retirement

so, my parents are retired and they live in about 3 hours from us in the house that i grew up in. as time goes on (and we all get older), i would like to persuade them into selling their modest 3 bedroom home and move closer to us. this would be beneficial in that we would have a safety net for babysitting and that type of thing, but also in that we would be close at hand if and when they need to start leaning on us as they get older. in financial terms, i thought it would be about a wash if they moved out of their home and moved into an apartment. where we live, real estate taxes are around 2-3% and insurance is probably around another 0.5% or so, but i thought that it was relatively conservative to say that they are paying about 3% all in with insurance, taxes, and maintenance. but, because of various homestead exemptions and caps, this is actually probably less than 2%. this doesn't amount to a whole lot of money out of pocket. it's certainly less than renting even a 1 bedroom apartment close by.

even so, i would like to still persuade them to make a move -- we could certainly supplement their income or provide housing, which would make the financial terms a non-factor. family matters aside, that still means up rooting them from a place where they have lived for a good number of years (again, it's the house that i grew up in) and transplanting them to a new city. it's a tough sell, but to me it has to happen at some point, so why not now?

historic returns

so, i always hear that the stock market roughly returns 10% annually over the long haul, but i started thinking about the basis of this figure, which i had previously pretty much accepted blindly. i did some research and found the following data on http://www.econlib.org/LIBRARY/Enc/StockPrices.html:

The average compound rate of return on stocks from 1802 through 1991 was 7.7 percent per year: 5.8 percent from 1802 to 1870, 7.2 percent from 1871 to 1925, and 10.0 percent from 1926 to 1991.

this means that this fabled 10% figure is actually based on data from 1926 until now (i'm assuming that from 1991 until now, the return has been roughly 10%). why do we throw out the earlier data? i'm willing to accept that the financial markets have grown and matured and that the nation and the world is on more financially stable ground today versus the 1800s, but there are several things that are still reasons to be wary about the magical 10% number.

baby boomers. this is a topic everyone has probably heard something about, so i won't spend a lot of time on it, but the fact of the matter is that at least part of the more recent returns can be attributed to the huge baby boomer population spike that has some impact on the financial trends of the past few decades. they have worked, spent, saved, and invested. and at some point, they will retire and tap into their investments. the question is will this reversal have a similar fall in the markets as money moves out of their investments to support their retirement?

investment vehicles. there are a lot more families with some level of investment in the stock market today versus even 20 years ago. in fact, today more than 50 percent of americans own stock up from 15.9% in 1983 (http://www.ici.org/pdf/rpt_05_equity_owners.pdf). i have to think that part of the reason for that is because the investment vehicles that are available today have made it easy for people to invest. 401ks, for example were 'invented' in 1978 and have provided a medium for the average worker to very easily invest in the stock market. not only that, with employer matching, there is good deal of money that is naturally going into the market on a day-to-day basis. now, i'm not saying that this is creating any artificial demand or anything of the sort, but the fact of the matter is that i don't have any data that speaks to what the effects of these investment vehicles have been over the past 20 years.

time line. the main point that i want to consider is not whether a retiring generation of 401k investors is going to trend the market in other directions, but whether a timeline of 80 years is long enough to safely contend that we should continue to expect 10% annualized returns over the long haul. if you look backwards, it's obvious that the market had significantly lower returns the 80 years prior.

the reality of the situation is this -- no one really has all the answers. and while i may not achieve a 10% return, i'm still stashing away my investment cash in the market. and while historic returns may not be an indicator of future performance, it still is better than stashing my money away in a mattress.

stocks fall

i know it's been a while since i posted -- been busy with work, vacation, and i managed to throw out my back some how -- but i wanted to jump in and say a little something about the stock market's fall this past week. the dow had it's worst week in 5 years and the other major indecies were decidedly lower as well. so, should we panic? pull our money out of the markets while we can? no and definitely not!

perhaps it's time to keep a little more money in cash. perhaps it's time to sit on the sidelines and wait and see.

if you're me, you just keep plugging along and keep investing just as always. you've been dollar cost averaging over the long haul and this little blip won't make any bit of difference. and, if you've got a lump sum turning to cat food in your bank account, put it into play. i happened to be reading scott burns the other day and he had a particularly pertinent article:

One of the best exercises to demonstrate this was done years ago by the American Funds group. They told the story of two investors. One had an uncanny knack for selecting the best day of the year to invest – the day prices were lowest. The other had an uncanny knack for selecting the worst day of the year to invest – he unerringly invested at market tops.

At the end of a 10- or 15-year period of annual investments, there is very little difference between the two investors. What is important is that they have invested over a long period of time.

so, if you're me, just keep plugging along. in 10 or 15 years, this dip won't even be a blip on the radar.

life insurance

my wife and i have never carried any life insurance above and beyond what our employers carry for us, but are considering it now that we'll have a family. i've always heard that term life is the way to go, but i have never done any research into it.

i started thinking, though, at what income level does life insurance become important and at what asset level does life insurance become superfluous? that is, if i make say, 5k a year, my income would easily be covered (i assume) by welfare and social programs to my survivors in the event of my untimely death. and, if i have a cash (or otherwise liquid) stockpile of several million dollars, why would i need insurance?

this general thinking is that insurance is a vehicle to replace an income stream (or streams, in the event that my spouse would have to stop working to care for our child) in the event that i became incapacitated and unable to bring home the bacon.

college savings

i have posted on here before that sometimes i wake up in a start, worried about the increasing cost of higher education. when i went to school (public state university), i was able to fund it entirely with scholarships. i had a part time job that helped me with expenses. i never asked my parents for any money, nor do i recall them giving me any.

but, since we're expecting, i started researching options for college savings. i actually signed up for a upromise account just this morning, though i haven't filled in all the necessary online paperwork just yet. it amounts to a cash back offer that participating manufacturers contribute to when you buy their products. it's free, so i thought, what the heck.

the other thing that i want to do is open up a 529 plan, that however will have to wait until the little one is born, as i have to designate a beneficiary. 529 plans come in 2 flavors -- a tuition lock program and a savings plan. i'm likely to go with the latter, as it affords the flexibility to put those funds toward any accredited university. i would hate to lock the kiddo into life as a longhorn if he/she really wanted to be an aggie. 529 plans are great in that the earnings are tax-deferred (though, you contribute after tax dollars) when they are used toward higher education, and you have a good deal of flexibility in naming and changing beneficiaries.

ira's are also a nice option, if you qualify, as you can put pre-tax funds into them. i assume that you are able to make penalty free withdrawals out toward education costs, but i didn't look into them in much detail.

again, the magic of compound interest plays a big part here, so my hope is that i'll be able to put a nice bit away on day one and make some small contributions between now and graduation.

vacation savings

we're out on a family vacation and i thought i'd share some tidbits on how we save money while on vacation.

first, we go on a family vacation once a year with my in-laws. they own a timeshare, so the accommodations are totally taken care of. that saves us a bunch of money right off the bat. i know not everyone will be able to take advantage of such a situation, but being able to trim housing costs is a great way to save. visiting friends, going camping, and planning your vacation around hotel deals are alternative methods that we like to use when we're not mooching off of the in-laws.

