Posted By Paul
Like many families, my family is contantly savings towards various goals, and one thing we've decided to try recently is the "Pretend You're Broke" strategy.
We're not doing the super crazy version that I've heard of where you go to churches and other places in order to get food donated for the needy (which is not only extreme, but it seems the worst kind of immorality unless you actually are in dire straits), or where you steal office supplies from work or stop tipping servers (also not cool). Instead we're just going to try to take a month or two and pretend that we're broke as a way to manage our spending and really get a leg up on our savings goals.
For example, now whenever I consider buying a new book/dvd/etc., I ask myself: "Would I buy this if I lost my job and was trying to get by on unemployment?" Most of the time the answer is no, and so I just pass on the purchase or try to find a cheaper alternative.
A few things that have come out of this experiment are:
-My family is eating out less. We still dine out with friends occasionally, but we rarely do the "let's go the restaurant because it's quicker or easier" thing. It helps that we have a small child since in many ways eating at home actually is the quickest and easiest option.
-It's kind of fun to try to come up with cheaper alternatives when it's voluntary. Choices that would be depressing if they were a necessity become empowering when they are done voluntarily.
-We find that with a little one there are often cheap alternatives that the child actually prefers. Our little one is now at the age where he can actually say what he would like to do. I am often amazed at how instead of the pricier things to do (the zoo, child activity center, etc.) he will often pick things that are incredibly cheap or free (like he will want to go to the park, or once he wanted to go to CostCo and watch the tire center put the new tires on cars).
-Some of the things we've tried might become permanent parts of our life. We've discovered that cutting back on restaurants is a sacrifice we are happy to make when in return we get to make improvements to our house or put money towards a trip.
If you find yourself wanting to try to save a little extra money for something, try taking a month and pretending you're broke. We've already learned from the experiment.
Showing posts with label savings. Show all posts
Showing posts with label savings. Show all posts
Friday, September 30, 2011
Wednesday, September 28, 2011
Article: 8 signs you're flirting with financial ruin
Posted By Paul
A cool little article. It listed 8 signs of financial ruin.
I thought the 8 signs they listed were good ones and I was happy to see that none applied to me.
I especially liked the signs that they listed like paying late fees on your bills or having bounced checks. The signs that aren't disastrous in themselves but serve as early warning signals of big problems to come.
Here is the article:
8 signs you're flirting with financial ruin
A cool little article. It listed 8 signs of financial ruin.
I thought the 8 signs they listed were good ones and I was happy to see that none applied to me.
I especially liked the signs that they listed like paying late fees on your bills or having bounced checks. The signs that aren't disastrous in themselves but serve as early warning signals of big problems to come.
Here is the article:
8 signs you're flirting with financial ruin
Saturday, September 17, 2011
A Dry Run For The Budget
Hi Everyone,
Sorry that I've been out of touch for so long, other aspects of the summer have kept me so busy that I haven't been able to post.
One new item in my world is that with a small child I've been thinking a lot about how to prepare for the future and possible expenses looming on the horizon.
For example, my kid isn't even school age yet, but I often wonder if private school might be something we'd want to look at sometime during his education (or if it's even something we could afford).
So as an experiment I did a quick estimate of what private school tuition costs per month (which by the way is very difficult since they seem to vary quite a bit) and I took that number and invented a monthly 'bill' for that amount.
So on the first of the month I take that amount and pretend to pay that bill. I actually take the money and just move it into a savings account that I created specifically for this purpose.
My hope is that this experiment will do two things:
1- It will give me an idea of how much adjustment it takes to cover this kind of bill every month.
2 - The money itself goes into a savings account that I can use for whatever (including giving me a head start on any future education costs).
It really is just an experiment to see what my family can reasonably afford and what kind of sacrifices we need to make in order to afford it. This helps me get a handle on large expenses that might be coming in the future and mentally prepare for these choices.
Sorry that I've been out of touch for so long, other aspects of the summer have kept me so busy that I haven't been able to post.
One new item in my world is that with a small child I've been thinking a lot about how to prepare for the future and possible expenses looming on the horizon.
For example, my kid isn't even school age yet, but I often wonder if private school might be something we'd want to look at sometime during his education (or if it's even something we could afford).
So as an experiment I did a quick estimate of what private school tuition costs per month (which by the way is very difficult since they seem to vary quite a bit) and I took that number and invented a monthly 'bill' for that amount.
So on the first of the month I take that amount and pretend to pay that bill. I actually take the money and just move it into a savings account that I created specifically for this purpose.
My hope is that this experiment will do two things:
1- It will give me an idea of how much adjustment it takes to cover this kind of bill every month.
2 - The money itself goes into a savings account that I can use for whatever (including giving me a head start on any future education costs).
It really is just an experiment to see what my family can reasonably afford and what kind of sacrifices we need to make in order to afford it. This helps me get a handle on large expenses that might be coming in the future and mentally prepare for these choices.
Sunday, June 26, 2011
Article: Conspicuously Thrifty
Posted By Paul
There was an article today on the Dollar Stretcher that really resonated with me because it reminded me of one of my very first Frugalize posts (here is the post from several years ago):
Conspicuous Consumption Gone Wrong
I still struggle with the idea of trying to wave the flag of frugality in a world that seems to focus so much more on showing off what you have (whether or not you can actually afford it).
One thing I have noticed is a definite change of attitude since our economy hit a slump. There seems to be a greater appreciation for stretching your dollar. However, I'm disappointed to see a focus on ways to still have a luxurious lifestyle while stretching your dollar, as opposed to the idea of trying to live a simpler lifestyle in general.
I suppose that's no surprise since the most common way I hear about the economic slowdown is in ads that are trying to encourage me to keep spending lavishly despite the situation.
The Dollar Stretcher article was great in that people suggested ways to be proud of their frugality without being overbearing. Several people said how frugality goes hand in hand with modesty, which I thought was a very nice point.
I liked the idea of being 'transparent' where you don't shout your accomplishments from the rooftops, but you do discuss your choices honestly when they come up in conversation.
Also, one of the comments specifically mentioned the book: "The Millionaire Next Door" which I read and reviewed in one of my first posts here:
Review Part 1: The Millionaire Next Door
One thing I have noticed that makes conspicuous thriftiness much easier is having a peer group that also views frugality and savings as something to be admired. I have two really good friends and we're all very practical when it comes to money and spending. It's great having friends who also consider living within your means to be a virtue. We don't try to "out miser" each other, but we also don't enable bad financial behavior.
I've seen people whose peer groups are all terrible with money, and they constantly encourage each other to overspend. It's like each person in the group serves as the "devil on the shoulder" for someone else. Always ready to provide a handy rationalization for a bad financial decision.
I'm sure that if you surround yourself with people who overspend it must feel very awkward to be the one person trying to live a frugal lifestyle.
