Thursday, January 31, 2008

Stop Contributing to 401k?

The Boston Gal put up this Boston Globe article. It suggests stopping investing in your 401k and instead put the money into taxable accounts. This will help with tax diversification. So stop overdoing your 401k. This way as the market tanks you can take advantage of the losses and lower you tax bill.

Overall sounds like a good plan right? Plus economists say they don't know where tax rates are heading, so why put money away in a retirement account. Another good point. Plus they suggest writing off losses in taxable accounts against gains, something you can't do in retirement accounts.

I agree it does make sense in some ways. But major flaw in the article is assuming that people will save the money they no longer dump into a 401k into a taxable account. We all know the reality is that people barely contribute to their 401k as is. US personal savings rate is -0.5%. So whose to say that someone contributing 5% to their 401k will turn around and contribute 3% to a taxable account instead?

Is that realistic or reasonable? So the only option is to not stop saving into retirement accounts. If people stop, will they save the excess or just spend it. We're better off not tampering any savings, considering the problems we as a society have in general with saving.

Wednesday, January 30, 2008

Too Much Stuff?

Do you have too much stuff? MP Dunleavy writes a provocative article about the cost of too much stuff. It certainly makes one think. I've asked people who are hard-core coupon shoppers, if it's worth coupon shopping to fill your house, where you have rooms of stuff and enough to fill a store, versus downsizing and using the saved downsized money to not coupon? Their answer? No. They don't see the price of their extra stuff.

But is it really worth having a large space to fill? I wonder that now sitting in my home of 1800 sq ft. We used to live happily in 540 sq ft. We never coupon shopped or stockpiled because it would mean moving to larger space and we saved more by living in a 1 bedroom. But then we bought a place 3x the size and I feel have managed to fill it to the brim. Granted part of it is having a roommate, so we only doubled in size. But still I feel extremely luxurious living with so much space.

And now I am a person who fills it with stockpiled toilet paper, body wash etc. Not to a huge extent, but some. Plus we added another dog to the mix and hopefully we'll add a kid while here. But was it worth it?

I'm not sure, so I can see the writers point. The more space you have the more you spend to fill it. And sometimes you start to forget stuff you already have and keep filling it with more identical stuff. That you find you bought a duplicate item you already have. Or you buy something you never use.

Unfortunately I think this starts to happen even worse for people who stay in their final home for 30 years like my parents. I come from a long line of packrats and I sent the article in an email to my mother. I hope she decides to start cleaning her house, which by the way last time I visited, I had to sleep on the couch because she had filled my old room to the brim (no walking space and on top of the bed) full of stuff. And my brother's rooms were the same. This is a 4500 sq ft house for 2 people and there is no guest room because my mom filled it full of stuff.

So what's the cost of too much stuff? Larger heating/cooling bills, more to clean (pay a housekeeper), more to maintain. But how do you get rid of all this stuff? I figure that I'll dump everything into a dumpster when my dad dies and my mom is forced to downsize. She won't be able to afford the house on her only pension/investments. And no way will she live in a house the same size so it'll all go into the trash finally.

I wonder if other 20-somethings with boomer parents are facing the same thing? The massive amount of collected garbage? How are people letting go and downsizing?

Tuesday, January 29, 2008

Taking Social Security

When should you take social security? An article in US News explains the difference between taking SS early and late. Right now people are allowed to take social security at age 62 (early) or normal (66), or late (70). People can see their eligibility by looking at this SS page. Currently the age I'd need to be to get full benefits is 67, but I likely see that being pushed to 70 by the time I retire.

The article says people should delay taking SS because every year you wait, your benefit increases by 7%. That means if your investments aren't making 7%, you should use them up first then take SS. This is a good point.

The article also addresses how long you will live as being a deciding factor. According to the SS website the "breakeven point" is 77 years old if you wait until normal retirement age (66) or 80 years old if you wait until 70 to start collecting SS. So life expectancy does play a role in this decision.

Another key factor I think downplayed in the article is how long you will be working for. The article mentions that working part-time could cause a higher income and it would not be worth taking SS.

But I wonder, how many people have enough to really retire at 62 even with SS? What sort of medical insurance will they have until Medicare kicks in at 65? Many people nearing retirement age lack sufficient funds to retire.

Thus I wonder if retirement any early than 65 is even possible for most people? Thus it makes no sense to draw on SS while still working because combined with their working income, most people will just be paying SS back in taxes.

So consider this, unless you are able to fund your retirement completely at 62 without SS, I would not think about taking SS until your "normal" retirement age.

Monday, January 28, 2008

Nationwide Healthcare?

About half of all bankruptcies filed were due to medical illness which caused tremendous financial problems for families. We Americans have knowns this to be true for a long time. That medical insurance in this country is an absolute must.

Personally I'm for a socialized, nationwide system. To temper this, I'm okay with a second tier being available for those able and willing to pay for services not covered. However, currently the US the lowest ranked westernized country with basic medical treatment. We are first in cutting edge treatment and research and new therapies, but these treatments are not covered by insurance and are paid for out of pocket.

But why should we care? Well it can easily hit the average consumer. Right now my best friend just moved home to Hawaii from California. She was in the process of changing her license plates, getting a new bank, getting a new license, getting a new health insurance, new doctors, and even registered for a class. She's debating about switching careers right now.

Unfortunately she's become ill, and because her private insurance is from CA, it's possible they won't cover treatment in Hawaii, and she'll be forced to go back to CA. Actually already they are covering her care at out-of network costs and anything about what is "usual and customary" will be charged to her. Basically they'll pay $x, and leave the rest for her to figure out. Right now she can't switch to Hawaii insurance because this would be considered a pre-existing condition.

So would you want to be in this scenario? Outside your home state and ill. If you are unable to travel, but have insurance, but it'll only cover a smaller portion than normal what would you do?