second, we eat in a lot when we're vacationing. everyone pitches in a prepares a meal or two. yesterday, i made dinner for 10, which included all the trimmings of a bbq dinner for perhaps 30 or 40 bucks, with leftovers enough for today's lunch. if we had gone out to even to a casual dining restaurant, it would have easily been $100, but probably much, much more.

next, we don't shop for fun. i know a lot of people love shopping and a lot of people love to shop when they are on vacation. we're not big shoppers, so it's easy for us to not-shop while on vacation. now, we do go window shopping, especially if it's a famous landmark, but generally speaking, we don't end up buying a whole lot of stuff to take home with us.

museums, zoos, beaches, and parks are great places for outings and way less expensive than amusement parks. we love the outdoors and love walking and hiking, so we usually end up spending one day doing that type of thing. a quick stop at the grocery store on the way out to buy a sandwich (or even better: some bread, deli cuts, etc) and we're set for a day.

now, don't get me wrong, we definitely do enjoy ourselves and eat out and hit the big tourist attractions -- it would be wrong not too, but we just don't do it every day. and being able to trim just one of those days off a vacation could result in some decent vacation savings.

kids cost how much?

well, we're expecting big changes around here . . . perhaps the biggest. i'm not talking about site changes or job changes. i'm talking about a change that's due in about 9 months from now. which got me thinking, what is the cost of raising a child? my best guess was several hundred thousand dollars and perhaps more depending on the amount of schooling he gets.

my o so thoughtful wife sent me this tidbit:

According to government estimates, the average middle-income family will spend roughly $10,000 on child-related expenses in the first two years of life ($8000 for a second child), and some experts suggest that figure may be too low. You can count on spending at a minimum of $25 a week ($1250 per year) on diapers, formula, and baby food alone.

while that didn't sound too terribly bad (read: life changing), it sounds way too low to me. what about college savings? what about moving into family cars instead of the old roadster? what about the cost of delivery (or more accurately, the cost of insurance and co-pays and deductibles)? a nanny? birthday parties?

and that doesn't even take any consideration of the costs leading up to birth . . . i think i need a drink or another job.

confessions of a job hopper

i've held more than a dozen jobs in the past 10 years. i didn't plan on it . . . it just sort of happened. but, i generally don't have to fess up as to why i haven't been at many jobs for more than a year. i have pretty marketable skills, i'm a decent interview, and i have pretty decent networking skills. while being a hopper is oftentimes looked down on, i believe that at a certain level, certain people know that valuable people are hard to retain -- they are in demand and like challenges. there is a benefit to my being a job hopper -- over the past 10 years, my salary has increased almost four-fold. it's unlikely i could have made those strides staying at one or two jobs over that time.

now, i'm not advocating it. being a job hopper isn't for everyone. there's a certain amount of risk that's involved, but for the right people in the right situations, there are good rewards.

brown bagging lunch

i eat 5-6 small meals a day. if i ate all of those meals out, it might get very expensive, so i spend about an hour or two on sundays preparing one or two big dishes that i can dole out and bring for lunch for the entire week. this saves me time and energy in the morning and i can get enough variety during the week by adding in a sandwich here or a protein drink or bar there. a lot of finance pages that i read tell you to keep a journal of things that you spend money on, and by making coffee at home (for instance) you can miraculously save tens of thousands of dollars (i exaggerate). i am not going to start telling you that a save a ton of money with my cooking extravaganza -- actually, eating healthy can oftentimes be on par with spending on a quick bite out for lunch. what it does do for me, though, is give me something that i can pretty comfortably ball park, budget-wise. i know that i'll every week, i'll spend about the same amount on food and it's a number that i can live with. of course, i eat out sometimes for lunch -- you have to for sanity, for business, for fun -- but i know that for the most part that's going to be every now and again and i can live with that.

supplemental income

i'm always looking for ways to earn a little extra cash. i used to do focus groups. they generally pay decently -- somewhere around 50 to 100 bucks for an hour or so worth of work. it's not regular work, though, and they usually don't give you much notice. so, when i started getting busy at my regular job, i found it difficult to pick up any of these gigs. i probably haven't done one in over 5 years.

i do try to pick up side projects whenever i can -- very rarely do i ever pass on an opportunity when someone asks me if i have some spare time to do some work on the side. again, it's not regular work, but it'll usually mean a couple extra bucks every now and again. and since i can sort of plan around it, it's much easier to fit into my schedule.

there's no way i could pick up a part-time job to earn more -- i just don't have enough time in the day, but i know several people who do that. there are a lot of part-time opportunities out there for people to supplement their income.

to me, any little bit counts. and a big part of it is maintaining good contacts and keeping your eyes open for opportunities out there.

bills

when i get lazy, i let bills pile up in my inbox. i just paid a bill for the security company today that was about a month late. now, i'm guessing that most companies won't ping my credit or turn my account over to a collection agency after that short a time, but it's probably not a good idea. most of my bills i can pay online, but very few of them have an auto-pay feature for whatever reason. it's in the best interests of companies to support auto-pay -- they get their monies and i don't have to remember to pay them. i actually just implemented the same feature for the company that i work for.

why don't more companies offer auto-pay?

debt in the middle class

i was listening to a radio program today and a caller phoned in and was asking a question about debt. the host basically berated her because she was carrying a lot of cc debt, but had a pretty high household income. i don't know if it was just a bad day for the host, but it's really easy to accumulate credit card debt and i would be willing to bet that it's pretty prevalent at many middle class income levels.

the fact of the matter is that debt is really readily available to us in the middle class. so readily available that i'd venture to say that if you're not educated on the matter, it's probably easier to go into debt making 100k than it is to be barely scraping by. why? i don't know. maybe there is a level of keeping up with the joneses or an i've arrived attitude or some other ridiculous notion, but whatever it is, i'm sure what the caller didn't need was to be ridiculed for making too much money. what she needed was to learn that she didn't have to spend that much!

spending accounts

my wife has a spending account (she calls it her slush fund) that she deposits about 0.5% of her paycheck into. she does whatever she wants with that money and i don't say anything. it comes out of her paycheck and gets deposited into a separate bank account automatically, so i don't even notice it.

i manage the money in our household, so i don't have a spending account for myself, but it probably would be a good idea. the idea behind the spending account is two fold. it puts a pause into our spending habits. if there's some impulse purchase that we want to make, it comes out of our spending accounts. if we don't have enough cash on hand, we'll have to make other arrangements (save, reconsider, haggle, etc.). what it really does, though, is gives each of us the freedom to buy something that the other person may think is a waste of money. it doesn't impact our bottom line and it kills any arguments before they start.

pre-bringing home your check saving

saving is a hard mindset to get into. it's even more difficult when every day, week, month, or whenever you get paid, you bring home your paycheck (or it's deposited in the bank for you). the easiest way to save, i think is to set things up automatically so that you don't feel like you've lost any income. there may be an adjustment period, but once you get used to your new paycheck it's very easy to save.

for instance, my wife and i each have 10% of our pre-tax earnings invested in our respective companies 401k plans. additionally, my wife has 15% of her (post-tax) earnings invested in her employee stock purchase plan. that right there has us saving an automatic 35% (not excatly because of taxes and matching contributions). additionally, we have various splits that put money into our primary checking, savings, and spending accounts.

at the end of the day, the deposits into our checking account don't look quite as full, but the balances in our 401ks, stock plans, and other accounts are looking healthy, and we hardly notice the ding to our disposable income.