Anyway here is the full article:
Conspicuously Thrifty
There was an article today on the Dollar Stretcher that really resonated with me because it reminded me of one of my very first Frugalize posts (here is the post from several years ago):
Conspicuous Consumption Gone Wrong
I still struggle with the idea of trying to wave the flag of frugality in a world that seems to focus so much more on showing off what you have (whether or not you can actually afford it).
One thing I have noticed is a definite change of attitude since our economy hit a slump. There seems to be a greater appreciation for stretching your dollar. However, I'm disappointed to see a focus on ways to still have a luxurious lifestyle while stretching your dollar, as opposed to the idea of trying to live a simpler lifestyle in general.
I suppose that's no surprise since the most common way I hear about the economic slowdown is in ads that are trying to encourage me to keep spending lavishly despite the situation.
The Dollar Stretcher article was great in that people suggested ways to be proud of their frugality without being overbearing. Several people said how frugality goes hand in hand with modesty, which I thought was a very nice point.
I liked the idea of being 'transparent' where you don't shout your accomplishments from the rooftops, but you do discuss your choices honestly when they come up in conversation.
Also, one of the comments specifically mentioned the book: "The Millionaire Next Door" which I read and reviewed in one of my first posts here:
Review Part 1: The Millionaire Next Door
One thing I have noticed that makes conspicuous thriftiness much easier is having a peer group that also views frugality and savings as something to be admired. I have two really good friends and we're all very practical when it comes to money and spending. It's great having friends who also consider living within your means to be a virtue. We don't try to "out miser" each other, but we also don't enable bad financial behavior.
I've seen people whose peer groups are all terrible with money, and they constantly encourage each other to overspend. It's like each person in the group serves as the "devil on the shoulder" for someone else. Always ready to provide a handy rationalization for a bad financial decision.
I'm sure that if you surround yourself with people who overspend it must feel very awkward to be the one person trying to live a frugal lifestyle.
Anyway here is the full article:
Conspicuously Thrifty
Wednesday, May 4, 2011
Article: 10 ways to fight frugality fatigue.
Posted By Paul
I saw this article that I liked because it focused on the psychology of frugality and saving, that it is just as much of a mind game as it is a number's game.
The general theme of the article reminded me of an earlier Frugalize post:
Crash Budgeting
Here are a few entries from the list with my added thoughts:
1 - Don't set goals too high: I see this one in so many places. People go from excessive spending to a super-frugal lifestyle, and they try to do it 'cold turkey'. More often than not they can't handle the dramatic change and they fall into their old patterns.
4 - Know your motivational style: This is a great point. I've talked to people about saving strategies and run into situations where their strategy would drive my crazy and vice-versa. It's important to find a system that works for you.
7 - Find a money buddy: This one is great. It is SOOO handy to have a person that I can discuss money items with that has similar goals to me and that can give me an objective opinion without their own agenda (i.e. my money buddy isn't trying to sell something).
9 - Go public: Obviously I like this one since it was what started this whole blog in the first place.
Here is the full article:
10 Ways To Fight Frugality Fatigue
I saw this article that I liked because it focused on the psychology of frugality and saving, that it is just as much of a mind game as it is a number's game.
The general theme of the article reminded me of an earlier Frugalize post:
Crash Budgeting
Here are a few entries from the list with my added thoughts:
1 - Don't set goals too high: I see this one in so many places. People go from excessive spending to a super-frugal lifestyle, and they try to do it 'cold turkey'. More often than not they can't handle the dramatic change and they fall into their old patterns.
4 - Know your motivational style: This is a great point. I've talked to people about saving strategies and run into situations where their strategy would drive my crazy and vice-versa. It's important to find a system that works for you.
7 - Find a money buddy: This one is great. It is SOOO handy to have a person that I can discuss money items with that has similar goals to me and that can give me an objective opinion without their own agenda (i.e. my money buddy isn't trying to sell something).
9 - Go public: Obviously I like this one since it was what started this whole blog in the first place.
Here is the full article:
10 Ways To Fight Frugality Fatigue
Monday, November 22, 2010
Finally dipping into the rainy day fund.
Posted By Paul
Those of you who follow Frugalize know that Matt and I strongly encourage people to have a rainy day fund ready for life's little emergencies.
I've been building an emergency fund for years and recently found myself in a spot where I actually used it.
Here was the series of events that made me very glad that I had my rainy day fund (many of which are mentioned in prior posts):
1) The roof - even though I saved money on doing the roof vs. paying someone there were expenses related to that which depleted my checking account. (Equipment, supplies, etc.)
2) Leaky pipes - it was a quiet afternoon when I saw the wet patch on my ceiling. Two minutes with a dry wall saw and one bucket of really gross water later and I discovered the leaky pipe. It wasn't the end of the world but it did cost some money to have the plumber come out and fix it. I believe in do it yourself when possible, but when it comes to leaky pipes I don't take chances.
3) Bad washer and dryer - The washer and dryer gave out on us. After many do it yourself repairs and years of faithful service our washer and dryer amazingly both gave out at about the same time. The repairman came and declared them "so broken that it would be cheaper to replace them" which is what we did.
4) Bad dishwasher - Not more than two weeks after the washer and dryer gave out our dishwasher also gave up the ghost. A similar story here. We called a repairman, he came, said that there were major issues with our dishwasher and it would be cheaper to replace it.
None of the above events had a huge financial impact, but putting them all together made for quite a bill.
It made me VERY happy that I had my emergency fund to dip into. Had it not been for the emergency fund we would have had to have either come up with the money some other way (borrow against retirement accounts - bad, putting it on credit cards - bad) or just plain do without those appliances for a while (which would have been doable but a hassle).
So now that hopefully the expenses have settled down for a while (knock on wood) our plan is to replenish our rainy day fund so that it is back up to full power. It was a good lesson for me to discover that the rainy day fund isn't just for an unexpected big event, it is just as likely to come in handy when you are faced with a quick series of small events.
Those of you who follow Frugalize know that Matt and I strongly encourage people to have a rainy day fund ready for life's little emergencies.
I've been building an emergency fund for years and recently found myself in a spot where I actually used it.
Here was the series of events that made me very glad that I had my rainy day fund (many of which are mentioned in prior posts):
1) The roof - even though I saved money on doing the roof vs. paying someone there were expenses related to that which depleted my checking account. (Equipment, supplies, etc.)
2) Leaky pipes - it was a quiet afternoon when I saw the wet patch on my ceiling. Two minutes with a dry wall saw and one bucket of really gross water later and I discovered the leaky pipe. It wasn't the end of the world but it did cost some money to have the plumber come out and fix it. I believe in do it yourself when possible, but when it comes to leaky pipes I don't take chances.
3) Bad washer and dryer - The washer and dryer gave out on us. After many do it yourself repairs and years of faithful service our washer and dryer amazingly both gave out at about the same time. The repairman came and declared them "so broken that it would be cheaper to replace them" which is what we did.
