Thursday, May 31, 2007

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.

Wednesday, May 30, 2007

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?

Monday, May 28, 2007

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.

Sunday, May 27, 2007

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.

Saturday, May 26, 2007

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.

Thursday, May 24, 2007

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.

Sunday, May 20, 2007

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.

Tuesday, May 1, 2007

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.