well. What is the likelihood that someone just starting out will have a pension? And the chance that it will be there in 30 years?

I find myself in all retirement planning not counting on a pension. In fact I’m not counting on Social Security if I’m honest. I think SS will be icing on my retirement cake rather than the cake itself. I think that by the time I retire SS will be provided on a sliding scale though we all pay into it. Those who have saved and been responsible will not be able to claim SS. They will be in too high an income bracket to need it.

Another issue is whether people will be able to manage without company pensions? How many people expecting a company to help them in their golden years? What sort of annuity are they expecting to be able to count on? My mom’s pension is absolutely golden. She’ll retire at the age of 55 from the state government with 70% of the average of her highest three years of salary (2% for each year of service, so she’s worked 35 years!). And she’ll have medical premiums paid for the rest of her life and my father’s. Talk about generous. This will be her primary medical benefit from 55 until 65 when medicare kicks in. Then after 65 medicare will be primary and the 20% she’ll be responsible for will be covered by the state paid insurance. That is a phenomenal deal.

Of course her pension is not available to current workers entering state government jobs at this time. In fact reform of this overly generous pension began in 1990 and many benefits were cut. Including only 1.25% of salary per year of service pension, no medical benefits for spouses, and retirement at 65 not 55 or else a penalty. This means that it’s more difficult to have such luxury. Of course I’d probably be grateful to get any pension.

Tuesday, December 19, 2006

Airlines Charging for food!

I understand that the airlines are in major financial trouble since 9/11, however I didn’t realize how bad it is. I flew from the NE through Denver to Honolulu and was not served a single meal. Instead the airline charged me $5 for a minimeal. While delicious was not exactly filling. Because of my connection, I didn’t have time to grab food at the food court, or else I would not be complaining. Not that airport food is cheaper, if anything it’s more expensive.

But the meal I was served was terrible, and no where near $5. I guess what really upset me is that I was flying one of the longest flights out there and the food was not included on the flight. Granted the price of my ticket was great, but I had flown home in March and found that meals were still served. Is this what way of the new airlines? Any flights less than 10 hours will have no food served unless it’s paid for out of the customer’s pocket? If so then we should be encouraged to bring on food from the terminal. And more choices on the plane should be given rather than a chicken sandwich and chicken salad.

But where is all new savings measures going? Is it going to lower priced tickets? Is it to save the underfunded pensions of the airlines? Haven’t most of the airlines already sent their pension to the government run HPBC to bail themselves out? They were unable to stay solvent after 9/11. I think this outrageous. But since I am a true cheapskate, I suppose that not serving meals makes my ticket cheaper than it should be. But is it still worth it?

Monday, December 18, 2006

Traveling now or later?

This is probably one of the hardest things about being a 20-something in graduate school is finding the money to travel. Sure I can take more time off and have more flexibility, but making $24k/year gross in a high cost of living eats that money up really fast. Thus the opportunity to travel is very little because of the costs involved.

I've been pondering this for about 7 years now since I finished college. Did I make a mistake? Should I have travelled immediately after college and gone into debt and figure out how to pay it off later? Should I have travelled while working and not bought a house? Should I have not saved for retirement, a car, and had CC and enjoyed life during my 20s?

I feel as though I've made my decision, right or wrong about it and I chose the conservative path of no debt. I decided to buy a home, not have CC debt, and travel when I can really afford it. Of course this has forced me to reevaluate traveling now in my mid-20s because I want to have children. Which is an huge undertaking financially as well as time wise.

But I am hoping that maybe I can take my kids traveling and give them the opportunity to see the world. And hopefully in my 50s after my years of childrearing are done, go exploring. Perhaps hiking Machu Pichu will be a bit more difficult, but it could be my motivating for staying in shape. Or perhaps we'll have jobs in the next 10 years which will force DH to travel and my wanderlust will be fufilled.

I don't know if I'll look back at 40 and regret having spent my 20s being responsible and cautious. Maybe I should have thrown caution to the wind and let the finances lie where they fall. It's a tough call. I hope I can blog about this in another 15 years.

Festival of Under 30 Finances

Here's my article for the Festival of Under 30 Finances. I hope you all enjoy, it's about our choice to go back to graduate school.

Here's the article of choosing fun over money...