4) Bad dishwasher - Not more than two weeks after the washer and dryer gave out our dishwasher also gave up the ghost. A similar story here. We called a repairman, he came, said that there were major issues with our dishwasher and it would be cheaper to replace it.
None of the above events had a huge financial impact, but putting them all together made for quite a bill.
It made me VERY happy that I had my emergency fund to dip into. Had it not been for the emergency fund we would have had to have either come up with the money some other way (borrow against retirement accounts - bad, putting it on credit cards - bad) or just plain do without those appliances for a while (which would have been doable but a hassle).
So now that hopefully the expenses have settled down for a while (knock on wood) our plan is to replenish our rainy day fund so that it is back up to full power. It was a good lesson for me to discover that the rainy day fund isn't just for an unexpected big event, it is just as likely to come in handy when you are faced with a quick series of small events.
Sunday, July 25, 2010
Crash Budgeting
Posted By Paul
As someone who has spent nearly all of their adult life budgeting, saving towards goals, AND trying to live a fairly healthy lifestyle, I was intrigued by the thoughts that came to me after reading the following article:
Why Budgets Fail: Leave My Latte Alone
It's a list of reasons why people are unable to stick to budgets and ways to help. I noticed the entry in the article called the "Gung-Ho Backfire":
---------
The Gung-Ho Backfire - You set up a strict budget and then wonder why you can't stick to it. By trying to cut spending too drastically, you create an unsustainable budget that is sure to buckle under pressure.
---------
I realized that the unhealthy approach described here was like the "crash diet" for saving money, where you create a goal that is so hard to maintain that you are practically guaranteed to fail.
For example:
I had a friend who was carrying some credit card debt that they wanted to eliminate (a great goal for sure). I was talking with them about the budget they had set up and discovered that they had set a goal of putting aside a certain amount of money each month to pay off their credit cards (I think it was something like $500 a month). I told them that I thought this was a great goal and since their debt wasn't huge they figured that they would be able to pay it off in about 6 months at this rate.
What actually happened? Well the first month went well. They managed to hit their goal and pay down their debt by $500.
The next month an unexpected car repair came up and since they didn't have a "rainy day fund" set up that had to come out of the money they hoped to set aside for their credit card debt.
The month after that they decided to splurge a little since the last two months had been all about saving, saving, saving. So they went on a shopping spree that ended up eating the savings for that month.
Things got worse after that and before long the budget and goal were simply forgotten.
I realized just now that this whole experience felt a lot like someone who was going through a crash diet.
By creating this specific savings goal my friend had slashed their budget to the bone. They had left no money for incidentals or the occasional bit of fun. Sort of like the crazy diet where you decide you'll only eat celery in anticipation of the pounds melting off of you.
The car repair was kind of like the holiday season or the vacation where you find it impossible to stick to your diet. So you get discouraged and feel like a failure, and you feel like maybe the goal is impossible.
The month where they decided to treat themselves is like the cheeseburger and ice cream sundae splurge after the miserable time spent on your crazy diet.
What follows is the same phenomenon you see with crash diets where the person can't stick with the diet and ends up quitting early. They often lose the dramatic results they gained at the start of the program (my friend quickly re-accumulated the credit card debt and then some).
At the time I thought the problem was that my friend didn't have the discipline to follow through on their plan, but now I think that a big part of the problem was that they set their expectations too high (just like with a crash diet).
You might be able to live the "pinch every penny" lifestyle like that for a while, but when you just can't keep it up anymore you give up on the plan AND the goal. This is too bad since the goal was probably attainable if you had just been able to accept a more moderate change with less dramatic results.
By creating such a hefty savings goal my friend had put budget constraints on them that were so strict that they couldn't follow them for more than a couple of months. If they had set a savings goal of $250 a month they might have been able to stick with their program and payoff their debt. Sure it would have taken twice as long but they would have reached it. It's the same way with a more moderate weight loss program where you make more moderate changes. Your results won't be as dramatic but at least you'll create a system that you'll be able to live with and maintain.
Maybe the problem with "crash dieting" and "crash budgeting" is that the goal is to create a temporary process so that you can fix a problem and then forget about it. What you really need in both cases is a long term plan that you can maintain so that the results actually last.
As someone who has spent nearly all of their adult life budgeting, saving towards goals, AND trying to live a fairly healthy lifestyle, I was intrigued by the thoughts that came to me after reading the following article:
Why Budgets Fail: Leave My Latte Alone
It's a list of reasons why people are unable to stick to budgets and ways to help. I noticed the entry in the article called the "Gung-Ho Backfire":
---------
The Gung-Ho Backfire - You set up a strict budget and then wonder why you can't stick to it. By trying to cut spending too drastically, you create an unsustainable budget that is sure to buckle under pressure.
---------
I realized that the unhealthy approach described here was like the "crash diet" for saving money, where you create a goal that is so hard to maintain that you are practically guaranteed to fail.
For example:
I had a friend who was carrying some credit card debt that they wanted to eliminate (a great goal for sure). I was talking with them about the budget they had set up and discovered that they had set a goal of putting aside a certain amount of money each month to pay off their credit cards (I think it was something like $500 a month). I told them that I thought this was a great goal and since their debt wasn't huge they figured that they would be able to pay it off in about 6 months at this rate.
What actually happened? Well the first month went well. They managed to hit their goal and pay down their debt by $500.
The next month an unexpected car repair came up and since they didn't have a "rainy day fund" set up that had to come out of the money they hoped to set aside for their credit card debt.
The month after that they decided to splurge a little since the last two months had been all about saving, saving, saving. So they went on a shopping spree that ended up eating the savings for that month.
Things got worse after that and before long the budget and goal were simply forgotten.
I realized just now that this whole experience felt a lot like someone who was going through a crash diet.
By creating this specific savings goal my friend had slashed their budget to the bone. They had left no money for incidentals or the occasional bit of fun. Sort of like the crazy diet where you decide you'll only eat celery in anticipation of the pounds melting off of you.
The car repair was kind of like the holiday season or the vacation where you find it impossible to stick to your diet. So you get discouraged and feel like a failure, and you feel like maybe the goal is impossible.
The month where they decided to treat themselves is like the cheeseburger and ice cream sundae splurge after the miserable time spent on your crazy diet.
What follows is the same phenomenon you see with crash diets where the person can't stick with the diet and ends up quitting early. They often lose the dramatic results they gained at the start of the program (my friend quickly re-accumulated the credit card debt and then some).
At the time I thought the problem was that my friend didn't have the discipline to follow through on their plan, but now I think that a big part of the problem was that they set their expectations too high (just like with a crash diet).
You might be able to live the "pinch every penny" lifestyle like that for a while, but when you just can't keep it up anymore you give up on the plan AND the goal. This is too bad since the goal was probably attainable if you had just been able to accept a more moderate change with less dramatic results.