That's a major problem with the US system. If we travel anywhere outside our coverage area we could be in trouble. Even with the best insurance they could consider it out of network. And each year the premiums rise and coverage declines.

But how to stop this? What can we do to avert this crisis? Do people really want to be solely responsible for their own care? That they pick and choose what they can afford by privitizing the system entirely? That if you aren't rich enough to afford basic care too bad? Or would they prefer higher taxes to cover themselves?

It's an interesting conundrum, and likely one to be put to the next president. I wonder where we will in another 2-3 years with the american healthcare system, let alone 10-20 years. Things are coming to a head fast with the skyrocketing costs of health insurance.

Carnival of Personal Finances #137

The 137th Carnival of Personal Finance is up at the Dividend Guy. My post about "Single versus Coupledom" was included.

But check out these two articles "Cash flow diagrams for the poor, middle class, and investor class", it made me laugh. Very true unfortunately. And "4% withdrawal rate", which is a simple explanation of how to withdraw money during retirement.

Sunday, January 27, 2008

Rogue Trader

Turns out the reason the world markets fell last Monday was due to the selling of stocks by a Rogue Trader called Jerome Kerviel. This man caused panic in the US Federal Reserve, which caused the abrupt rate cut on Tuesday.

What happened? Well this French Trader somehow managed to invest his company's money into the international stock market. Heavily invested about $7B dollars, leaving them much to open to losses, and something the investment group would never do. The investment group realized this mistake on Friday, realized the true extent/nature on Saturday/Sunday, but they never felt the need to disclose this information to the US government, or other nations.

Instead they tried to hide the fact they were overexposed and determined on monday they would close all positions this man, Jerome Kerviel, had opened. Hence the massive stock dump and sell off on Monday, a national US holiday (Martin Luther King's Birthday). This is what caused a mass exodus and made the US Federal Reserve convene and emergency meeting and declare our economy in a state of emergency.

Worse the bank only disclosed all this fraud on Wednesday after they had finished closing all of this Rogue Trader's positions. This leads one to wonder, why didn't the French bank communicate sooner with other nation's economic leaders? Why were they being deceptive?

Did this really help our economy because of the immediate action taken by the Feds? Or did it cause more turmoil, unrest, and mistrust within our economy?

I find it appalling that a government can get away with covering up such misactions. That they are allowed to rock the global economy and get away with it. Right now we're living and moving to a completely globalized economy. Where no one country is solely independent from other nations.

So what shall we do with the Rogue Trader? And was his company really unaware of his misdeeds, or did they turn a blind eye to him as long as profits were up? Or was he just a scapegoat?

Saturday, January 26, 2008

Single versus Coupledom?

Is it better to be single versus coupled? Is it easier or harder? In so many casese it would seem being coupled is easier but then there are many cases where being single is easier. This week a prime example happened about what my DH's life would be like if he were single. Honestly I have to say it would be awesome.

But my DH and his best (single) friend entered a business competition. They are semi-finalists and have to go end of March to Denver. I mentioned starting to research the costs of going.

The Single Friend (SF), says why bother. We can book it at the last minute. I say, so I can work it into the budget and account for it now. Then set it aside the money. The SF why do you need to work it into the budget. Just use your incoming money. I respond that's because you don't have anyone else to worry about and save for.

The truth is that SF does not make a lot of money but it's all his and he has complete control and freedom over it. He can afford to eat out every meal, do any activity, and has no responsibilities for his money.

For example he makes $3k gross but nets probably $2500/month. He doesn't save for retirement or a house or anything because he lives simply. Retirement is not an option being a foreigner, house is unnecessary for the same reason (and his parents are giving him a DP), and so he has $2500/month to blow on anything he wants. That's way more than my DH who makes 3-4x as much but has to pay for our mortgage, retirement, college, cars, etc.

When you are coupled, you start thinking more long term. You are unable to just buy what you want when you want. You suddenly worry about emergencies, you want to replace your car if you have children. Or you worry about retirement. Or you worry about things like college for your children or how to pay if they are ill. Basically you worry more about the future in a couple.

I wonder though if it wouldn't be more fun sometimes to still be single? If I had spent my 20s untangled in a relationship would I be more carefree about money? I think so. If not in a relationship, I would not save for a wedding until I found someone. I probably would not save for a house because I'd be thinking more about where I could move or travel. I would buy less things to tie me down, certainly I'd have no pets.

So which is better single or coupledom? There is no easy answer, but it is fun to see the differences we have in budgeting money. And how being a single versus in a couple changes a person's perspectives on money.

And when I say single I mean really single. Not single living with a significant other or in a long term relationship but unmarried. Those usually have significant financial implications, but single as in not in a relationship, living alone, etc.

Friday, January 25, 2008

Revised Tax Rebate

Congress announced a revised tax package yesterday. People who make at least $3k and pay taxes would get back $600 back and $1200 for couples, and each child would be $300 extra. People who don't pay taxes but make at least $3k would recieve $300 back. The rebate phases out for individuals who make more than $75k and couple making $150k.

Lower than the package suggested by Bush, this new rebate of taxes cover more families who do not pay income taxes. Hence the lower rebate amount instead of $800/$1600 initially suggested.

What to do with this money? Well the government is hoping we'll spend it to boost the country. To help the economy grow. However, I'm not sure I understand how we're growing the economy by causing the government to take on more debt by giving back taxes while still spending foolishly?

Since 2000 there is no balanced budget. The US government is in a huge deficit and they keep digging themselves deeper. I wonder how can a government expect people to be fiscally responsible when they themselves show no leadership or example? The example set by our government is one of get into debt and someone else will hopefully bail you out. And it's not your fault there's debt, it's someone else's fault/problem.

But seriously, will this really help people? Will it really stimulate the government? Perhaps making serious changes to our government spending, telling people that it's wrong to be in debt, and showing how to stick to a budget would do more consumers good than just handing out checks which don't solve the problem.