Friday, December 15, 2006

Chasing Returns on Mutual Funds

Recently I was on a message board where someone said they followed the sound mind investing principals. Well sound mind investing does fund upgrading following the principals of the bible. What those are I have no idea. BUT I did however find a website that also does fund upgrading but just based on the climate of the market. The website No Load Fund X is run by Janet Brown of DAL management services.

What is the strategy? The strategy is investing in mutual funds based on their previous returns and expectations in comparison to the field they are in. Thus only the top mutual funds in each category are suggested as investment. These mutual funds are to be held until they fail to outperform the market and fellow competitor mutual funds.

Thus monthly, you pay money to either SMI or NLFX ($9 or something), and they make suggestions of top mutual funds you should be holding for the highest rate of return. Of course there are a few caveats, one of which is if you constantly trade mutual funds you may be paying early redemption fees. Also the mutual funds they suggest could have very high annual maintenance fees. Thus it's possible any gains could be easily eaten up when put against the index.

I personally am tempted to try this strategy and see what happens. I suppose this is why I am writing about it. I'm not sure if it would really be the most efficient or highest returns, but people who pay for the advice really believe in it.

I am hoping for feedback from people who have used this methodology for investing in MF, thanks...

Tuesday, December 12, 2006

Prenup or not?

Bringing up the idea of prenuptial agreement seems to bring a bad taste to many people's mouths. It implies that you lack trust in your partner and the future you may have together, actually the linked study above 15% of Americans believes it dooms a marriage. Yet with the divorce rate in the US at 50%, with the leading cause of divorce being financial issues, gives rise to the question why don't more people have a prenup?

Of course, 50% of divorced people think prenups make sense while only 21% of married people believe in prenups. Although 50% of all people the benefit of a prenup is to keep assets divided equitably and protect the assets brought into the marriage. 25% of people say they would never sign a prenup, while 27% say they would if their significant other insisted. So if all about half of the people out there believe in prenups, then why are there are only 1% of couples with a prenup?

I think the problem is that we still believe in romanace and love, but talking finances before marriage takes away the rose-colored glasses. It forces the couple to communicate about finances and future values and ideas before the walk down the aisle. Sure, ideally every couple would do this anyway but the reality is that most don't. So are prenups a good idea?

Personally, I don't have one, but think they are an excellent idea depending on the circumstances. I feel they are appropriate for couples who are older with substantial assets, someone with a large inheritance, or a divorced person. This way these people are able to protect their current assets and decide how to allocate their new lives with their spouse.

However prenups are not necessary for people who are young without any assets, debt, or inheritances. I fell into this category, we had absolutely nothing to fight over. We came in with our respective cars and not much else. However if I were to be single now with my current assets, I think I would definitely consider a prenup.

That being said would you get a prenup?

Monday, December 11, 2006

What's in your shopping cart?

Over on another board, a poster had written about a women spending $700 on Christmas gifts, and yet seeing that she wasn't even done. The poster then complained about the woman's spending and made remarks regarding the woman being in debt.

This bothered me greatly, because I've never looked at other people's carts. So it makes me paranoid that perhaps I'm being judged by others. I guess I wonder if you are happy with your life and feel secure in your spending why would you waste your time looking at other people's purchases? Is it envy or jealousy? Is it the need to have more than you can afford? Is it what drove you into debt in the first place?

I think a key idea to staying out of debt is being satisfied with your money, your life, and your purchases. Then you'll never look at what others carts hold, but rather be satisfied with your cart has.

What do you think drives people to look in other's carts?

Carnival of Personal Finance #78

I posted my article on the cost of pets in the Carnival of Personal Finance #78 at Kirk Walsh's website. There are many cool articles including 2006 end of the year tax planning strategies by makingourway and FMF. Check it out.

Here's my article again about the cost of pets..

Saturday, December 09, 2006

Consumer Christmas

I thought Christmas was about the birth of Jesus. However as I get older, I realize it's a clever marketing plot by stores to make the consumer buy more stuff. I feel overwhelmed at this time of year trying to racket my brains for gifts for people. The hunt for the perfect gift is tiring and never ending it seems.

Fortunately for me, I manged to stop exchanging gifts with friends a few years ago. When I started graduate school I decided to be HONEST and tell them I was broke and couldn't afford to keep buying gifts $25 for so many people. I think they were all happy that we could stop having to put on a show of looking for gifts and exchanging them. Since they we get together and have a meal out instead.