monthly savings

after we moved, we're trying to save a bit of money by taking on some normal household chores that we used to 'outsource'. i don't know how prevalent it is in other parts of the country, but at least in our small version of the world (our neighborhood), most everyone has a lawn service and housekeeping service. we've been getting by without either so far.

our cable and internet service is roughly the same as it was before our move, but it's possible for us to drop from basic cable to the absolute minimum, which would be just the network stations, though it's probably not going to happen.

we've dropped a home phone line and use only our cell phones. my wife's company takes care of her charges and i never go over my minutes.

we've canceled our netflix subscription, which saves us from having the same three movies on our coffee table for months and months.

the bitch of living

my wife and i were talking about debt and i asked her how many of our friends she thought carry a significant amount of debt (aside from their home) and i postulated that it must be about 90%. we actually sort of went down a mental list and tried to verify (based on comments that we have heard from them or implications) and we came to realize that that figure was probably pretty close. we have a good number of friends that went on to lots of higher education and carry significant student loans. some just tend to over use their credit cards. just about everyone has a car note (ourselves included).

i guess what it comes down to is that to me debt is a very typical thing and it doesn't have to be a negative, as a lot of people view it. you just have to be able to manage your debt. for example, we have a car note at about 4% that's got a few years left on it. i'm not in any particular hurry to pay that off, because if i put cash away (even in a cd or something else with a guaranteed return), it's probably close to a break even.

what i don't get is how people live off their credit cards. no matter how painful it is, i always pay off my balance. it just pains me to hear that a lot of my friends simply make the minimum payments on their cards each month. i'm trying to grasp where this mentality comes from. i mean credit cards are a pretty recent phenomenon -- i believe they came out in the 70s, but i don't think my generation is dealing with any learning curves from credit. it may be a matter of immediate gratification, but for the most part, i think a lot of my peers that do carry card balances could pay off their balances, but they don't. maybe we're just bad at math. maybe we don't like to write big checks. maybe we're simply overspending. maybe it's the bitch of living that throws some wrenches in our well made plans.

whatever it is, we need to learn that debt is a tool that we can use for our benefit and if we can't, maybe we should learn to live without it.

as an aside, we just saw a musical -- spring awakening -- which was great (the title of this post comes from that show).

keeping up with the joneses

i read a few personal finance blogs and subscribe to some magazines and all too often i read something about how someone is doing relative to some benchmark. it's great for stats, but in the end, the question that you have to answer is whether you have enough money to live how you want to live in retirement.

a good friend of mine does really well financially and he has this annoying trait of trying to talk salary with everyone to see where he stacks up (generally, he's at the top) -- and he's very competitive about it. he takes it very seriously that his salary is largely a measure of his success in life. well, we all know that people have very different values and some careers just don't pay like they should -- people get into teaching, social work, and a lot of other careers for rewards that are likely worth more to them than cold hard cash (which is not to say that teachers and social workers and what-have-you shouldn't be paid more).

in the end, what you earn is not nearly as important as what you spend, and what you spend isn't nearly as important as what you save. because one day, we're all going to be retired and not making a lot of money. so, ultimately we'll all be at the same end of the salary measuring stick (we'll all be making $0 from our non-existent employers, hopefully), so it's probably not worth obsessing about keeping up with your neighbors, friends, or the joneses. you just have to keep up with you and how you want to live.

15 or 30

i posted a while back about whether it was better to go with a 15 or 30 year mortgage on our house. in the end, for flexibility, we opted for the 30 year. this made me think about whether it would be better to go with a 15 or 30 year note on an investment property. now, generally speaking, i think rents on investment properties probably allow you to take in some passive income if you're on a 30 year note, but it's probably much more difficult to do on a 15. but, of course, you get the benefit of depreciation, so it's probably doable. my question is this -- is it better to build equity in an investment property (say a small house or condo that likely appreciates slower than your primary residence) quickly with a 15 year note and possibly take on some investment losses until the mortgage is paid off, or take some gains while paying off the mortgage and go with a 30 year note?

non-emergency fund

i've mentioned in the past that i keep an emergency fund of about a years worth of living expenses in cds that mature at the start of every month. it took me a while to build that fund, but it basically just sits there now.

i'm wondering now about the amount of cash that i keep that's unrelated to my emergency fund -- the stuff i have sitting in various checking, savings, or money market accounts. i used to keep just a bear minimum in these accounts to avoid any banking fees, but as we were getting ready to move, i started keeping more in our primary checking account so that we would have the money at hand at closing.

well, we've moved in to our new place and i still have a decent chunk of cash turning into cat food in a very low interest checking account. i know i should move it out of there, but i've been very busy at work and moving in and taking care of all of that stuff that i haven't considered where to put this non-emergency money.

it's pretty obvious to me that the best thing to do would be to go ahead and plunk it lump sum into an index fund (yes, i'd rather do this than cost average in because of my long investment horizon), but i just haven't gotten around to it. it got me to thinking, though, of some alternative investments for the cash:

1. extra principal payment on the house. that would basically be an immediate return of whatever the tax-discounted interest rate is on our house. in this case about 4%.
2. higher interest savings/money market. i could potentially earn about 4-5% (i'm guessing since i haven't looked at rates) annually here.
3. cd ladder. cd's are returning about the same amount (just a touch more) as some savings accounts. no way i'd bother with this.

seems to me that these are the obvious choices . . . so, i'll hopefully get around to plunking the money into the market soon -- it's the most obvious of the obvious choices.

to pay extra on my mortgage

we moved into a new home (with a brand new mortgage, to boot) last month and i have been setting up the auto pay options with my lender. we secured a 30 year loan at 6% and i figured i could pay a bit extra each month and trim about 10-15 years off the note. well, when i initially set up the auto pay, i figured instead of paying extra principal i could take it and invest that money elsewhere. if i'm borrowing at 6% (really, somewhere around 4% because of the interest deduction), i reasoned, i could put that money into the market, which historically returns around 10%. so, that's how i set it up.

then, a few days later, i reasoned a bit differently and reset my auto pay options so i was paying extra. i would be saving the guaranteed 6% (or the effective rate after applying 25% or 33% or whatever depending on my tax bracket) and i wouldn't have to worry about putting that money at risk in the stock market.

but now, i'm back to thinking that i should just pay the monthly payment, invest the extra, and sit back and relax. right now, it makes the most sense to me. yeah, i'll end up paying about twice the price of my house over 30 years. but in 30 years, my extra investments should easily return a double. so, absolute worst case, it's a toss up. best case, my monies that would have otherwise reduced the price of my loan will end up beating out those gains.

rewards cards

i carry a few credit cards, but my primary one is an amex cash rebate card. with it, i get a graduated cash back reward that goes from 0.25% to 1.5% (when i spend more than $5,000 in a year). i am thinking about switching over to the amex blue cash card. it pays 0.5% to 1% until you spend $6,500 in a year and then it bumps that up to 1.5%. then it bumps the reward to 5% on purchases at gas stations, drugstores, and supermarkets. it's got no annual fee and a 0% APR for the first 15 months.

sounds like a decent way to 'save' some money on money that i'm going to be spending anyway.