This money if we ever see it won't change our lives. It's a balm on the problem our government is ignoring. If they really wanted to help they would start looking at the real problems, not just a band-aid sticker solution.

What will I do? I have no idea, when and if I see the check I'll decide then. Until then it's just the current administration prentending to care about the economy. Until I see changes and a real budge why should I listen to this administration about my finances? I don't think their succeding at all.

I hope everyone who gets the rebate uses it to pay off debt or save, rather than spending it like the government expects.

Thursday, January 24, 2008

Chance to shorten your mortgage?

One thing I've contemplated doing, and have done before to shorten the length of our mortgage is potentially taken out a Home Equity Line of Credit Second Mortgage. I have one in place now for $60k unused, and I've been thinking about it a lot more since the Federal Reserve cut rates by 3/4 point on Tuesday.

First a home equity line of credit is usually directly tied to prime. So with the prime rate being down to 3.5% it's looking to be a better deal than our 4.25% current first mortgage. This rate of course is variable but as long as it's lower than means less interest on our mortgage.

So what would I do? As am example I tempted to take out $10k and pay off $10k of our first mortgage. Then target the Home Equity line of credit to be paid off in 1 year. Basically focusing payments on a small portion of the mortgage rather than the large first mortgage.

On our previous condo we did this, we had a first and second mortgage. And when the second prime rate dropped, we took out more and started prepaying our first mortgage which at the time was 5.875%. It saved us so much we were able to refinance both mortgages 1 year later into a lower rate and smaller balance 1st mortgage. Also we threw all our extra money at the second and paid of $10k in 1 year because the rate was about 1%, while we grossed $42k/year combined. Yep, crazy.

But it takes discipline and firm financial plan. Meaning you have to earmark money for the second to make sure you pay it off quickly. I would consider it debt like a credit card. This is definitely risky, but for someone already trying to pay off their mortgage quickly, it could help lower the mortgage amount faster because more of the payment is going to principal.

This should not be done at the expense of retirement funding, savings, or college funding. However, when we did this, only I was a US citizen so we only had a $2k/year Roth IRA. DH could not qualify for a Roth IRA until marriage. Also I was a student without a 401k so our retirement savings options were limited. Hence, paying off the house seemed like an ideal solution to our extra savings.

I've been running scenarios about how much it would cost us to do this and if we could swing a $500/month payment right now. If so I could borrow $6k and pay off our mortgage by an extra $6k right now. But it depends on many factors, of which DH's raise and bonus next month will influence these decisions.

One problem is this does take away a person's liquid investments. And you could possibly have less cash on hand. But it's something worth considering. I do realize it's like shifting your mortgage to a 0% balance transfer CC. And I've considered that as a potential mortgage payoff strategy as well in the future.

On a message board I frequent, a man there paid off his house in 5 years using 0% CC offers, he kept on taking it out and prepaying his mortgage and paying his CC in full within the year. I think I might do this when DH is done with school and we have more free cash. I might be tempted to because it would motivate me to pay off our house sooner.

But for now it's all thoughts. A lot depends on what the rates for HELOC are, and where they appear to be going.

Another consideration, is if we borrow $20k and pay off our first mortgage, we'd be under the conforming mortgage numbers and we could potentially refinance our first into a normal mortgage instead of our current Jumbo mortgage. I think we need to really watch the rates and see what happens if it's worthwhile to increase our down payment and get a smaller first mortgage. Choices, so many choices.

But this is a great opportunity for people to look into refinancing if they have improved their credit score since they purchased their home, have paid off a large portion of the mortgage and might qualify for a better rate, or are looking to lower their monthly expenses.

Wednesday, January 23, 2008

Feds Cut Rates...

The Federal Reserve cut interest rates yesterday by 3/4 of a point. That's a rather large cut. The cuts applied to prime, which impacts how much people pay interest on CC, auto loans, home equity lines of credit, etc. There is speculation about what the Federal Reserve will do at it's normal meeting at the end of the month.

This cut was a direct action against the falling international markets which occurred on Monday, which most of the US had off due to Martin Luther King's Jr. holiday. The Federal Reserve decided to cut rates to stabilize the US market among worries of a recession.

This cut allowed the Dow to only lose 129, after dropping 400 pts in the early morning of Tuesday trading. Also key worries is if the Federal Reserve cuts too much it will impact the inflation worries already present in today's economy.

Should we be worried? What can we do to weather this storm?

I'd say don't look at your investments. Leave everything alone and don't follow market trends. The fastest way people lose money is chasing hot stocks and selling following a bad day in the market. Basically people who are trying to time the market, but instead of doing it based on facts, are using emotions.

Right now the best thing you can do is try to live within your means. With the impending credit crunch, now would not be a good time to get too much car or too much house. Sure rates are low, and car companies and homes are offering awesome incentives. But can you really afford it?

Yes the $500 car payment sounds great @ 0% interest financing, but it's still $500/month payment. What happens if you lose your job due to a recession? Or if you have to increase your food, gas, utilities by $500/month because of inflation?

Getting out of a ARM might also become feasible. Yes housing prices have dropped in SOME areas, but rates might start trending lower and already have from this summer. It will take some time for the interest rate cuts to have an effect on the 10 year treasury bill (which most mortgages are based on, or LIBOR), however you can start investigating now.

Another way is keep investing in your 401k and IRA. Now is not the time to stop. Dollar cost averaging will help smooth out these rough bumps. Shut your eyes and keep moving ahead. I'm dying to jump back into the market with more money.

But for now, keep on watching the market without panic or fear.

Tuesday, January 22, 2008

Longer car loans...

Here's an article about a couple who got a 7 year car loan. The couple were a little worried about taking on such a long obligation, but they couldn't pass up the offer. They were able to get under $700/month car payments.