However I haven't found a way to be honest with my family. And my list for my family is huge. I am unable to claim being broke now, unlike before, but I find myself more and more exhausted looking for a "quality" gift people will like. I just want to sit and weep over the stress this holiday puts on people.

We run around like chickens without heads, buying things left and right that we suppose people will like. What if people are really like me, and what they would like best is NOTHING! No stress, if we have to give a gift, cash is great. Okay, by the way, as I sit here writing, I realized that I have to go and wrap gifts before dinner tonight for a couple who we're going out to dinner tonight and has kids. I could scream!

The commercialization of this holiday forces people to overspend. There appears now to be an obligation to give gifts to pretty much everyone. Do people really enjoy it? I love gift giving, but the pressure of finding the right present, mailing it out or ordering it online, is stressful. For example my in-laws and parents have everything. I never know what they want, last year harry and david and GC to places to eat. This year? What? More GC?

Next year I want to boycott Christmas. I wish we had a kid, just so I could be stupid and take a picture of the kid and put it in those digital photo frames. But if I did that with my dogs people would think me nuts.

Friday, December 08, 2006

December Net Worth

So our net worth I believe went down by $20. The main reason is that I didn't count our $6600 ESPP or $12k bonus we got on December 5th. We're not sure what we're going to be doing with either money so I'm just going to leave it alone and out of the equation until we figure it out. I guess our end of the year wrap up will end with it in the equation because we'll sell the company stock, but right now we're so tired to think about anything other than just getting through Christmas.

That will be tomorrow blog, the consumerism of Christmas.

Thursday, December 07, 2006

choosing fun over money

When I went back to graduate school 4 years ago, I left a great job in the biotechnology sector. I had always planned on going back to school for my doctorate, but I was about to take a 50% paycut. That was really tough. But I wanted to go back to school to be able to teach at a university level. So finances didn't really play a role in my decision, it was a decision based on what I wanted to do with my life. I hope it turns out well.

It was tough financially for us, but we managed to cushion the blow by cutting expenses drastically and realizing it was only for 2 years before DH graduated and got a real job. Turns out we did better than expected taking the paycut and just going back to school. We barely made it out of those two years alive without CC debt, but we did now and then draw on a home equity loan which we paid when we had extra money. We were able to really cushion ourselves during our lean years as graduate students, and have a wonderful place to live to boot.

Currently DH is back in school part-time for an MBA at 29. He's already finished his phd so he's doing this not for financial gain but personal fufillment in his job. Instead he wants the move up in his current career path and also have the opportunity to move into the business side of the pharmaceutical industry. He's never had the opportunity to learn about marketing, sales, or any business skills before and is curious as to why the company he works for is making certain decisions. He tells me the classes are amazing, interactive, fun, so different from our repetitive/recitation science classes. I almost wonder if he shouldn't have gone into business in college?

But it will cost us $20k/year for 3 years with his employer potentially only covering $5k/year. So I have no idea if this will be a bad move for us financially, I hope not. However deep down I feel that it's the right decision because it will make DH more marketable to find the job he loves and enjoys.

For us, money is important in that it buys freedom to choose what you want to do with life. But it's not the end all be all, we also want to love and be successful in our careers and feel as though we're making a contribution to society. Though I loathe debt, taking out student loans to help us get to where we want to be feels like the right thing for us to do.

Student loans $4250 and counting.

Wednesday, December 06, 2006

the worst investment ever...

Easily the world's worse investment ever is a pet. For us, we've got two rescued Bichon Frises. Why is it the world's worst investment? Because you spend a small fortune on keeping them and they eventually leave you after years at attachment. In many cases pets are four legged members of the family, so it's tough to let go, the cost not withstanding. But of course the benefits of having them by far outweight the cost.

However from an financial standpoint, pets are a nightmare. Starting out each little guy we rescued cost us $300. At least we were giving to a rescue group/shelter and not a breeder, but still that's a pretty steep starting cost for an investment that will require monthly maintenance fees. Next up is dog health insurance, laugh but we have a basic health plan in place with Banfield Pet hospitals. This is to ensure we have all the vaccines needed, easy accesibility to vet office visits, and discounts on major care. This costs us $30/month per dog or $720/year, not including the costs of medications (heartworm/ticks monthly). Then there is feeding, grooming, and the time of caring for a dog.