By creating such a hefty savings goal my friend had put budget constraints on them that were so strict that they couldn't follow them for more than a couple of months. If they had set a savings goal of $250 a month they might have been able to stick with their program and payoff their debt. Sure it would have taken twice as long but they would have reached it. It's the same way with a more moderate weight loss program where you make more moderate changes. Your results won't be as dramatic but at least you'll create a system that you'll be able to live with and maintain.
Maybe the problem with "crash dieting" and "crash budgeting" is that the goal is to create a temporary process so that you can fix a problem and then forget about it. What you really need in both cases is a long term plan that you can maintain so that the results actually last.
Wednesday, June 16, 2010
The Hunt For The Perfect House
Posted By Paul
My wife and I have been in our current house (which was our first house) for about seven years and we recently started talking about moving. Having been in our place for a while we've learned a lot about what we would like in our next house.
So now we were faced with some really tough questions:
-Should we move?
-Can we move?
-What can we afford to move into?
I now appreciate what people mean when they say that buying your first house is the simplest since you don't have to deal with selling your OLD house as well. We decided to take it step-by-step.
We started off by browsing properties on the internet. We wanted to see if properties existed in the area that met our criteria to get an idea of what they cost.
That ended up being pretty easy. We discovered several properties that met the basic criteria of what we wanted. That told us that properties like we hoped for did exist (we wanted a little bit of land) and what they cost.
We then did some research to get an idea of what we could get for our house if we sold it. We tried to factor in a cushion to cover what we would do if there was a long gap between selling our old house and finding a new one.
We quickly end up with a spreadsheet where a lot of the numbers were guesses, but at least they were hopefully guesses grounded in the fact.
Based on a general idea of cost and a guess of what we could get for our current house it was simple math to figure out the mortgage payment we would need to swing in order to make it happen (based on the current mortgage rates).
Unfortunately that is where the process ended. The way the numbers worked out it looked like the mortgage payment for our dream house would be much bigger than we wanted to take on.
So now what? Well we're going to do three things:
1) Keep browsing the web for properties. You never know, maybe some amazing bargain will pop up.
2) Get our current house in shape for selling. This just means that any projects we decide to bite off will be based on the idea that we'll be selling this house in the semi-near future (so projects that help the resale value of the house get priority).
3) Save, save, save! Just because we can't afford our dream house now doesn't mean we can't get there. Towards that end we're focusing on paying down the mortgage (giving us more equity to put towards the next house) as quickly as we can without sacrificing our other "required" savings vehicles (rainy day fund, college fund, retirement, etc.).
It was tough looking at all of these cool properties and trying to figure out a way to get the numbers to work. Phrases like: "Well that mortgage payment wouldn't be TOO bad." keep going through your head. Luckily with a quickly growing toddler in the house it was easy to remember that unexpected expenses come up and that even if we COULD manage a bigger payment every month, it doesn't mean that we SHOULD.
Our hope is that if we stick to our plan that eventually we'll be able to afford our dream house and we won't be stuck in that "house poor" mode where we have a great house but we struggle to make the payment every month.
We'll keep you posted!
My wife and I have been in our current house (which was our first house) for about seven years and we recently started talking about moving. Having been in our place for a while we've learned a lot about what we would like in our next house.
So now we were faced with some really tough questions:
-Should we move?
-Can we move?
-What can we afford to move into?
I now appreciate what people mean when they say that buying your first house is the simplest since you don't have to deal with selling your OLD house as well. We decided to take it step-by-step.
We started off by browsing properties on the internet. We wanted to see if properties existed in the area that met our criteria to get an idea of what they cost.
That ended up being pretty easy. We discovered several properties that met the basic criteria of what we wanted. That told us that properties like we hoped for did exist (we wanted a little bit of land) and what they cost.
We then did some research to get an idea of what we could get for our house if we sold it. We tried to factor in a cushion to cover what we would do if there was a long gap between selling our old house and finding a new one.
We quickly end up with a spreadsheet where a lot of the numbers were guesses, but at least they were hopefully guesses grounded in the fact.
Based on a general idea of cost and a guess of what we could get for our current house it was simple math to figure out the mortgage payment we would need to swing in order to make it happen (based on the current mortgage rates).
Unfortunately that is where the process ended. The way the numbers worked out it looked like the mortgage payment for our dream house would be much bigger than we wanted to take on.
So now what? Well we're going to do three things:
1) Keep browsing the web for properties. You never know, maybe some amazing bargain will pop up.
2) Get our current house in shape for selling. This just means that any projects we decide to bite off will be based on the idea that we'll be selling this house in the semi-near future (so projects that help the resale value of the house get priority).
3) Save, save, save! Just because we can't afford our dream house now doesn't mean we can't get there. Towards that end we're focusing on paying down the mortgage (giving us more equity to put towards the next house) as quickly as we can without sacrificing our other "required" savings vehicles (rainy day fund, college fund, retirement, etc.).
It was tough looking at all of these cool properties and trying to figure out a way to get the numbers to work. Phrases like: "Well that mortgage payment wouldn't be TOO bad." keep going through your head. Luckily with a quickly growing toddler in the house it was easy to remember that unexpected expenses come up and that even if we COULD manage a bigger payment every month, it doesn't mean that we SHOULD.
Our hope is that if we stick to our plan that eventually we'll be able to afford our dream house and we won't be stuck in that "house poor" mode where we have a great house but we struggle to make the payment every month.
We'll keep you posted!
Monday, April 26, 2010
Article: Financial Peace In Tough Times
Posted By Paul
I liked this article on Debt Kid that talked about how an emergency fund was useful in a time of family crisis. We often think of emergency funds for times where our car breaks down or we discover a hole in our roof, but this was a great example of how having some extra money can also help when a family emergency comes up:
Feeling Financial Peace In Tough Times
I liked this article on Debt Kid that talked about how an emergency fund was useful in a time of family crisis. We often think of emergency funds for times where our car breaks down or we discover a hole in our roof, but this was a great example of how having some extra money can also help when a family emergency comes up:
Feeling Financial Peace In Tough Times
Friday, April 16, 2010
Follow up on my system for saving
Posted By Paul
One thing that I've been doing that has worked well for me is based on a REALLY old post of mine that talks about how I save money. Here is the article:
Simple System For Saving Money
I still use this system but now I tailor it a bit in that I keep a list of places that I like to put money when I have a little extra. For example here is my current list:
Roth
Mortgage
Car Loan
Child College Fund
Fun Fund
Rainy Day Fund
I just keep this list in a text document and whenever I have more than my 'target amount' in my checking account I transfer $100 to the item that is at the top of the list and then that item moves to the bottom.
I like this system because I can change the list easily if I ever want to divert money to saving for a new goal. I can even put the same item in the list multiple times if I ever want to save towards a specific goal faster.
You may notice too that I have 'Fun Fund' in the list. This has been a great addition in that every dollar that goes into that account (which is just an account in my ISA that I labeled 'Fun Fund') is intended to be spent on something fun. It's a great way to give yourself a reward for saving. It's also a really nice way to save up money in preparation for a vacation or some other fun event. We don't even know what exactly we're saving for (though it'll probably be some sort of vacation when our child is old enough to travel), but it's great to have the money set aside and to see it growing.