The article says that people are no longer just buying more home, but more car as well. The average car loan is now 5 years and many more are written for longer. Also the average amount of car loans has increased 40% to $30k.

So is it the car companies fault? Perhaps they should stop making nice, expensive cars. And perhaps they should stop giving out loans. Or maybe people like the Posts, should step back and consider the debt before just leaping on it.

The couple bought a Ford Truck for $44k. They rolled over $9500 owed on their previous truck which they hadn't paid off into this new truck.

But they aren't the only ones, another woman in the article Cindy Gerhardt did the same thing. Except she has done it with multiple cars, rolling what she owed from each previous car into another successive car. So now she owes at least $15k more than the cars are worth. Her monthly payments are more than her mortgage. And she's unable to sell both cars and get a loan for a single car and the difference she owes.

She says the car dealerships never said no. That they kept giving her loans, I wonder did she ever wonder how she was driving nicer and nicer cars continually? Did she ever wonder how she drove a nicer car than someone who earns 2-3x what she does? I am guessing it just seemed like a normal quality of life for her. She drove cars she thought she could afford, but never stopped to consider if she could.

I wonder do you just see the monthly obligation and think great, I can handle $600. I know we would never be able to buy a car and say great $600. So I don't quite understand how it's so easy for people to do so. And think you can afford your luxury car. If you make $40k/year how do you buy a car that costs more than you make in a year?

Carnival of Personal Finance #136

The Carnival of Personal Finance #136 is up at Green Panda Treehouse. My post about "College Obligation" is up at carnival.

Other articles to check out is "Are Credit Cards the Problem" by Rather be shopping, and Two Pennies Earned writes "housing and net worth", a great post about the different cost of living.

I would love to move somewhere cheaper and buy a home, potentially in a few years we'll be doing that. I cannot wait!

Monday, January 21, 2008

$800 help or hindrance?

On Friday President Bush released a press statement saying that he intended to give taxpayers a rebate of $800/individuals or $1600/married couple. This was in hopes of jump starting the economy, similar in nature to his previous tax rebates in 2001 where he refunded $300 and $600 to taxpayers. Bush also suggested making his temporary tax cuts permenant.

The checks he's suggesting would be mailed out in June potentially. He says they would be from eliminating the 10% tax bracket on the first $8000 of income or $16000 for married couples. Democrats say this should be given to all taxpayers including the 40% of payers who pay nothing because they don't make enough to pay any federal income taxes.

However economists are debating whether this rebates are effective. Will it really stimulate the economy? And prevent a recession? Or are we already in one?

What will you do with the money? I am not sure what we would do. I am guessing it's going to DH's tuition payments. Other than that I'm not sure we're going to spend it like the government hopes.

So I am not sure if it's really going to help the economy? Will people really blow it? Or will more people stash it because they are worried about their jobs? Or use it to just catch up on bills, since it feels like our incomes are not rising as quickly as inflation.

Sunday, January 20, 2008

Are 401ks stupid?

Well that's the question asked by a 26 year old writer, "Are 401ks stupid?". Wow, I can't believe there is a 20-something who doesn't believe in the 401k.

Now she's got reasonable arguments when she says she needs to pay off credit card debt, student loans, car loans. Those cost more than investing in a 401k. However this women gets a company match, so free money. She should be putting in minimally to the match.

But her main argument is she wants to live now. She doesn't want to save money to buy a trailer in 40 years, she wants to buy stuff now. I'd like to know how she plans to live in 40 years? Guess that hasn't hit her yet.

A second issue she raises is the 401k match is not guaranteed, but discretionary where they can be "Nixed" if the business does bad. Also the match usually requires people to stay at certain period of time to "vest". Both valid points, but your contributions are always there. So at least you are saving something for retirement. Also employers matches should be considered "gravy" not the main entree of retirement savings. Many financial advisors say don't count on it and save 10-15% of your income without the match.

Third, while she makes the point highly compensated employees don't get to contribute as much, I'd argue that's not necessarily true. What? Well DH is highly compensated but his company and previous company did something called safe harbour contributions for all employees which meant that everyone could contribute the maximum $15.5k no matter what their income, because the employer put in $X for every employee. Many companies do this to allow their HCEs an opporunity to save as well while not being dependent on lesser wage earners to save. It also helps lower wage earners have something saved for retirement.

Fourth she argues why save in a 401k if you get hit with a hardship withdrawal? Say you kid is ill or mortgage shoots through the roof? Well you should be saving for these expenses outside your 401k. And if you aren't even saving in a 401k, what makes you think you'll save outside of it? A 401k is designed to support you in retirement, not during your working years. Also trust me, if you can't find a penny to save into the 401k which is tax free, you're probably living paycheck to paycheck right now. And if an emergency happened you'd be screwed whether you are saving into a 401k or not. And I'd rather see you have the tiny 401k savings than NONE at all.

Fifth, she says people who save are steady eddies, but she'll have spent her younger years living. And if she's eating cat food at 65, at least she'll have had fun eating great cheese, travelling, and enjoying life.

I'd personally rather eat rice and beans my whole life than eat gourmet cheese for 30 years and suddenly have to eat cat food. A steady diet of knowing what I have to eat is more appealing than having been used to a better quality of life that I'm unable to maintain as I get old. Plus honestly who'd rather have a few luxuries as they age and need it more than when they are young and able to live leaner?

Well you've got a lot of thinking to do Ms Twenty-Something. I'm also a twenty-something, but I'd prefer a slightly different lifestyle than the one you've got planned for your future.

Saturday, January 19, 2008

College obligation?

Are you obligated to pay for your children's college if you can afford it? Meaning you already have a secure retirement, paid for home, and lots of extra money? Are you still obligated to foot the bill for college?

Does it make you less of a parent if you choose not to? Or are unable to because of poor financial choices in the past?