if i had a million dollars

so, i read somewhere recently that if you'd like to have a million dollars at retirement age (whatever that means) that you need to have $160,000 in investments by age 40. sounds sort of fuzzy to me -- i only came across it while browsing the web, so i don't have the exact source. it got me to thinking, though, about this fascination that we have about the million dollar mark. i mean, most of us can probably get by with far less than a million bucks at retirement. it all depends, of course, on your lifestyle and spending.

in talking to my wife the other day we spoke about retirement and how much of a fund that we would need. we'd like to be able to travel a bit, spend time with our families, dine out -- we're really not extravagant people. if we had a million dollars and our house was paid off, i'd certainly think that it would be very, very easy to retire. i figured, even at a modest 5% interest, we would be able to draw about $50,000 per year (before taxes) from this imaginary nest egg without touching any principal. but, what's the point in that? and, what's a reasonable amount of spending to budget in retirement?

i ran some calculations and i came up with this -- a $500,000 nest egg earning 5% would last over 20 years if we were withdrawing about $37,500 (that's the $50,000 from above after taxes) per year. that's with no other income what so ever, except for the retirement nest egg. since i don't keep a very tight budget, i can't tell you exactly how much we spend today, nor can i tell you what a dollar today will buy in 20 years . . . that's not really my point.

really, what i am getting at is this: a million dollars is just some imaginary line that some people make a big deal over. some of us could get by easily with a million dollars, others can spend that in a month. so, what it really comes down to is what each of us personally needs in retirement. unless it's really important to you, don't get hung up on the $1,000,000 mark, but instead, focus on your personal number: $500,000, $100,000, or whatever that number may be.

late fee

well, it's totally unlike me, but i entirely forgot to pay by credit card bill last month. it was a big one, too. but, i got on the phone to my credit card company and asked that they waive the late fee, which they were happy to do. sometimes, you just have to ask.

of course, i don't know that they view me as a great customer -- i always (okay, not this time), pay my balance on time and in full. so, they're really not making any money off of me in terms of finance charges or late fees, but they always do get a small percentage of the cost of the goods that i am buying. this percentage is actually paid by the retailer and in the early days of credit, you would often see discounts when you were paying by cash versus credit. today, it's not really something you hear much about, but you can still get some discounts if you pay with cash -- you just have to ask. try it when buying big ticket items like furniture or other major appliances. i don't know that big retailers want to negotiate, but smaller shops are generally happy to give you a bit of a break when you pay cash.

retirement income

i posted a few weeks ago that i thought it was seriously out of line that common knowledge says that you need 85% of your pre-retirement income in retirement. i figured it was maybe a good rule of thumb, but still, seemed way out of line. in retirement, you've hopefully paid for your home and have a lot of the 'growing up' expenses out of the way -- putting your kids through college, buying new cars, etc.

well, i finally came across an article that backed up my notions: scott burns wrote an article about the exact same thing a week or more ago.

one of the more salient points mentions this:

In fact, if you are married, had and educated children, financed the purchase of a home or paid off student loans, odds are the 70 percent to 85 percent rule doesn't apply to you.

That's a lot of people.

a whole lot of people, i'd say. it's definitely something that i'm aiming for in my own life and certainly something that i'd venture to say that a good number of people across the nation and the world would say the same about.

it certainly doesn't mean that we'll be able to live off a meager retirement fund, but it does take some of the emphasis off the big numbers that we've seen in the past.

15 or 30

well, after quite some deliberation, we decided to opt for a 30 year mortgage rather than a 15. gasp! on our last house we secured a 30 year mortgage when we bought it and then refinanced a year later to a 15, and we felt that would be the prudent thing to do again.

since we're not experts at home buying, we figured that on a 30 year note, we would have the flexibility to pay extra towards principal and essentially turn the 30 into a 15, but if we started with a 15 year mortgage, we wouldn't have that same flexibility. this is especially important the first year or two in a new house at least in texas where we live, where property taxes are pretty high. mortgage bankers generally will take the previous years taxes and use that to calculate your payment. in our case, since we built a new house, our year ago appraisal would have been that of an unimproved lot and taxes would be a lot lower.

almost without question, i certainly think that a 15 year note is the way to go. when you look at the amount of interest you pay over 30 years, you basically are paying for your house twice! on a fifteen, that gets cut down to about a 1.5x multiple. it comes down, of course, to what kind of return you can get on your money as to which one (or even a longer term) to go with. since we're rather conservative, we'd rather take the guaranteed return by paying down our mortgage -- but not to the exclusion of other investments. other people might opt to take a longer term (and hence a smaller monthly payment) and find a better return on stocks or other investments.

for sale . . . sold!

so, after months and months, we have finally built, sold, and closed on our new, old, and our new and old homes, respectively. it was a very harrowing ordeal that came down to the last few minutes, but so far, we are really enjoying it.

the process started off easily enough: we decided to move to a house that was more suitable for us and our growing family. when we found the 'perfect' house, we decided to build it and sell our old house. since the build process takes a while (about 7 months for us), we thought we would have plenty of time to sell our old house. well, 6 months in, we still hadn't sold our house and decided to switch realtors . . . all the while, the progress on our new home was moving along. fortunately for us, our builder really worked with us and didn't even pressure us for more down or anything -- the contract called for a considerable deposit at the time it went to dry-wall. a day after we switched realtors, we got an offer and they wanted to move in quick -- in about 4 weeks. wow!

lo and behold, a call into our builder revealed that our new house would be done the exact same day that the buyers wanted to close on our old house! talk about coincidence!

we were getting very excited as we got close to our closing date (both the old and new on the same day) . . . the day before we were scheduled to close, with movers and an assortment of services scheduled, we got some uncomfortable news. our buyers had to move their close date out because they had changed lenders at the last minute and were scrambling around to get all their paperwork in place. well, we were supposed to use the proceeds of that sale towards the down payment on our new home. what were we going to do?

i called the title company and found out that it was perfectly acceptable for us to go ahead and close but the keys wouldn't be released to us until the loan was funded. not an issue with me. we had a day of buffer built into the whole process. but wait, there's more! at our final walk through with our builder, we found out that he had to push out the closing due to some small items that needed his attention. so, now, we were back to closing on the same day -- a friday. we'd close on the purchase in the am and as soon as the closing on the sale was done, the magic of wire transfers would make everything okay.

we found out that we were going to close on the sale at 3pm on friday. that gave us 2 hours for everything to get signed off on before the banks closed for the weekend. when we showed up, the buyers were still signing. at around 3:30pm, we got in, signed the HUD settlement statement, which got faxed over to the other title company while we continued to sign. about half an hour later, at 4, we finished and i called the other title company to make sure everything was okay. they just picked up the settlement statement and faxed it over to our lender, who was waiting on it. driving home, i got a phone call from the title company saying they were waiting for another document. what?! it was 4:30 and we were running out of time. i was calling the title company that we just left to find out what was going on when another call came in -- we were funded and everything was done!

whew!

i thought i'd pass on this story because i never had a real appreciation for how closings happen and what order things can happen in. basically, what it comes down to is this: you can more or less sign in any order you like, but nothing will be done until all the money moves around and all the docs are likewise passed around.

credit score

well, i've been pretty busy lately with the new house move and haven't had much time to post, but i finally found some time today, and i thought i'd share some interesting information. i've created a lot of stress by changing lenders at the last minute, but i am saving about 1/4 of a point.

anyway, during the loan process, my lender pulled my credit report and while my credit is okay, something very interesting came up -- a collection filed against me.