One thing that I've been doing that has worked well for me is based on a REALLY old post of mine that talks about how I save money. Here is the article:
Simple System For Saving Money
I still use this system but now I tailor it a bit in that I keep a list of places that I like to put money when I have a little extra. For example here is my current list:
Roth
Mortgage
Car Loan
Child College Fund
Fun Fund
Rainy Day Fund
I just keep this list in a text document and whenever I have more than my 'target amount' in my checking account I transfer $100 to the item that is at the top of the list and then that item moves to the bottom.
I like this system because I can change the list easily if I ever want to divert money to saving for a new goal. I can even put the same item in the list multiple times if I ever want to save towards a specific goal faster.
You may notice too that I have 'Fun Fund' in the list. This has been a great addition in that every dollar that goes into that account (which is just an account in my ISA that I labeled 'Fun Fund') is intended to be spent on something fun. It's a great way to give yourself a reward for saving. It's also a really nice way to save up money in preparation for a vacation or some other fun event. We don't even know what exactly we're saving for (though it'll probably be some sort of vacation when our child is old enough to travel), but it's great to have the money set aside and to see it growing.
Wednesday, February 24, 2010
Article: Overcome marriage money challenges
Posted By Paul
I read an article on the dollar stretcher that I really liked. So many aspects of the article reminded me of things that my wife and I do to handle money in our marriage, such as:
-Using rewards credit cards (never carrying a balance but splurging with the reward money)
-Saving up for expensive items (which also gives you time to decide if you really want or need the item in the first place)
Worth a read for all married couples, whether or not spending is a source of friction in your marriage:
Overcome marriage money challenges
I read an article on the dollar stretcher that I really liked. So many aspects of the article reminded me of things that my wife and I do to handle money in our marriage, such as:
-Using rewards credit cards (never carrying a balance but splurging with the reward money)
-Saving up for expensive items (which also gives you time to decide if you really want or need the item in the first place)
Worth a read for all married couples, whether or not spending is a source of friction in your marriage:
Overcome marriage money challenges
Wednesday, December 9, 2009
Article: To act like the rich, be frugal
Posted By Paul
I'm a big fan of the book 'The Millionaire Next Door' as you can see by the previous posts:
The Millionaire Next Door Pt 1: Big Hat No Cattle
Millionaire Next Door Review Pt. 2: UAW or PAW
Millionaire Next Door Review Pt. 3: Economic Outpatient Care
There is an article with the author where they ask him about trends in purchasing of certain "status" items. His findings and opinions are interesting. Here is an interesting excerpt from the article:
"For example, most prestige makes of cars -- 86 percent -- are driven by nonmillionaires. Yes, people with very high incomes, high levels of wealth are more likely to drive status automobiles. But in sheer numbers, the largest consumer segment for pricey cars, vodkas and homes is not the millionaire population, it is the aspirationals. These are people who think they are acting rich via their adoption of prestige brands, but in most cases they are only acting like each other."
Here is the link for the full article:
To act like the rich, be frugal
I'm a big fan of the book 'The Millionaire Next Door' as you can see by the previous posts:
The Millionaire Next Door Pt 1: Big Hat No Cattle
Millionaire Next Door Review Pt. 2: UAW or PAW
Millionaire Next Door Review Pt. 3: Economic Outpatient Care
There is an article with the author where they ask him about trends in purchasing of certain "status" items. His findings and opinions are interesting. Here is an interesting excerpt from the article:
"For example, most prestige makes of cars -- 86 percent -- are driven by nonmillionaires. Yes, people with very high incomes, high levels of wealth are more likely to drive status automobiles. But in sheer numbers, the largest consumer segment for pricey cars, vodkas and homes is not the millionaire population, it is the aspirationals. These are people who think they are acting rich via their adoption of prestige brands, but in most cases they are only acting like each other."
Here is the link for the full article:
To act like the rich, be frugal
Wednesday, December 2, 2009
HSA? HRA? FSA?
Posted By Paul
So just when you thought medical insurance couldn't get more confusing they added even more types of health related accounts for you to puzzle out. I've been trying to figure out what they all are so I thought I would share what I found.
Let's start with the FSA. For that I'm going to refer people to an earlier post which describes them in detail:
Are FSA's worth doing?
So then what is a Health Reimbursement Account (HRA)?
An HRA is an account setup by your employer that you can use for medical expense reimbursement. It's essentially your company telling you: "We're going to give you X dollars to help you pay for your health care costs this year."
Generally you have to submit proof of medical expenses to your company for reimbursement.
So what's the downside? As near as I can tell there really isn't one. However, the HRA might not be for everyone. For example, one thing I've seen are things where a company has two plans that you can choose from:
Plan A: Costs you $1000 a year and you don't get an HRA.
Plan B: Costs you $2000 a year and you get an HRA of $1500.
If you assume Plan A and Plan B have the same coverage, which one should you choose?
Well, if you are healthy Plan A might be better since you might have health care expenses that are so low that you might never even USE your HRA. However if you have some known health issues that makes you certain that you'll end up using that $1500, then Plan B becomes the better option.
Okay, so then the final account to cover is the Health Savings Account (HSA)
The first thing to know is that not everyone is ALLOWED to get an HSA. You only qualify for an HSA if you are in what is considered to be a High Deductible Health Plan (or HDHP...sigh all these abbreviations). If you are enrolled in an HDHP (your employer should let you know) then you are allowed to open an HSA.
So what does an HSA do? Well first lets cover how money goes INTO the HSA. Contributions come from YOU (not your employer like in the HRA), and contributions go in pre-tax (which is cool).
While in your account your money can be invested (the investment vehicles depend on the financial institution that holds your account usually a typical set of funds and a money market).
So how does money come out? You use it for reimbursement of medical expenses (by submitting paperwork to whoever is administering your HSA).
Now one cool thing about the HSA is that the money doesn't "expire" at the end of the year like it does with an FSA, it remains yours so if you have a lucky year you have that money saved up for the following year.
If you withdraw money from your HSA that isn't for a medical expense then you take a penalty, but from what I've read, this penalty disappears when you turn 65, so if you whatever money you don't use become yours without penalty when you turn 65, so in a way you can consider it part of your retirement funds.
Also, if you leave your job or change health plans such that you are no longer in a HDHP then your money doesn't disappear. If you leave your job your account remains yours. If you end up switching to a health plan later that ISN'T an HDHP then you're not allowed to contribute to your HSA any more, but you can still withdraw money for qualified expenses.
It seems to me that an HSA can be a good choice for people who are in a situation where they don't have many health expenses currently, but expect to in the future. They can put money in their HSA and if they are lucky enough to have a year without any significant medical costs then they have those contributions saved in case it happens the following year. If you manage to go several years without any significant medical costs then you could build up a pretty nice little rainy day fund for when something does happen.