When did paying for college become an obligation? Now it's no longer raising your children till 18, it appears it's until at least 22. Is 22 the new 18? Are parents now required to pay all bills until the child finishes college?

And afterwards does it give the right for the child to do what they want? Or are they obligated to defer to their parents wishes because the parent paid for college?

Does parents financially helping mean they have a hold of $$$ over their children for the rest of their lives?

Friday, January 18, 2008

Can you be content?

How do you talk money with your spouse? MP Dunleavy's newest NYT article discusses how she talks finances with her spouse. For them, they enjoyed a conversation in the car while driving. But rather than a serious talk they discussed light-heartedly about what potential future the would have if they had a windfall of money.

An interesting line in the article was that MP's DH thinks that saving money and having more is greedy. If that's so, then check me into that lifestyle, I'd love to save more and have more money period.

But MP suggests that to live a lifestyle they dream of they'd need to earn $35k/year. Not a ton, and definitely a reachable number. Within that number she dreamed of $9k/year retirement savings (10%), $7k vaction, and $19k/year extras. She said this was totally possible because her husband had just started working part-time ($500/month) for the larger mortage. How this $6k/year extra translates into $35k, I'm not sure, but heck she's dreaming.

But something MP fails to see is a lack of contentment. They make a great income $72k/year, her husband can stay at home, and yet they are wishing for a $7k vacation and new car. From the previous article they have trouble saving for retirement, are unable to save for a 3 month emergency fund, and can easily waste $10k mindlessly. Will they really be able to save $9k for retirement if they were making $35k/year more? Or would it just go to increase a lifestyle?

Trust me, I'm all for increasing your lifestyle. You work hard and deserve it. But having credit card debt, car loans, no savings, implies that you are unable to afford the lifestyle you think you deserve. You are living a lifestyle you want but haven't achieved.

MP is the epitomy of Americans. Living well beyond her means. She doesn't save for emergencies, she doesn't save for retirement. Basically she's been living paycheck to paycheck. So her lifestyle isn't one of someone living on 75% and saving 25%, it's someone living 100% or 110% if you count consumer debt.

And the desire to still want more? Where does it stop? How does it stop? Can you ever become content?

I feel that if you are content with your lifestyle you'll be able to weather whatever life throws at you. That you'll be able to manage because you are happy with many intangible factors and the monetary numbers are worthless. Plus you'll be used to living on less and saving so you'll be able to survive a job loss, death, etc.

I think it's great to have dreams, goals, ambitions. But still being content with what you have is the way to financial freedom.

Thursday, January 17, 2008

MP Dunleavy Wraps Up 2007

MP Dunleavy writes about her 2007 year financials. I was highly critical of her choice to purchase a second house for $225k at the end of 2007. Turns out, it was a bad move. She doesn't think so, but the numbers well they aren't looking any better.

Her Networth for 2007 started out at:
Consumer debt: $8,500.
Emergency fund: $3,300.
Long-term savings: $40,000.
Retirement: $12,300.
Home equity: $40,000.
Net worth: $87,100

MP Dunleavy ended 2007 with:
Consumer debt: $5,900.
Emergency fund: $2,100.
Long-term savings: $0.
Retirement: $17,400.
Home equity: $85,000.
Net worth: $98,600.

Basically she gave up a long term cash position to have greater home equity? Not a smart move. Also in the article she said that the value of her first home had dropped because of the slow market, but she had just bought a new house $15k over the list price. Hmm...makes me wonder how much her home equity is really worth.

Now she also wrote that she only saved $5k for retirement when she made $72k from her regular job and A LOT extra from her book. So basically she saved less than 5% of her earnings for retirement. Bad idea, considering she's 41?

So you want idea of what not to do? Don't do this. Basically if the renters don't pay rent, she'll be screwed. She has no cash on hand to handle any accidents, unexpected bills. Even if she only uses cash, where's the cash to pay for a month of double mortgage? Or a repair to a house she's not living in? She makes about $100k/year and she has $2100 in her Emergency Fund? This is a reciepe for disaster.

I also think her home equity is an overstated number. But if it makes her feel better. I'd rather have $85k in an IRA or 401k than in home equity. Equity which even she believes has gone down, yet she still purchased another home.

But hey maybe New York isn't going through a housing downturn. Maybe the houses will be her retirement savings. That is if nothing goes wrong and she doesn't have any repairs that cause her to go into foreclosure.

But she's a great poster child of what people of any age should not do. Do not overextend yourself and buy more house than you can afford. Do not live without an emergency fund. Do not count on housing prices to bail you out. Do not try vacation when you can't save for retirement.

Wednesday, January 16, 2008

Retirement Living Facilities

Living in an assisted living community can be expensive. Here's an example in Hawaii, it costs $2690/month starting rate for a studio, and $3200/month for a one-bedroom. Sure it's affordable for people who have a pretty generous savings/retirement, but what if you dont? My grandmother makes $800/month, I have a feeling that won't cut it.

DH and I plan on maxing out our retirement contributions for life. We are saving way more than the reccomended 15% because we have looked at these retirement communities and plan on retiring into an assissted living facility. However it takes money.

Sad to say, most people believe that their living expenses go down in retirement. Actually it can go up easily. When you start looking at assisted living facilities, nursing home, or 24 hour in home care, it's not cheap.

One other reason to consider these options is if your child is unable to care for you. What if they have a handicapped child? Or what if your child is ill or dies early? Will you still expect to move in with them?

I know it's harsh, but the reality is that many expected circumstances can happen which prevent a parent from moving in with a child. I fully expect my mom to move in with us if we are healthy and able to care for her. But she's hoping to afford a retirement community.

The financial circumstances of parents sometimes are not what we could hope for. The only thing you can do is plan for yourself, so you don't put your own children in the situation of trying to afford care for you. But people rarely plan and accept responsibility for their own misactions.

If not we wouldn't be in a subprime mess. We wouldn't have so much consumer debt on credit cards or car loans or student loans.