well, i have hardly ever been late on a payment in my life, so i was very surprised to see that i had a balance so old that it was kicked over into collections. it turns out that after i moved out of a place i was sharing with my brother, i never filed the appropriate change of responsibility forms so that he would take over the utilities, etc. it turns out that after he moved out, he didn't pay the last bill, so there is a mark on my credit for collections on a $119 light bill.

i don't know what to really do about it. the collection agency has never contacted me and the debt really isn't mine. should i really bother about a 6 year old collection? from my limited research, paying off the collection won't erase it from my report -- it'll stay on there for 7 years!

it hasn't impacted my life or my ability to acquire credit. either way, let it be a lesson to you -- these little things can have side effects that you have no idea about.

point of interest

we are currently securing a loan for a new house purchase. mortgage rates are pretty low these days and some of our lenders are offering to let us buy points to lower them even more. these so called discount points cost 1% of the loan amount and bring down the interest rate 0.125%. so, i started thinking about the merits of buying discount points. it's not nearly as straightforward as i thought, but it feels like a sucker bet to me.

there are a lot of components:

0. your interest rate will change, causing your
1. your monthly payment to change slightly, resulting in
2. your overall cost of the loan changing, and
3. you lose any flexibility that you would have with that money

now, i haven't done any calculations, but the overall savings on 0.125% seems pretty slight to me. that is, i think you could do far better by taking the money and investing it elsewhere.

let's look at a tangible example. let's say you're looking at a $475,000 home, where you need to borrow about $380,000. if you are looking at a 30 year note @ 5.875% where principal and interest comes to $2,250, you'll end up paying $810,000 over the course of the note. if, however, you decide to buy that down, paying 3% of your home cost ($14,000), to 5.25%, you'll end up paying about $2,100 monthly, or $756,000 over 30 years. that comes out to a $54,000 savings. sounds like a lot, huh? well, depending on what you can make on that $14,000, i'd say you'd be better off not buying it down. if you could get about 10% on your money, you're likely to see about 3 triples, or a return around $100,000 on your money!

and anyway you look at it $100,000 > $54,000. so, stay away from the sucker bet, and stash your cash somewhere else.

how to save money

i read all the time about how to save money -- just skip your morning coffee, brown bag your lunch, quit smoking -- but, to me this advice is good for a week, maybe two, and then you fall back into your old habits. it's a lot like new year's resolutions or dieting or other things that are bright and shiny when they are new, but get old fast.

the only real way to save money is to make it a priority in life. ha! that's definitely one of those things that is easier said than done. look, i bring my lunch to work, i drive a used car, i eat out only once a week, but it took a long time for me to realize and prioritize these things in my life. what it really took was for me to understand that the pleasure or convenience of these things was not really worth the money because the cheaper alternatives were not sacrifices: my lunches are just as good as the food i could get around my office, my car is nice, but not too nice, and my one meal out is usually a great one.

there's more to saving than just saying it, of course. i have several accounts where money is taken out of my check automatically. i also use electronic transfers to move money out of my primary checking account. it makes it easier to avoid spending if the money is already spoken for, but i do leave a good amount in my primary checking account, but i don't consider all of this money spending money. it's just way too hard for me to budget exactly what i am going to spend from month to month. that means some of my savings spills over into my spending accounts. how do i resist the temptation to go and spend all of it? honestly, i just do. there's no magic to it, unfortunately, but at some level learning how to do that is probably a good exercise. again, it's like dieting. back when i had a weight problem, i tried a lot of things -- low carb diets, counting calories, packaged meals -- but what eventually happened on all of them is that i would start craving something and crack and never get back on track. what worked for me was finally learning about nutrition and exercise and applying those concepts to my life. instead of depriving myself, i would allow myself a taste of this or that. i think the same concepts can be applied to your financial life.

if you feel like you're depriving yourself, it's never going to work, so relax a bit and learn about financial matters. don't corner yourself into the low-carb equivalent of a financial diet. learn how to spend and save your money and you'll be better off for it.

millions made simple

i was thumbing through men's health today and came across some financial advice by ben stein, an article entitled millions made simple. i consider myself a fan of mr. stein -- i think he's a smart guy who has probably done pretty well for himself -- so, i dove in and read the article.

for the most part, everything he says is true, but what it really tells you is what to do, not how to do it. for instance, he mentions that if you are 30 and making 50k a year and you expect to live until you are 80, you'll need 270k a year between 65 and 80, or $4,000,000. that sounds like a lot of bucks. of course, he's adjusting for inflation -- 50k in today's dollars will be roughly equivalent to 300k 35 years from now. fair enough, but it's really hard to come to terms with those figures. but, how the heck can i get my hands on 4 million dollars?

i guess the advice in the article that is closest thing to a 'how-to' is his 5th step -- keep on buying. what he is refering to is, of course, buying broad index funds, consistently and essentially forever. based on a 8% average return, this is the way to take part in compound interest and have your money work for you.

hey, it's great advice, and it'll even turn you into a millionaire if you have enough money and enough time, but $4 million still sounds like a lot of dough, and i'm going to need more help if i'm going to make it.

who wants to be a millionaire

i just read an article in the paper that indicated that there are roughly 2.9 million millionaires in the united states today. that translates roughly to 1% of the us population and puts you in some decent company, especially considering the awful savings rate of us americans. now, a million bucks is a good deal of money, but it doesn't mean that you can simply go hog wild and forget about your finances.

i once estimated (in my younger days) that i would need about 2 million dollars to retire -- i could easily live off the interest and not have any financial worries. i don't remember what i used as a rate of return or rate of inflation, but it still seems like something that would be easily doable. heck, if you're making a relatively safe 5% on that, you'll have 100k in spending cash each year without having to tap into your nest egg, though to be honest, i probably estimated earning closer to 10% on it.

i've come to my senses, though. while having 2 million dollars available to fund my retirement would be nice, it certainly is not a goal of mine. my goal in retirement is to have an account that i can safely make withdrawals from for the rest of my life. how large this fund needs to be depends on my expenses. if i could live off of $25,000 per year, a fund of $500,000 might be what i need. if i needed $100,000 per year, i'd need a significantly larger account to start from. the bottom line is that i won't be living off interest entirely. my retirement account will continue to earn interest, but i'll also likely be eating away at the principal, so i'll have to have some solid data about how much i spend to know how long my money will last.

to that end, i've had to break out of the typical paycheck to paycheck mentality. fortunately for me, i was able to break out of that mold many years ago and start building something for my future. now, how about you?

emergency fund

ask any number of people about an emergency fund and you are likely to get just as many responses. some say that you need 3-6 months of living expenses in your emergency fund, others say a year of take home pay, and others will tell you something entirely different. don't even ask about where you should keep your money, because you'll get an equally confusing array of suggestions.

here's my take on the whole thing. an emergency fund is a fund that you need in the event that you lose your job. period. end of story. it's not something that you would tap into if you incur a sudden unexpected expense. it is used only in the event that you lose your job and you need to pay your bills. that's it. people will tell you that it's okay to use for this or that or the other. a popular one is medical emergencies. sorry, bub, that's what insurance is for.