I found a link to a pdf that did a nice comparison between the three accounts:
HRSFSAHSA.pdf
I also recommend the wikipedia entries as they all do a good job of explaining the accounts in further detail:
Wikipedia Entry - FSA
Wikipedia Entry - HRA
Wikipedia Entry - HSA
So just when you thought medical insurance couldn't get more confusing they added even more types of health related accounts for you to puzzle out. I've been trying to figure out what they all are so I thought I would share what I found.
Let's start with the FSA. For that I'm going to refer people to an earlier post which describes them in detail:
Are FSA's worth doing?
So then what is a Health Reimbursement Account (HRA)?
An HRA is an account setup by your employer that you can use for medical expense reimbursement. It's essentially your company telling you: "We're going to give you X dollars to help you pay for your health care costs this year."
Generally you have to submit proof of medical expenses to your company for reimbursement.
So what's the downside? As near as I can tell there really isn't one. However, the HRA might not be for everyone. For example, one thing I've seen are things where a company has two plans that you can choose from:
Plan A: Costs you $1000 a year and you don't get an HRA.
Plan B: Costs you $2000 a year and you get an HRA of $1500.
If you assume Plan A and Plan B have the same coverage, which one should you choose?
Well, if you are healthy Plan A might be better since you might have health care expenses that are so low that you might never even USE your HRA. However if you have some known health issues that makes you certain that you'll end up using that $1500, then Plan B becomes the better option.
Okay, so then the final account to cover is the Health Savings Account (HSA)
The first thing to know is that not everyone is ALLOWED to get an HSA. You only qualify for an HSA if you are in what is considered to be a High Deductible Health Plan (or HDHP...sigh all these abbreviations). If you are enrolled in an HDHP (your employer should let you know) then you are allowed to open an HSA.
So what does an HSA do? Well first lets cover how money goes INTO the HSA. Contributions come from YOU (not your employer like in the HRA), and contributions go in pre-tax (which is cool).
While in your account your money can be invested (the investment vehicles depend on the financial institution that holds your account usually a typical set of funds and a money market).
So how does money come out? You use it for reimbursement of medical expenses (by submitting paperwork to whoever is administering your HSA).
Now one cool thing about the HSA is that the money doesn't "expire" at the end of the year like it does with an FSA, it remains yours so if you have a lucky year you have that money saved up for the following year.
If you withdraw money from your HSA that isn't for a medical expense then you take a penalty, but from what I've read, this penalty disappears when you turn 65, so if you whatever money you don't use become yours without penalty when you turn 65, so in a way you can consider it part of your retirement funds.
Also, if you leave your job or change health plans such that you are no longer in a HDHP then your money doesn't disappear. If you leave your job your account remains yours. If you end up switching to a health plan later that ISN'T an HDHP then you're not allowed to contribute to your HSA any more, but you can still withdraw money for qualified expenses.
It seems to me that an HSA can be a good choice for people who are in a situation where they don't have many health expenses currently, but expect to in the future. They can put money in their HSA and if they are lucky enough to have a year without any significant medical costs then they have those contributions saved in case it happens the following year. If you manage to go several years without any significant medical costs then you could build up a pretty nice little rainy day fund for when something does happen.
I found a link to a pdf that did a nice comparison between the three accounts:
HRSFSAHSA.pdf
I also recommend the wikipedia entries as they all do a good job of explaining the accounts in further detail:
Wikipedia Entry - FSA
Wikipedia Entry - HRA
Wikipedia Entry - HSA
Sunday, October 18, 2009
Links: Good info sources for annuities.
Posted By Paul
As I did my research on annuities I found some links that I wanted to pass on:
AnnuityTruth.org - specializes in info for annuities for seniors
Ultimate Guide to Retirement: Annuities - A great page from CNNMoney with all kinds of info about the different types of annuities. A must read for anyone thinking of purchasing an annuity.
Useful info to find out more about annuities.
As I did my research on annuities I found some links that I wanted to pass on:
AnnuityTruth.org - specializes in info for annuities for seniors
Ultimate Guide to Retirement: Annuities - A great page from CNNMoney with all kinds of info about the different types of annuities. A must read for anyone thinking of purchasing an annuity.
Useful info to find out more about annuities.
Wednesday, October 14, 2009
What the heck is an annuity part 4: Variable with Life
Posted By Paul
This is going to be my next to last posting in the annuity series (my final posting will be a collection of useful info sources I found on annuities). I'm going to talk about the most controversial member of the annuity family, the variable annuity with life.
This is a very strange investment vehicle in that it is a mix of life insurance and fund investment. Essentially you put money every month into the variable annuity, part of that payment goes into the insurance component of your account (essentially like a life insurance premium) and the other part goes into "sub accounts" (mutual funds that you can choose from a family).
So what is the appeal? Well a common argument is that you get life insurance AND a retirement vehicle. You often hear of the idea that down the road you borrow against the cash value of your annuity which means you get your money tax free. I've heard of financial advisers presenting this idea as if it were something they had thought of.
What is the downside? Here are two of the most basic arguments against variable annuities with life insurance:
1) If you want life insurance, just go and buy life insurance - my research into this mentions that generally if you compare the money you pay for life insurance through a variable annuity to just getting a normal life insurance policy you'll discover that the life insurance through the annuity is MUCH more expensive.
2) Just as with regular variable annuities, watch out for fees. Brokerage fees, fund fees, commissions, maintenance fees. They can eat up your investment quickly.
I also found in my research that when you hear about "life insurance scams" that most often it is in the form of a variable annuity with life insurance product. This doesn't surprise me since the whole variable annuity with life insurance is a great product if you want to confuse and deceive someone since you have a variable annuity (which is already a complicated and poorly defined product) and you toss in life insurance (which is a complicated thing unto itself). A variable annuity with life insurance takes these two complicated things and mashes them together into a product that is almost impossible to understand, and makes it VERY easy to hide fees.
To give a personal slant to this, I had a variable annuity/life insurance policy for a short time. I opened it and then later closed it and luckily I didn't lose much.
So what did I learn from my brush with variable annuity/life insurance policies?
-They are confusing. When I first invested I THOUGHT I knew how it all worked but only after watching it closely did I see the fees and how the affected my return on investment.
-There is inertia and psychology involved. For example when I opened my annuity I put in a small amount of money and I watched it closely. I shudder to think what would have happened if I had put my whole nest egg in there and just stopped checking it and figured it was doing fine.
-They have all kinds if little ways to keep the money rolling in. With my annuity I would get a letter every few months saying that I had been offered an increase in my life insurance death benefit, and that for just X dollars more a month I would get an additional coverage of Y dollars in death benefit. The worst part was that the letters said that unless I contacted them they would assume I wanted the increase in benefit (and premium). It got to be annoying to have to write or call them every few month and tell them NOT to raise my premium. Imagine if I had just ignored the letters? Then every few months my premium would have gone up a little and who knows where it would have ended up.