Tuesday, January 15, 2008

Parents moving in...

After the controversy about loaning money to family, another step in family finances is what to do when your parents move in with you?

How do you handle the financial aspect of a parent moving in? Do you allow them to live rent free and not contribute to the household? Do you expect them to contribute equally?

And of course this is further complicated if you have siblings. If one sibling takes on the responsibility of allowing the parent(s) of moving in rent free, should the others contribute? Or should that child which steps up responsibility expect to inherit a larger portion of the parents money? Should that child use the money to care for the parents? Or will siblings feel that their "inheritance" is being squandered?

This is currently the predicament ongoing in my family. I doubt my grandmother can live alone. And she is not rich, nor does she have any money. Instead her children have always had to support her. Since she currently lives alone in my mom's second house, she needs to move out. At 80 years old she can't manage the upkeep or cleaning of the house.

But what to do? Financially it will be tougher on any child that takes her in obviously. But should they take her tiny monthly pension and social security? It amounts to less than $800/month.

I think this is a financial predicament likely to hit many boomers as they age. How to handle moving in with their children.

Friday, January 11, 2008

Family Loan?

Do you loan money to family? Ever? I sat thinking about that after reading an article on the New York Times about giving his grandmother money, a loan. He was undecided about it.

I'm firmly of the mindset and practice of I never loan family money. It's not a loan, it's a gift. However, I also usually do not give family money. I have and will pay a bill for a family member directly, but I won't just give them money to "pay some bills." No way. I want to see where the money is going, or else I'd end up like JW and his loan to his cousin. Turns out the cousin had said it was going to his family but it went to finance his new lifestyle.

Well that wouldn't happen to me. I've paid for my grandmother's phone, gas, bills, etc. And I've bought her gift cards for groceries. I've also paid a cousins bill when they needed money for personal reasons. But to give cash to someone, well it's just asking for trouble. Is it ever right to give a family member a loan? Or is it just a gift? Or money should never be exchanged between any family members?

Thursday, January 10, 2008

Property taxes..depressing

So we got our quarterly property tax bill, and the assessed value of our home dropped yet again. I thought it would decrease our property taxes, but instead they raised the rates of our property taxes so it turns out, it's a wash.

We used to pay $9.33/$1000 of assessed value. Now it's $9.70/$1000 assessed value. So basically if your house dropped more than $35k the taxes were lowered a bit, if not it's a wash.

Should I be worried about our house value dropping? Yes and no. We're not moving so everything right now is on paper. Until you realize the loss or gain, all home values are relative. This means that it's only on paper you are rich. If not it's lost opportunity cost. Whether you rent or own you still need a place to live.

So should we be worried? I think if we were going to sell maybe. But the longer you stay put, the better the odds of breaking even. Now the likelyhood of us losing money is NIL. I know we're in a unique scenario, but one of the job perks is not losing money in real estate

Wednesday, January 09, 2008

Bond Investing

I don't mind investing in Bond Index mutual funds. However, right now we don't invest in Bonds. Having bonds usually stabilizes a portfolio and doesn't decrease the returns by very much. However the reason we're not doing bonds right now, is because we have have a heavy cash position at any given time. The reason for this is because of DH's tuition and uncertainty in the job market.

Because of our heavy cash position, it's not necessary to put 20% of our portfolio into bonds, because cash acts pretty much the same way to stabilize the returns of our portfolio. However for most people I'd suggest a 80% stock/20% bond portfolio. I would keep this until retirement at which time I would slowly scale down into a 70%/30% mix. I don't know if I would go less just because you need to keep up with inflation during retirement and don't want to lose your purchasing power.

Now along with buying Bond Mutual Funds, I also like the idea of buying individual bonds with your cash on hand. One of the better ways to do this is using TIPS (Treasury Inflation Protected Securities). TIPS are a good way to buffer against inflation using bonds.

But it matters when you buy TIPS. Why? Because TIPS are not normal bonds. They have a fixed rate component and variable rate component. This allows it to pay different dividends depending on inflation. So you could make as much as 9-11% (back in 2003) using TIPS. Wow! Great returns. Plus they are good for 30 years.

But timing the purchase of TIPS is important. What am I looking for and watching for my mom? Well when the fixed rate component hits 2% I'll tell my mom to dump tons into TIPS. This way she'll be able to keep a minimum 2% plus whatever else the economy is doing. Also there isn't a fee for reedeming after 1 year of holding. That's not a bad deal.

I've read many articles about it, and TIPS are a great way to hold bonds which can help buffer agaisnt inflation in retirement.

Tuesday, January 08, 2008

Investing Strategies for 2008

By the way I'm not an investment guru or anything like that. I am not involved in finance at all. This is just something DH and I cooked up over the weekend for our plans for 2008. We're going to bank on the US dollar dropping maybe 10%. And because of this we're going to have a heavy tilt into international stocks.

Also we think that a recession is coming. So we've dropped all retail stocks and are picking up instead energy and resource stocks. We hope to buy international resources. Also we plan on putting a nice chunk into emerging markets.

Also we're avoiding things like retail, healthcare/pharmaceuticals, and banking. The banking if it should drop more, and the books start to balance, we'll jump into Citibank is what we're thinking.

We're avoiding retail because we think people are going to be spending a lot less this year with the recession and salaries are not going to keep up with inflation. So people will be cutting discretionary spending. Although huge drops like 30-40% may induce us to buy some stocks.

Also we both feel Medicare Part D will be revamped by Congress. Expect Medicare to be able to negotiate with Pharmaceutical companies. This is a HUGE deal, this will cut pharmaceuticals companies profits. Right now the US is 2/3 of the income revenues of all drugs, and there is no regulation of price. Other countries negotiate price of drugs with these same companies. So sure Merck and Eli Lilly are coming out with blockbuster drugs, but the time of unlimited drug charges are coming to an end. Thus there is too much uncertainty to invest in.