Of course a major medical costs is when your dog nears the end of it's life. When you pay any amount of money to sustain it's life. When letting go is difficult. My mom had a beagle for 15 years, since my childhood, and he had a stroke after 14 years. She just wasn't ready to let go, and had the vet IV and resuscitate him into living. She spent a few thousand to help him live, but he was like her second child. Thus you see the true financial impact of owning a pet.

Our particular breed, though absolutely gorgeous requires a ton of coat maintenance. One grooming session easily costs $50-60 without tip per dog. What you say? That costs more than a human haircut. So now we've started shaving them down ourselves occasionally and lessening the visits to the groomers.

Another expense is kenneling the dogs when on vacation or going out of town. It costs us typically $35-45/day per dog to kennel our boys. Meaning that a weekend trip costs us an extra $200 easily if not more. This Christmas I'll be spending $500 for dog kenneling while we're gone, more than DH's ticket home. Outrageous. Previously depending on the length of the trip, we've even sent Stefan home to Mom in Canada! Yeah, talk about costs.

Finally the cost of neurosis. A lot of rescue dogs have issues, and ours have got them as well. We've spent a fortune on dog behaviorists and trainers. In fact this weekend we'll be going to another trainer to see if we can lower the aggression in Mochi.

All in all the costs of pets are easily the worse investment ever. But the love and comfort you get in return is priceless. The true downside is the sorrow you feel when you lose your beloved pet. The price of having a pet can be high both financially and emotionally. Yet I personally cannot go without the companionship, love, and warmth of my boys.

Tuesday, December 05, 2006

the cost of living is killing us

I whine all the time about living in a high cost of living place. I say I want to move to a lower cost of living area and people say "yeah right, you'll never leave the culture." But truthfully I longer for a simpler life. I'm going to compare where we live in the expensive Northeast, Bellvue, WA (suburb of Seattle), and Boise, ID. These statistics are from Money Magazine Best Places to live.

Starting out with NE, the median income is $118k, but that translates into only $65k real purchasing power (ouch!). You do get a break with only a 5% sales tax and 5.3% flat state income tax. This however is largely offset but the ridiculous cost of housing, which the median house costs $645k. That is more than double the national median housing cost of $250k.

Second on the list is Bellvue, WA, a suburb of Seattle. The median income is $88k/year which adjusts down to $57.5k/year in real purchasing power. While a downgrade, it's still not terrible. The sales tax is a whopping 8.8%, probably because there is no state income tax in Washington. This is a huge bonus to anyone looking for tax breaks. However the median home price while substantially lower than the NE, is still $405k. While not 2x the national average, it's still a pretty steep price to pay for housing.

Finally there is Boise, ID, which is apparently an awesome place to live. The median family income is $58k, however this was the only city I could find in the top 25 on Money, where the purchasing power increased to $64k/annually. Amazing. Anyway though the sales tax rate is 5% and the state income tax rate is 7.8%, which is pretty good. Also the median price of a home $183k which is about $70k less than the national average. These are great statistics.

However living in Boise, ID is a totally different thing. I can see how people hate the idea of moving away from friend/family. Or moving to a slower way of life when they are used to a faster exciting city life? Or the culture involved? But do people really go to museums and cultural events?

I find I don't, but I would miss the ocean if I couldn't live near it anymore. It has something to do with growing up on an island. But I think for us personally we're going to consider trying to eventually settle in city where the cost of living isn't among the highest in the nation, but more mid-range. And thus I think Seattle would be an ideal location for us to live...

Would you move if you could? And if so where?

Monday, December 04, 2006

Carnival of Personal Finance #77

This week the Carnival of Personal Finance #77 is hosted by Penny Nickel at Money and Values.

My article on the Necessary Evil on Student Loans is included.

Sunday, December 03, 2006

Dining out for less

For years now DH and I have been avid Entertainment book users. This coupon books costs ~$30 and is filled with coupons that you can buy one get one free meals. We started using this book back in San Diego and found that it saved us a ton of money. It also forced us to try new places to eat that we normally wouldn't have had the nerve to eat at. For instance we ate Ethiopian food, which was a bit unusually. While I'm not sure I'd go back, to get dinner for two for $20 at a place that I would never have spent $40 seems great.