It sounds like I'm pretty down on this type of product, and I would have to say that for the most part I am.
If you read my previous article on variable annuities you may recall that I suggested going into it ASSUMING it's a bad investment and then see if you can be convinced otherwise. For the variable annuity with life insurance it's so complicated and easily prone to hidden fees and catches that I would take my warning even further.
For a variable annuity/life insurance product I would suggest the following rules:
1) If you aren't taking full advantage of 401k/Roth IRA options then don't even think of looking at this product.
2) If someone offers you an annuity life insurance product, find out what it would cost to get the equivalent death benefit with out the annuity part.
3) Take some time to find the fees. They are in there, so see where they are and how much they are, ask about broker commissions, fund fees, maintenance fees and so on.
4) Do not invest in this product unless you can get an impartial knowledgeable person to think it's a good idea. When I say impartial I mean someone who is not making or losing money based on whether or not you invest in this product. This is NOT the type of product where you should trust the person who is selling you the product.
5) Do the research. This is also NOT the type of product where you should think: "well my aunt has one and she likes it, so mine's probably okay". There is so much variety among these products that your aunt could have a totally different TYPE of product, and maybe your aunt has one but doesn't really understand how it works either.
6) If anyone suggests that you invest in this type of product, ask yourself: "Would this person make money off of my investment?" If the answer is yes, then take EVERYTHING they say with a huge grain of salt.
There might be people in situations where this type of product is a good idea, but I would predict that this type of investment is probably the most commonly owned "bad" investment.
If you are someone who has this type of product and you don't really understand it I would do some serious research into your product, just some basic things like:
1) Find out what your death benefit is and do a little research to see what it cost you to get the same benefit from a reputable insurance company without all of the annuity stuff.
2) Check your subaccounts, find out what their maintenance fees are, compare them to mutual funds at Vanguard.
If you are at all worried after doing the above, then consider finding a financial adviser that is paid by the hour and seeing what they think, or perhaps just find a trusted friend or family member that is "into investing" and have them look over the account and see what they think. The worst thing to do is to be in a bad investment and continually paying month after month.
This is going to be my next to last posting in the annuity series (my final posting will be a collection of useful info sources I found on annuities). I'm going to talk about the most controversial member of the annuity family, the variable annuity with life.
This is a very strange investment vehicle in that it is a mix of life insurance and fund investment. Essentially you put money every month into the variable annuity, part of that payment goes into the insurance component of your account (essentially like a life insurance premium) and the other part goes into "sub accounts" (mutual funds that you can choose from a family).
So what is the appeal? Well a common argument is that you get life insurance AND a retirement vehicle. You often hear of the idea that down the road you borrow against the cash value of your annuity which means you get your money tax free. I've heard of financial advisers presenting this idea as if it were something they had thought of.
What is the downside? Here are two of the most basic arguments against variable annuities with life insurance:
1) If you want life insurance, just go and buy life insurance - my research into this mentions that generally if you compare the money you pay for life insurance through a variable annuity to just getting a normal life insurance policy you'll discover that the life insurance through the annuity is MUCH more expensive.
2) Just as with regular variable annuities, watch out for fees. Brokerage fees, fund fees, commissions, maintenance fees. They can eat up your investment quickly.
I also found in my research that when you hear about "life insurance scams" that most often it is in the form of a variable annuity with life insurance product. This doesn't surprise me since the whole variable annuity with life insurance is a great product if you want to confuse and deceive someone since you have a variable annuity (which is already a complicated and poorly defined product) and you toss in life insurance (which is a complicated thing unto itself). A variable annuity with life insurance takes these two complicated things and mashes them together into a product that is almost impossible to understand, and makes it VERY easy to hide fees.
To give a personal slant to this, I had a variable annuity/life insurance policy for a short time. I opened it and then later closed it and luckily I didn't lose much.
So what did I learn from my brush with variable annuity/life insurance policies?
-They are confusing. When I first invested I THOUGHT I knew how it all worked but only after watching it closely did I see the fees and how the affected my return on investment.
-There is inertia and psychology involved. For example when I opened my annuity I put in a small amount of money and I watched it closely. I shudder to think what would have happened if I had put my whole nest egg in there and just stopped checking it and figured it was doing fine.
-They have all kinds if little ways to keep the money rolling in. With my annuity I would get a letter every few months saying that I had been offered an increase in my life insurance death benefit, and that for just X dollars more a month I would get an additional coverage of Y dollars in death benefit. The worst part was that the letters said that unless I contacted them they would assume I wanted the increase in benefit (and premium). It got to be annoying to have to write or call them every few month and tell them NOT to raise my premium. Imagine if I had just ignored the letters? Then every few months my premium would have gone up a little and who knows where it would have ended up.
It sounds like I'm pretty down on this type of product, and I would have to say that for the most part I am.
If you read my previous article on variable annuities you may recall that I suggested going into it ASSUMING it's a bad investment and then see if you can be convinced otherwise. For the variable annuity with life insurance it's so complicated and easily prone to hidden fees and catches that I would take my warning even further.
For a variable annuity/life insurance product I would suggest the following rules:
1) If you aren't taking full advantage of 401k/Roth IRA options then don't even think of looking at this product.
2) If someone offers you an annuity life insurance product, find out what it would cost to get the equivalent death benefit with out the annuity part.
3) Take some time to find the fees. They are in there, so see where they are and how much they are, ask about broker commissions, fund fees, maintenance fees and so on.
4) Do not invest in this product unless you can get an impartial knowledgeable person to think it's a good idea. When I say impartial I mean someone who is not making or losing money based on whether or not you invest in this product. This is NOT the type of product where you should trust the person who is selling you the product.
5) Do the research. This is also NOT the type of product where you should think: "well my aunt has one and she likes it, so mine's probably okay". There is so much variety among these products that your aunt could have a totally different TYPE of product, and maybe your aunt has one but doesn't really understand how it works either.
6) If anyone suggests that you invest in this type of product, ask yourself: "Would this person make money off of my investment?" If the answer is yes, then take EVERYTHING they say with a huge grain of salt.
There might be people in situations where this type of product is a good idea, but I would predict that this type of investment is probably the most commonly owned "bad" investment.
If you are someone who has this type of product and you don't really understand it I would do some serious research into your product, just some basic things like:
1) Find out what your death benefit is and do a little research to see what it cost you to get the same benefit from a reputable insurance company without all of the annuity stuff.
2) Check your subaccounts, find out what their maintenance fees are, compare them to mutual funds at Vanguard.
If you are at all worried after doing the above, then consider finding a financial adviser that is paid by the hour and seeing what they think, or perhaps just find a trusted friend or family member that is "into investing" and have them look over the account and see what they think. The worst thing to do is to be in a bad investment and continually paying month after month.
Sunday, October 11, 2009
What the heck is an annuity part 3: Variable
Posted By Paul
As I go through the various types of annuities I seem to be gradually moving towards the more controversial types of annuities, and that brings us to one of the more controversial members of the annuity family, the variable annuity.