But overall we're moving into a rather aggressive posture for our investments this year. We're looking at 40% international, 30% small cap, 10% emerging markets and 20% large cap US equities.

No bonds this year, I think I'm waiting to buy TIPS. Watch TIPS on May 1st. For everyone whose 40-50s. I'll explain what I'm waiting for TIPS, and why I'm waiting to buy some for my mom and myself.

Monday, January 07, 2008

Correcting a mistake?

Do you correct a mistake if a store rings up an item the wrong price? I would say yes, but half the time, I don't even catch the mistake until I'm home. I don't actually look at my receipt unless there is a huge discrepancy of a few dollars or more. But a say $1 I probably won't catch it.

This makes me wonder is it wrong? I have returned an item to a store when it was not rung up. I got home and realized that I hadn't paid for something in my bag, which wasn't mine. Actually I had gotten a bag of groceries from the previous customer. But I didn't catch the error until I got home and unloaded the groceries and thought, huh I didn't buy that.

But I haven't really checked my receipts carefully. I check eating out totals, but otherwise, I assume it's right.

What do you do? Do you check every item on your reciept? Do you correct the store if they make a mistake? I do, but I feel like I don't have a choice. Why?

Because of Karma. I have serious good Karma, having lost my wallet 3x and had them returned. Also this year I dropped my keys and had them returned to me. Yep, I need all the good Karm I can get because of my forgetfulness and stupidity. I can't have bad Karma surrounding me with my behavior. I am one of those people who does a lot of stupid things. I need all the luck I can get.

Sunday, January 06, 2008

Retiring early - pipe dream?

I'm about to say that, honestly I think my dream of retiring early is a pipe dream. Now why would I say that? First of all because I am unable to determine what I need to retire early. DH and I are super conservative when it comes to projecting returns on our investments, how much we'll need, etc. But the one area that we are unable to get a handle on and the most important area is health insurance.

What will we do if we retire at 55? Until then we'll be covered with employer provided insurance. We cannot be denied nor turned down. However at 55, we run the risk of being ineligible for coverage due to pre-exisiting conditions. This may mean certain health factors will not be covered. Also it could mean that we cannot buy insurance at any reasonable rate. So we'd be stuck without insurance or working until 65, when Medicare kicks in.

Of course, we've thought about this, and come up with a few different options. One, we work part-time in a job which provides benefits. Places like starbucks, borders, home depot are known to provide medical so many retirees work there for the prescription coverage. Or we could work part-time at our current jobs at that time.

Two, if we own a business, what is the likelyhood of buying insurance through our business? This is another possibility. Three, likely I should get a government or state job which might provide insurance after retirement like my mom.

My mom retired at 55 with free medical insurance for the rest of her life for her and my dad. The insurance premium is $1k/month for the two of them and she pays nothing. This insurance becomes supplemental after 65 (ie like my dad), so they pay nothing for his medical care. Also it includes vision, dental, and prescription coverage.

Fourth, move to Canada. This is something we've discussed more because of their universal health care. DH loves the idea of moving back, and after visiting Vancouver I'm more keen about it.

Maybe I shouldn't be so negative about retiring early. It could easily happen. However, I feel that the reality is it could be impossible. And this is why we are saving as much as possible for retirement. To be able to manage every curveball thrown at us, and plan for any unforseen circumstances.

The only way to reach a goal is to plan for it. It's great to say "I want to retire early." And even better to save money for it. But you also have to realize potential problems or issues that may arise, and how it will affect you.

I've spoken with many 30/40-somethings who want to retire early. But most, not in a health related field, believe they can do it being debt free and with little savings. Everyone who works in a hospital, health insurance, etc tell me no way. Most have not considered what they will do to replace employer provided insurance. They beleive something will magically appear, or say they will do a high deductible health plan (HDHP). But they have no researched at all or seen any estimated costs or coverage.

So in many cases retiring early might be a pipe dream. Even for me, I realize I won't really know if the numbers are enough until probably around age 50. I'll be able to at that time see if the medical system has changed, how much insurance is, and what we really have saved.

Saturday, January 05, 2008

Browsing a bookstore

Is it wrong to browse in a bookstore and not buy? This was a question raised on The Simple Dollar. It really made me stop and think, because I never buy books at a bookstore. The person asking had read and article by a small bookstore owner complaining about people who browse but never buy.

Saying that many people would come in and browse, write down titles, then go online and order the books. Or others would go the library to borrow the books, I tend to fall in this category. Anyway, though the owner was complaining about the loss of business.

And people responded that if they didn't buy books, they did use the coffee shop in the store. And that many went online to the same larger book retailer. But for small shops, they didn't have any answer.

Do you think it's wrong to browse and not buy books? And specifically walk out and either borrow the books or buy them online later?

What a moral dilemma. The frugalite in me says it's not wrong, but now I do feel bad for browsing in the bookstore. I love books, and am a passionate borrower from the library. I also do paperback trade, and usually if I do buy a book, it's used and online, never new. So I feel terrible now, but I also don't ever go into a small bookshop. I only go to the conviently located Border's or BN.

But does that justify my browsing? DH loves to go and listen to CDs, but again he'll either buy it used, online, or I'll get it from the library.

So is browsing in a bookstore not frugal, but morally wrong and actually cheap?

Friday, January 04, 2008

Retire Rich...

An interesting interview by Walter Updegrave with Henry "Bud" Hebler about retiring rich. Mr. Hebler runs the website

Mr. Hebler addresses some myths about retirement. The first being that your spending will decrease as you age. I absolutely agree with this, I don't think my parents have cut back that much. Also how hard is it to go and have takeout or eat out instead of cook? Go to the theater, join more activities like golfing, ballroom dance, etc.