now, on to the specifics of your fund. your fund should be based on your total monthly household pay (you need to consider your spouse's earnings) and you should fund it so that in the event that you lose your job you have the equivalent amount of money available to you as you would while you were working. so, you would need to have however many months stashed away as you think it would require to find a new job. in some cases that may be 1-2 months. in others, it may be a full year. a rule of thumb is that for every 10k you make, it will take a month to find a job. so, if you make 40k, you should budget for 4 months to find a job, and, as such, 4 months in your emergency fund.

where should you keep this fund? personally, i keep it in a series of staggered CDs that mature every month. that way, it is almost exactly like getting paid -- the money is available to me at a specific time each month, and if i have a job, i just let it roll over. for example, let's say i make $60,000 a year ($5,000 per month). i need an emergency fund to cover 6 months of pay, or $30,000. i divide that 30,000 into 12 CDs, each maturing at the beginning of every month. in this case, i would have 12 $2,500 CDs. now, if i lose my job, i'll be able to tap into my emergency fund at the beginning of the next month . . . but wait! i don't have my full pay available to me! that doesn't bother me, but if it looks problematic to you, you may want to put your money into a more liquid account. to me, the $2,500 is fine because it's an after tax versus a pre-tax (gross) figure, and i won't be overly concerned with contributing to a 401k or putting money away into savings while i am unemployed. i'll probably want to cut back on some expenses, too. so, to me, the $2,500 is roughly equivalent to my $5,000 monthly gross pay.

what you need to retire

i was perusing a money magazine over the weekend and happened to stop on an article about retirement. it suggested that you strive for an income in retirement that was 85% of your pre-retirement income, so you could continue your current style of living.

my first reation was: WHAT!?@!? why would i need such a high income stream? that's ridiculous!

after thinking on it for a bit, i came to the same conclusion.

if i could achieve an income 85% of my current income, i'd be retired now! no, i'd say what you need in retirement is largely dependent on the size of your nest egg. if i had 10 million dollars that i had saved over the course of my working life, i could probably get by without any income -- i could put that 10 million in my mattress and simply make withdrawals from it whenever i needed to buy something.

the only reason i could imagine that i'd need a high income stream would be is if i had little or no savings and did not own my primary residence.

i don't know who writes this stuff out there in the print media, but some of that stuff sounds just plain crazy to me.

retire early

i was talking to my mother-in-law over the weekend about retirement. she had been looking over the obituaries in the paper and was just mortified to see how young people are passing away. all the time i've known her, she's always been working at 100 mph, but this weekend she expressed a desire to retire early. mainly, she came to this conclusion by looking at it from a very pragmatic angle -- if you live until you are 70 and retire at 65 and spend 2 years bedridden at the end of your life, how are you going to enjoy your 3 years in retirement?

i think it's a fine point. if you suppose that you enter the workforce at 25 and use the age of 70 as potentially stopping point, i'd say retiring at 50 would be pretty worthwhile. that would give you 25 years working and 25 years to enjoy the fruits of your labor.

based on this conversation, i'd like to be able to retire within the next 10 years, at which point, maybe i'd change careers or do something part-time. it just doesn't make sense to work so long into your life.

wasting away in . . .

well, i just returned from a week long vacation in manuel antonio, costa rica. it was a really relaxing and beautiful vacation. it's easy to overspend on vacation, but my wife and i were able to only spend about $100 on souvenirs and by taking advantage of the kitchen in the place that we were staying, we were able to save a ton on eating out -- i think we only dined out three or four times that week!

we vacationed with a group and rented out this amazing house for the week. it was pretty expensive, but once it was divided 10 ways, it ended up being really affordable, and it was a lot of fun vacationing with all of our friends.

we hiked, played on the beach, surfed, and enjoyed the natural beauty of costa rica without spending a ton of money.

buying vs renting

i had a conversation with a buddy of mine yesterday about saving . . . he asked me what i thought my savings rate was and i said, it probably varies between 30% and 50%, but what i didn't take into account was home equity. every month a good portion of my take home goes toward paying on my mortgage, and while it is technically not the same as saving, it is going toward an asset that i could convert to cash at some point. not only that, it is probably earning 'interest' in the form of appreciation.

you can make a good argument on the benefits of renting versus buying. there are a lot of nice things about renting -- you get a good deal of flexibility, you don't have to put a lot down, and, if you rent a place cheap enough, you can really put your money where you can do better than in your home. on the other hand, if you are buying, at the end of it all, you can own your home and/or take some equity out along the way. you get some tax benefits from owning and if your mortgage is around what it would cost to rent, you're really using your home as a great vehicle for saving (it's an asset versus liability thing, if i remember from accounting).

look, i'm not saying one is better than the other, but for me, it's the way to go.

living well is the best revenge?

a co-worker of mine pointed me to an interesting article on forbes site on how much it costs to 'live well' in various parts of the country. they define living well as paying on a 30 year mortgage on a 4 bedroom house in an upscale neighborhood and a vacation spot in a likewise upscale place, owns 2 nice cars, travels, sends their kids to private school . . . basically all the trimmings. i was shocked to read the article.

for one, i punched in a pretty nice salary into the calculator -- $200,000 (and, this is a net income figure!) -- and selected what is renown as one of the cheaper big cities in which to live, houston, texas. well, i was floored to find that i was nearly $100,000 shy of being able to live well! absurd!

i think the premise of the site is a bit ridiculous. not only would i be able to live very well on $200,000 after taxes, i could easily have all the things they mention and still be able to put some away for savings. forbes points out, however:

"Our family saves very little (1%) of its income. This may not be the most fiscally prudent way to behave, but it is the norm in this country. In fact, we were even a little generous, as according to the Department of Commerce, American households save less than 1% of their income these days."

well, at that rate, it would take you nearly 30 years to become a millionaire -- and that would only be because you'd be building equity in your million-dollar home.

who can really afford to live like that? anyway, i'd much rather live how i am living now than 'well' by those standards.

live (debt) free or . . .

i was driving in to work the other day and heard an ad on the radio about living debt free and how great it is. i understand the allure of carrying no debt, there are some forms of debt that make a lot of sense.

i mean a mortgage, for example, affords me the opportunity to build equity in my home versus spending money on leasing. what this amounts to is that with a mortgage, i get a vehicle for saving money rather than spending it.

the same cannot be said for most other forms of debt, which is where i agree with debt free community. i currently carry debt in the form of home and car loans, but their rates are very reasonable and in the case of the car loan, i can take the cash that i would have spent and invest it. if i can at least break even on it, i prefer having the flexibility of having the cash.

anyway, living debt free may be nice for some, but if the plan involves me selling everything and living on the street, aren't i better off living with some debt?

how rich are you

i recently came across a site (http://www.globalrichlist.com) where you input your annual income and it ranks you on how 'rich' you are. it's an interesting site that kept my attention for a few minutes as i tried various figures, but it got me thinking. someone making 100k a year could very easily be a lot poorer than someone making half that.

if the 100k guy overspends, it's actually very easy for him to amass debt and be much worse off than the other guy.

it's not how much money you make, but what you do with it that makes you rich.

also, you can be very, very wealthy and not bring in any income at all -- if your holdings are in real estate or the stock market, you could be making unrealized gains and not have any amount of income at all. imagine you are retired, but have a million dollars in the stock market appreciating at 10% per year -- that would give you a million dollars of unrealized income, but $0 of actual income.

doesn't sound too poor to me.

you're a credit to your . . .

