big decisions

i've been looking at our finances and looking at ways to improve our cash flow. on thing that has been jumping out at me is a rental property that we purchased about 8 years ago on a fifteen year note. the cash return on this property is pretty close to 0%, though, we obviously are increasing our equity position with tenants paying down the note each month.

in 7 years, we will own the property free and clear, and it will start returning us around $1,000 a month (after property management, hoa fees, insurance, and taxes) in cash.

we could pay this down early and start getting the benefit of this return today, though this would be a pretty big drain on capital, it's hard not to consider. the annual return would be around 12-13%, the only real concern that i have is the opportunity cost of putting all that money into play. over the long term, it's hard to refute this as the best play -- we have the money earmarked for investment, anyway. the other option would be to put that toward another property, but the cash return on that would probably be half.

it seems like a no brainer, but i'm still on the fence about it. when my wife and i got married, we joked that she is responsible for all the small decisions and i'm responsible for all the big decisions, and up to this point there haven't been any big decisions.

stay tuned . . .

the escalating cost of higher education

a common conversation topic when i'm talking with my friends who have kids is the price of a college education these days, and whether we as parents are intending to cover any or all of that expense for our children (and, if we are planning on doing so, when to clue the kids in).

back when i graduated from the university of houston, about 15 years ago, tuition and fees for a full course load was less than $1,000 per semester for an in state student. i remember that figure, because i had a scholarship that paid that exact amount, and i would routinely get some spending or book money when my check came in. i just checked around, and the price is now closer to $3,000 per semester -- that's a decent chunk of change to have around, when you've got two kids that are going to overlap their college careers. and, that doesn't count room and board or other living expenses, which could easily double that figure. it wouldn't make much sense for my kids to go to the university of houston, though, unless they got some scholarship money there. with our rental properties in austin, it would be almost a no brainer that heading to the university of texas would be a better bet, as their housing would be set. but, what if they want to attend a school out of state? or an ivy league school?

i was able to live at home for part of my college life, which helped with expenses, and allowed me to be in the enviable position of not having to borrow any money in pursuit of my degree. after my freshman year, i decided to get a job and live on or nearer to campus with friends and have a more complete college experience. i juggled a pretty full load of school and work pretty much throughout my years at school, which i think helped prepare me for the "real world" in a way that many of my friends did not get to experience, while trading off some of the activities that my friends were able to participate in.

as parents, i think we all want to provide as much support and assistance as we can to our kids, and many times that comes with great sacrifice on our part. as i mentioned, i feel that my college experience allowed me to be better positioned for life after school, but i don't feel that is a lesson that i'd want to force on my kids.

we've already socked away enough for our three year old to handle a little more than year of tuition at the university of texas, and our one year old might just have enough to get through a semester at this point. i'd imagine, barring a drastic decline in their rates of return, that they'd have enough to get through an in-state public school, even with the trend of tuition increases that we've seen over the past years continue. and that's what we are prepared to do for them -- put them through a public university. of course, if they choose to go out of state or attend a private university, we'll let them make up the difference.

reboot

i've been purposely anonymous (not just by name, but also in not divulging my age, profession, income, etc.) in my writing on this blog from the beginning because i felt that would allow a broader audience to read my posts.

an interesting thing happened the other day that made me rethink this approach, and made me think that i should narrow my focus and write with a very specific and personal audience in mind. you see, i was having lunch with a co-worker and the topic of goals, retirement, and the like came up. now, here's a guy i respect very much, who is about the same age as i am, about the same income level, and for all practical considerations, we could be practically twins on paper.

when the talk moved to retirement, i shared with him that my goal is to retire or semi-retire by the time i am 45 years old. i am currently 36. he was a bit shocked, and floated a big question my way: "what's your secret?"

i was perfectly honest with him. i don't have any secrets. for the most part, i am a pretty normal guy. i have not had any big windfalls occur in my life. i have not made a ton of money in stocks or real estate. i did not come into any family money by birth or inheritance. i am not an entrepreneur. i do not own my own company. i am a hard worker and make a decent wage.

there might be some small things that may separate me from my co-worker. i have never carried any credit card debt. i did not take out any student loans. the only debt that i have ever carried is mortgage and car loans. i have been an aggressive saver most of my working life.

i am married and my wife and i were dual income / no kids for about 7 years. my wife is now part time and we have 2 kids -- a one year old and a three year old. we live in the suburbs some 20 miles north of dallas, texas, in what is for most respects our "dream house".

i used to think that i'd need 2 million dollars to retire, but these days i feel like retirement or semi-retirement can be accomplished with far less. i could be dead wrong. but, this is what i am going to write about.

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.