He suggests buying an annuity immediately. I'm not sure I agree with this. However, I assume he suggests this because many people are not financially savvy and probably cannot invest their nest egg well. I would suggest a simple retirement portfolio using vanguard index funds because it's cheaper. But obviously again my parents fall into this category. And since they refuse help, perhaps an annuity is better.

I agree that you can't forsee all possible events. And people should set aside money for these unforseen events. Finally, he suggested that 10% used to be enough to save for retirement. Now he says 15-20% is more required because people don't have pensions.

I agree with that fully. Another thing people fail to realize is previously employers provided healthcare after retirement. Not anymore. Now people have to pay more medical after retirement. And this is expensive and costs are rising quickly.

But overall a neat, concise interview. Enjoy.

Car Choice

Okay so as an update, our friends who visited mentioned selling their car. It is a 1998 Subaru Impreza with 125k miles. According to KBB, it's worth $4k maybe. We are very interested in the AWD and we know them very well, and know it's been well maintained. So this is not your typical used car.

If we sell DH's 2000 Ford Focus, according to KBB it should be worth $4500. This move sounds like a lateral move financially. But is it a smart move financially?

Should we buy an older car? I think it's a better car than the Focus, but it's a tough choice. We have until this spring to think.

Thursday, January 03, 2008

When the money rules don't apply

According to MP Dunleavy in her follow-up article to buying a new house, she says there are times when the money rules don't apply. Sounds like the typical mindset of many Americans, that they deserve the new car, bigger house, vacation, eating out, etc and they deserve it now.

Now in the article MP suggests they didn't do the math before they lept but they thought about it afterwards. I have to say that's a for sure reciepe for disaster, looking after you leap.

First they bought a house about 2x what their current mortgage is. Not a big deal if they were selling their first house, but they aren't.

Second they spend $5k/year in repairs on their current home. But somehow, MP suggests this $5k in repairs is no longer their worry. Hmm..interesting because renters ususally don't pay for repairs. Nor does she mention how she'll pay for it. Instead she says her new house doesn't need repairs. For now, I would say she'll love her new house, until something breaks and she hates it.

Third, her husband found a part-time job to cover the extra costs. Sounds to me like she is expanding their budget to fill all areas of their incomes instead of using the extra money to pay off debt, save for retirement. Getting caught up again in the two income trap.

Fourth, if you read her Women in Red updates here is the most recent. MP still has $7700 in consumer debt, and her retirement is at $16k for a couple in their 40s. They are only saving 8% of their income for retirement while saving instead of fancy vacations. I also don't see a 6 month cash Emergency Fund in place. This is a must for someone whose about to become a landlord. Also since she has a new baby, I also don't see any college savings, which is not necessary, I'd put over taking an annual vacation to Spain.

If I were a financial planner, I'd tell her she's crazy. She hasn't got the cashflow or cash on hand to whether any issues that may arise from landlording. She is still in debt, and way behind on her retirement savings. They need to stop going on vacations and start paying off debt seriously, and get into saving for retirement.

She previously stated she makes $80-90k/annually, but looking at her vital statistics they sure havn't saved like they have made that much.

So do the money rules not apply? Or is she just making excuses to have them not apply?

Wednesday, January 02, 2008

Worthless Dollar?

Well quick post about the worthlessness of the US dollar. Here is an article where the Iran president called the US dollar worthless. The worse part is that as Americans we can't really argue about it. We're in severe trouble with the housing market. Our national debt is $9 trillion dollars, a far cry from our surplus of the 90s.

This national debt causes the devaluation of our currency. And our interest rates do not encourage outside investing, although our goods are supposed to be cheaper now for people to buy, but we're not seeing the benefit.

Where can we go from here?

Net Worth 2007 Final Tally

The final net worth for 2007. Was it a good year? I think so for reasons non-financial. But financially not as much. Our net worth for the year appeared to have increased only by $20k. Not much at all. Mostly because we added according to my calculations $13.5k. in student loans. However last December I counted only $4500, but this year I just added $8500 at the beginning of the school year.

So our retirement accounts increased from $34782 to $67786. Nearly doubled, and a bit shy of the $75k I was hoping to have. However we didn't make our Roth IRA contribution yet for 2007, and after reviewing out paystubs I believe we're good to go, so that will happen in January. If you are close to the limits of not contributing to a Roth IRA, I believe you should wait until the next year and do it. Our problem has been DH switching jobs, worrying about any stock benefits that might cause a problem taxwise to our situation. So we decided to wait every year until we see what plays out and try to contribute in December. So I guess in January we'll hit the $75k I had hoped to hit.

We increased our debt from $4500 to $17k for student loans. Ugh. We however paid our house down from $450168 to $441986. I love to see the number going down.

So overall not a terrible year. Also we still haven't figured out DH's new ESPP so we have a bit of unaccounted for money right now probably $5-10k, which will go directly to DH's tuition bills. We use the ESPP as a monthly savings for it.

I guess my goal for next year? Well save $25.5k, so our retirement accounts will be over $100k, I guess with returns I should hope for around $115 in our retirement accounts next year. Wow, that's huge seeing as we started with zero a few years ago.

To everyone out there starting out, there is HOPE! Keep on contributing and working hard. It pays off quickly. I never thought to see our accounts growing so quickly, but it's awesome. I wish I had started earlier, but I used all of our savings to buy a house instead. I wonder if it was a mistake? Ah well, hindsight is 20/20. But honestly at least we are happily in a home and are quickly I feel catching up on retirement savings because we're 28 and 30 years old.

Our returns for the year have been very decent. I calculated in our stock portfolio DH made about 40%, I made 15% for the 4 months I invested = 45% APR if extrapolated for our Roth IRAs, and DH's 401k made 9% for the year. Not bad at all.

Tuesday, January 01, 2008

Happy New Year!

Happy New Year. Gee we're doing not much today, but plans are to clean our house! Woohoo...Finally.