about 3 weeks after we bought our first house, my wife and i were laid off from our respective companies within a few hours of each other. it was a pretty stressful time, but we made it. imagine draining your savings to put into a down payment and taking on the responsibility of a mortgage with no job and very little cash on hand. it was quite an experience, but we definitely learned a lot from it. here's how we did it:

the day i found out we were going to be without a job, the very first thing was call my credit card company and ask for a credit limit increase. crazy? maybe so, but i figured that if i was going to need some leverage to handle any type of emergency, i should have some more credit. this wasn't for going out or having fun, but basically a very high priced insurance policy, in the event of some major emergency.

the very next thing we both did was file for unemployment. unemployment insurance is something that you pay for in every paycheck, so it's not something that you should be ashamed of collecting. it's not much, but it helps with the necessities.

the next thing we did, obviously, was get our resumes together. considering the state of the economy at the time, we weren't going to be bombarded with job offers, or even interviews for that matter. we made finding jobs our jobs. it was a tough time, but we didn't mope about it. we sent our resumes out, made calls, went out on interviews, and made it our daily routine.

we also learned how to live on very little. it was spring time, so the weather was pretty mild. we opened the windows to cool the house, we prepared food at home, we cut out all non-essentials, but we still treated ourselves and went out every so often. i think it was important that we did that. just because we were jobless didn't mean it was the end of the world, and it helped us break the monotony of the everyday.

since we had just moved in, we didn't have a mortgage payment due immediately. you'll get one or two months after you close before you have to pay, so we didn't have that looming over our heads. and, in the end, we made it through, but what we learned was we could deal with being out of work, we could manage and make it through, and the next time we'd buy a house, we'd have more of a savings cushion on hand after our down payment to deal with just these types of emergencies.

0% credit

i was trolling the web the other day and came across a number of 0% credit cards. there are quite a number of cards out there offering 0% balance transfers for up to a year or longer. their rates then jump back up to typical credit card standards of 10-15%. well, i figure there are enough cards out there that i might could just revolve some credit around and never have to pay . . . never really tried to take advantage of the system like that, but i imagine it would work for a while.

anyway, i have taken advantage of this before. once, we were organizing a trip, so we collected money from all the people on the trip and booked everything through my credit card. well, instead of paying that off right away, i transferred the balance over to a 0% card for about a year while i had the cash stashed away drawing interest. it wasn't a lot, but it amounted to enough to buy a nice dinner or two at the end of the year (it was a trip to hawaii for about 25 or so, so it was a decent chunk of cash).

actually, my credit card is always has a 0% interest rate on it because i pay my balance in full every month. i still get to take advantage of 2 weeks of float . . . and while it's not a lot, it's a lot better than paying 15%!

the cost of higher education

every so often, i'll wake up in a cold sweat and bother my wife with the trouble of the escalating costs of college. i'll ask her: 'what if our kids want to go to harvard?' or 'how will we ever afford to send our kids to school?'.

when i went to college -- a state school -- it was really cheap. i remember it being less than $1,000 a semester. i had a scholarship that paid up to $1,000 a semester and i always got a little spending money back after registering for classes. but even state schools are expensive today . . . my school would likely cost me 2-3 times that much today. when you add in room and board, things can get pretty expensive pretty fast. now, i had a job throughout college and managed to get out of school with no debt. i'm not sure that i could do it today with the numbers i hear being thrown around about cost of school.

well, fortunately for me, i have time on my side. no kids yet . . . so, even if somehow a newborn were dropped on my doorstep today, i'd have about 23 years to stash some cash away (that's 18 years up to the 1st year of college and 5 years after that). and to me, that's the only way to do it. if it cost $25,000 a year, that's $125,000 per child for a college experience. sounds like a lot, huh? well, that's only somewhere around $5,000 per year every year if you start saving the day your child is born through his last year of college. that's if it's just sitting there without any interest. if you can make 5% on that annually, it turns out that you can just stash away $3,000 a year, which seems pretty doable -- that's just 250 bucks a month. of course, if you can jump it up to the 10% historical return on the stock market, you could put away half of that annually -- a very reasonable $1,500.

now, i've exagerated the numbers a little bit, but i'd rather wrong on the high side in this case. i mean, if it turns out that my kid can finance some schooling with a scholarship or if it doesn't quite cost as much as i'm expecting, hey, that's a nice little fund to start off with coming out of school.

another day older and deeper in debt

i tell people that i've never carried any credit card debt in my life -- maybe missed one payment way back after something got lost in the mail -- but it's something that i am quite proud of. i read an alarming statistic once that credit card companies write off over a billion dollars a year of bad debt annually. a billion dollars sounds like quite a lot of money to me. i know there are a lot of companies out there that have lost a few billion here or there -- the airlines were doing poorly for a while, u.s. automakers are bleeding money right now -- but the reason that credit card companies can basically throw away a billion dollars a year is that total u.s. credit card debt is somewhere around 700 billion dollars!

i used to think that if i could amass about a million dollars, i could live off the interest without chipping away at the principal. at about 5%, that's 50,000 a year -- a very reasonable take home for doing nothing at all. now, with inflation and other trappings of middle class life, i estimate i'd need a bit more, but imagine what you could do with 700 billion dollars! and, credit card companies don't charge no 5%, either. they're pulling in 14, 15, sometimes close to 20%. i could learn to live on that, i'm sure.

what's more, people don't pay off their cards at the end of the year -- many people just make the minimum payment -- so these numbers just keep growing for the credit card companies. if you continue to just make the minimum payment on those balances -- as many people do -- it'll take forever. i've seen articles that show that by making a minimum payment on a 1,000 dollar balance, you could have your balance paid off in a short 22 years! that's just nuts.

look, i'm not anti-credit by any means. i'm not even anti-credit card. i use my credit card for everything, but i always, always, always pay it off every month. i've found that's the easiest way for me to not fall into the 700 billion dollar trap.

maxed out

i sometimes come across shows on tv like maxed out, suze orman's show, and personal finance shows of that ilk. they're not bad, but they're all alike and they're a lot like other kinds of advice shows -- people call in, describe a pretty dire situation, and the host says something like: you can't do that, you can't live like that, you need to save, blah, blah, blah.

yes, it's all true, but the key to helping people to me is not to tell them what to do, but to teach them how to do it. when it comes down to it, over extending and over spending seem to be habitual, practiced, almost unconscious behaviors. if you don't realize how you got into your current situation, it's going to be easy to find yourself back in the same situation a year or two down the road.

fortunately, i think we as people are pretty stuck in our ways, so, if you can reverse max-out type behavior and turn it into savings, i find that it's pretty easy to get out of debt, and start building a nest egg or a rainy day fund.

a new car!

i've purchased 3 cars in my life -- all new -- and i'll never buy a new car again. my first car, i bought after about a year at my first job. the car that i had been driving wasn't in great shape -- it had some body damage, the a/c didn't work, it burned all sorts of fluids -- but it drove pretty well. i just 'needed' a new car.

well, i bought one. it was pretty reasonably priced and i put quite a bit down. i financed it over 3 years at 5% and the payments were somewhere around 200-300 a month. i drove that car for 3 years and got into another new one. this time, i had some better reasons, my family needed a car and i could afford to help out.

well, i found another new car to buy. i put nothing down on that, financed it over 4 years at 7% and the payments were around 750 a month. i liked the car, but i didn't like it 750 a month worth. i had serious buyers remorse, but i kept plugging along and am still driving that car today, 8 years later. i love that car now. the best thing about it is there's no payment.