We love to eat out so this book has fantastic deals. Thus far this year we've saved about $40 in eating out already since November. Sure people will say it fosters spending money, but we'd probably go out to eat anyway, so why not try to get a deal?

We also use it because they have movie ticket deals. $6 to see a movie at any regal cinemas, which worked out great in San Diego because we lived down the street from one. Also they have deals on hotels for 50% if you are avid travelers. But overall the best use of the entertainment book has been the fact it forces us to try places outside of normal reccomendations by people. It makes us decide to try different types of food, we would normally hesistate, and it's fun.

Saturday, December 02, 2006

To Roth or Not?

A lot of people always assume that a Roth IRA is the best place for retirement investing. That is not necessarily true. A lot has to do with your current level of income. Roth investing is better if you think your current interest rate is lower than when you'll be in retirement. However if you are in a higher bracket now, but will be at a lower income during retirement, then a 401k is a better retirement shelter. But overall it doesn't matter, what matters is that you contribute to either retirement account.

Scenario 1: $1k to invest in a 401k or $800 into a Roth IRA (assume 20% bracket). For 10 years it grows @ 10% each investment. At the end you have $2593.75 in the 401k and $2075 Roth. But after 20% taxes 2593.74 becomes $2075. So there really isn't a difference.

What is a difference is where you are currently and projected to be on the tax scale. Without funding the 401k to the maximum, there is a chance we would not be eligible to fund a Roth IRA. Therefore, it is beneficial to us at our current tax rate of 25% to fund the 401k twofold. One it makes us eligible for a Roth investment, and two there is a chance we will be in a lower bracket during retirement. I project our earnings to keep rising during the next 20-30 years.

I have no crystal ball as to where our tax brackets will go so I can only assume it will be the same brackets. Whose to say that the tax rules on retirement accounts won't change either? Thus if given the option I am not sure I would change into a Roth 401k.

Friday, December 01, 2006

Necessary Evil - Student Loans?

How evil is it to take out a student loan? Those following Dave Ramsey's baby steps would say it completely unnecessary to take out student loans. That your degree should either be delayed until you can pay it cash in full or part-time. This makes a lot of sense to not take out student loans to go school because it can be difficult to payback. Often student loans are stretched out 10-20 years.

However there are many cases where it can be next to impossible to achieve higher education without going into debt. Many times an individual lacks parental support for anything. In which case should they take 8 years to finish a bachelor's degree? Is that better than finishing in 4 years and getting potentially a higher paying job? Or a more likely scenario is, it's impossible to work while going to dental, medical, veternarian, law school. Most of these people walk out with a mountain of debt. Yet there is great potential to make a substantially higher salary than a bachelor's and they are supposedly doing something they truly enjoy. Thus is it worth taking out the student loan?

I'm of the camp that education is important and doing what you love is equally important, money or no money. Therefore if you have to take out a loan to do so it's worth it, however the loan money should be spent only on essentials, not on vacations, tvs, etc.

Currently we're financing DH's MBA through a combination of employer reimburstment (only $5k/year, cheapskates), $8500 Stafford loan, and our cash flow. Considering he is going part-time and it still costs $20k/year in tuition, I would say that we are trying out best. We did calculate the returns and it appears that we will be able to pay off the $8500 by the time he graduates easily, potentially in the form of a bonus he'll get when he finishes.

Another reason for the loan is that we expect our incomes to increase over the next three years. So we have the potential to not take out loans, yet we're not there yet. So far we've paid out of pocket most of the costs and still have to garner the reimburstment. Since this is our first student loan for DH, while I had $5k in student loans paid off within 6 months of undergrad, we're pretty nervous. We walked out of undergrad pretty much debt free, and this one year $20k costs more than our tuition for four years at our public undergraduate universities.

I can easily understand how people fall deeply into debt. But is it a necessary evil? Should we have followed the tenets of Dave Ramsey? I don't know. One personal reason for us to do this with loans instead of waiting to save up the cash, which we could have done in probably 1-2 years, is that we want to start a family. We feel the faster this is out of the way, then we can start a family. We'd prefer if our education is done before we start our family because we'll have the time and energy to focus on our kids. So this is a selfish reason for not waiting because we don't want to work full-time, raise kids, and go to school.

What have most people done? What would most people do? I will try to follow this and remember in 3 years to tell everyone what happens to us. If we do borrow 24.5k and if we are able to pay it back immediately.