my next new car was an suv that i bought 2 years ago. similar situation -- my family (or actually my wife's family in this case) was in need of a car. so, we bought a new one and gave them her old car. this time, we put quite a bit down and are currently financing it over 4 years at around 4%. payments are around 300 a month.

the next time i have to buy a car it is going to be used. i used to think that there was no way to buy a reasonable used car -- there'd always be mechanical problems, you can't trust a guy selling a used car (why would he be selling it?), etc. but, i've come around -- that 750 a month payment taught me a lesson. 750 bucks a month can be much better spent (or saved) other ways.

i came across a posting by dave ramsey about how to get into a car you want. it basically starts with you buying a beater for cash and putting the money that you would be spending on a new car into savings. a year later, you can trade the car you bought and add the savings for a better beater. rinse and repeat.

balance your books

i never balance my checkbook, there's just no reason to do it anymore with online banking. everything is handled for me online -- all withdrawals, deposits, interest, checks. i do however check my account online and make sure it is correct.

i rarely use cash, either. credit is convenient and helps me to keep a similar register of my purchases with the benefit of fraud protection, insurance, and points, rebates, or cash back. i use an american express cash rebate card with no annual fee, which rebates me 1.5% on all purchases. it doesn't sound like much, but it's free money.

i never carry a balance, so this really is a no brainer. no matter how painful it is -- and believe me, some months it can be quite so -- i always, always, always, without fail pay off my balance in full before the due date.

if you can do it, it can be a great way to live.

how to rest easy in retirement

when i was 25, i thought i'd retire a millionaire at 30. at a more conservative 30, i figured i'd be a millionare by 45. now, while i'm pretty sure that i'll be a millionaire at some point, the exact date seems to slide.

at 25 i wasn't too concerned with retirement accounts -- that stuff is for old ladies, i thought -- and besides, i wouldn't be able to get at that money until retirement age without some stiff penalties. i didn't care about it then because i was going to build a company that would change the world. i worked some crazy long hours back in my 20s and spent quite a lot of cash blowing off steam (i would reason that it was necessary after those crazy hours), and didn't contribute much at all to my retirement . . . why bother, when i'd have enough money after i cash in on the next big thing?

5 years later after basically treading water retirement-wise and not being part of the next big thing, i started paying closer attention to my retirement accounts. i started contributing 10% of my income to my employer's 401k plan and maxed out contributions to my roth ira. while it's not a huge nest egg, it's at least a nice place to put money for my old age.

401k plans (and iras) are nice in that they are tax deferred. you get a break on your taxes today because they reduce your taxable income -- you pay taxes when you take the money out in retirement. the thinking is that you're in a higher tax bracket today when you're making money than in your salt-and-pepper days when you're not working. pretty sound reasoning. employers often make matching contributions, too, which is essentially free money.

roth iras (and roth 401ks) are a bit different. you put after-tax dollars away, but the money grows tax free, making it a perfect vehicle to experience the magic of compound interest. if time is on your side, i don't know that you can beat that kind of magic.

i've heard of a method where you pay your children and have them contribute their earnings to a roth ira. i know there is some speculation out there about this, but to me it sounds like the perfect way to help them save for retirement. it would require you to actually pay your children -- that is, you would have to submit a 1099 or w-2 tax form to them and the irs for work that they have done. they would have to file taxes as well, but now that the legalities are out of the way, they can contribute those earnings to a roth ira. even with the most conservative portfolio, because they have time on their sides, their contributions would likely be worth well over a million dollars when they reach retirement age. there are all sorts of calculators and things online to predict this . . . try one with one or two contributions at age 13 or 14. that's the power of compound interest.

so, now all i have to do is build a turn-back-time machine, go back in time to when i was a kid, get the roth ira on the books (it didn't exist back then), convince my parents to pay me for household chores (ha!), contribute to a roth, convince my past self not to break into that roth for any reason, and return to the present . . . and i'd be able to rest easy in retirement.

save, save, save

last year, i lost somewhere on the order of 50 pounds, but before that, i had yo-yoed, like many people do -- gaining 5 pounds here, losing 10, gaining another 15. i had tried a lot of fad diets with some success, but it wasn't until i dedicated myself and really learned about fitness and nutrition was i able to lose the weight and keep it off.

now, what does this have to do with personal finance? at first glance, absolutely nothing, but i think a lot of people fall into the same weight loss traps with their savings. i mean, it's easy to stash some cash away one day but find it gone the next, get a raise or bonus and find your spending magically drift to that level, or diligently contribute to your savings but break into it because you 'need' that next great thing. we've all been there -- nutritionally and financially.

i read somewhere recently that the us savings rate for this past year was something like -1%. that means that as a people, we were spending more than what we made last year. now, i know that this doesn't take into account other measures of worth like unrealized gains in equities or real estate, etc., but, it seems like a pretty alarming statistic to me. at this rate, we'll be broke in a few years!

personally, i am an aggressive saver -- it has saved me from myself those times that i have been an aggressive spender. i've heard all sorts of numbers, rules of thumb, etc. on how much we should save, but i've never paid much attention to those -- they just seem way too low. i put away 10% of my after tax pay directly into a separate account, but beyond that, i contribute 5% to my 401k plan, put another 35-40% into equities or other savings vehicles and live off the remaining 50%, which largely falls into my mortgage, bills, and other spending. these percentages have stayed pretty much static throughout my professional life. it's rather unfortunate, but what that means is that i am spending way more today than i was when i was bringing home 20k a year. i think that makes me pretty typical, too, though.

i guess the point to my whole rant is this . . . einstein is credited with saying that compound interest 'is the greatest mathematical discovery of all time'. i don't have a lot of knowledge in the stock market or real estate or other investment vehicles (these are all part of my portfolio, but we'll get to that in a future ramble), so one way that i can make sure that i can participate in this great discovery is to save. whether that be a money market account, savings account, cd's, or what-have-you, i save a bit every month.

whether you put away 5, 10, 20, or more percent of your take home every check, it's all getting you the game of the great discovery of compound interest. it may not seem like that much now, but after it doubles in a few years, and doubles again a few years after that. it's just like dieting -- one or two pounds this week or next doesn't seem like much, but after 25 weeks, you've lost 25-50 pounds!

first post

i was stumbling around, looking for something interesting this sunday afternoon, and i came across a decent personal finance site. unfortunately, i can't find it anymore, and after googling for a bit, it looked like most of the existing sites out there on the matter weren't really that great.

so, i figured i'd try my hand at it and maybe could contribute something at least as good.

first, a little about me. i am a thirty-something, dinky, professional. i started my career about 10 years ago making a tight, but livable wage. i have been able to move up professionally and financially, but along the way have had to start over several times. while i have never fell into the credit trap, i have seen my bank account return to single digits, purchased way more home than i've needed, purchased luxury cars, and made a number of fiscal mistakes that i have been able to learn from and hope that others can learn from, too.

in the coming days, weeks, months, i hope to contribute some postings on saving, investing, and spending from what i have learned over the course of my life and over the past 10 years, specifically. i am by no means any type of investment professional, financial adviser, or anyone with any credentials to speak of, but, hopefully what has worked for me will work for you, and what has failed for me will be a warning for you!