So what's a variable annuity? Here are the basic characteristics of a variable annuity:
1) Tax deferred - gains are only taxed when you withdraw them.
2) Fund based - your money is going into some sort of mutual or bond fund that you select (generally an annuity offers 6-12 funds that you choose from).
The variable part just means that your money is going into an investment, your return is based on how well those investments do. There is no guaranteed return.
I'm guessing that a lot of you are thinking: "This sort of sounds like a 401k." and you're right. It is SORT OF like a 401k, but that SORT OF is important.
In my research the main thing to watch in this sort of annuity is the fees. There are often high management fees, commissions for the agent who sold it to you, and other little fees like that. The fees may seem like a minor thing, but imagine if the fees end up being 2% of your total investment, you need to make 2% to just break even, and even more to beat inflation.
It seems that these fees are what typically give these types of investments a bad name. Even if you don't see any specific up front fees, the funds themselves might have a very high expense ratio. To see what that means go to my earlier post:
A Few Quick Tips On Mutual Funds
The question now is, are variable annuities something to avoid at all costs? Well I'd say that you should ONLY look at a variable annuity if you are already taking full advantage of your allowed contributions for your 401k AND Roth IRA.
If you decide to look into a variable annuity I would be VERY careful. I hate to recommend paranoia but this is one of those situations where I would suggest going into the situation with a very skeptical eye. Assume that the variable annuity is of the "bad" type (high commissions, high fees, etc.) and only invest if you are convinced this isn't the case.
Also, I would suggest that you observe the agent you are dealing with very closely. If they seem to be trying to conceal or downplay various fees and commissions, I would be VERY careful.
Finally, if anyone tells you that you should take your IRA or 401k and roll it into a variable annuity, consider this a HUGE RED FLAG! I found several articles that said that this sort of suggestion is essentially like saying:
"Hey let's take your big pile of money in a low fee environment and roll it into an investment with high fees and commissions without any added tax benefits."
If you have money in a variable annuity, I would suggest that you take a very hard look at it and see just how much you are paying in fees and then see how that is affecting your investments.
As I go through the various types of annuities I seem to be gradually moving towards the more controversial types of annuities, and that brings us to one of the more controversial members of the annuity family, the variable annuity.
So what's a variable annuity? Here are the basic characteristics of a variable annuity:
1) Tax deferred - gains are only taxed when you withdraw them.
2) Fund based - your money is going into some sort of mutual or bond fund that you select (generally an annuity offers 6-12 funds that you choose from).
The variable part just means that your money is going into an investment, your return is based on how well those investments do. There is no guaranteed return.
I'm guessing that a lot of you are thinking: "This sort of sounds like a 401k." and you're right. It is SORT OF like a 401k, but that SORT OF is important.
In my research the main thing to watch in this sort of annuity is the fees. There are often high management fees, commissions for the agent who sold it to you, and other little fees like that. The fees may seem like a minor thing, but imagine if the fees end up being 2% of your total investment, you need to make 2% to just break even, and even more to beat inflation.
It seems that these fees are what typically give these types of investments a bad name. Even if you don't see any specific up front fees, the funds themselves might have a very high expense ratio. To see what that means go to my earlier post:
A Few Quick Tips On Mutual Funds
The question now is, are variable annuities something to avoid at all costs? Well I'd say that you should ONLY look at a variable annuity if you are already taking full advantage of your allowed contributions for your 401k AND Roth IRA.
If you decide to look into a variable annuity I would be VERY careful. I hate to recommend paranoia but this is one of those situations where I would suggest going into the situation with a very skeptical eye. Assume that the variable annuity is of the "bad" type (high commissions, high fees, etc.) and only invest if you are convinced this isn't the case.
Also, I would suggest that you observe the agent you are dealing with very closely. If they seem to be trying to conceal or downplay various fees and commissions, I would be VERY careful.
Finally, if anyone tells you that you should take your IRA or 401k and roll it into a variable annuity, consider this a HUGE RED FLAG! I found several articles that said that this sort of suggestion is essentially like saying:
"Hey let's take your big pile of money in a low fee environment and roll it into an investment with high fees and commissions without any added tax benefits."
If you have money in a variable annuity, I would suggest that you take a very hard look at it and see just how much you are paying in fees and then see how that is affecting your investments.
Saturday, September 26, 2009
What the heck is an annuity part 2: fixed deferred
Posted By Paul
I came across another major annuity type called the "fixed deferred" or "fixed interest deferred" annuity that I wanted to talk about.
A fixed interest deferred annuity is kind of like a savings account, so I'm going to assume we all know what a savings account is and describe the annuity in contrast to that.
1) Like a savings account a fixed annuity gives you a known return on your money. In fact with fixed annuities you generally "lock in" an interest rate for some amount of time (like 5 years) and then after that interval has expired you "lock in" a rate again. One example is that Vanguard has a fixed annuity where if you open today you get a rate of 2.65% for the next 5 years. Note that this isn't a bad rate, in fact it's better than most CD's you can find right now.
BEWARE: I read about places where you get some awesome rate for the first year and then after that it resets to something lame, only now they have your money and you have to go through all kinds of hassle to move it.
2) Unlike a savings account, any interest you get is tax deferred. You don't pay taxes on it until you take it out.
3) Unlike a savings account, you can't just deposit and withdraw money whenever you feel like it. They vary, but it seems like most places have rules about how and when you can withdraw your money. The one through Vanguard for example says you can take out 10% of your savings in a year without penalty (but be careful, as with all tax deferred vehicles there can be tax consequences for getting your money out early). From my research it also seems that in most cases to add money you have to open a whole new annuity.
The above points generally capture what this type of annuity is. It's sort of like a 401k (you get the tax deferred part) and kind of like a savings account or CD (guaranteed interest).
So what are the pros and cons? Here is what I was able to come up with:
Pros: You get all the perks of a savings account PLUS tax deferral.
Cons: This is money you shouldn't plan on touching until the terms of the annuity are met. If you needed to "break open the piggy bank" early then tax and penalties could eat in to your money fast.
Overall, I think that this sort of annuity isn't a bad thing to consider if you've already given all you can to your 401k AND Roth IRA and still have money to sock away. When considering this sort of annuity BE SURE TO READ THE FINE PRINT and make sure you know what you're getting. Key questions to ask are:
1) What is my rate and how long does it lock in?
2) Is this rate an introductory rate?
3) How can I withdraw my money and what kind of withdrawal limits/penalties are there?
4) Is there any way to deposit additional money?
One interesting point is that when you compare this to my previous post:
What the heck is an annuity? Part 1
You'll see that this type of annuity is VERY different from the type I describe in my earlier post. As I mentioned before (and will mention again) that's one thing I REALLY don't like about annuities, it's such a broad term.
Once again I'll close with a quote from Warren Buffett about business investing, but it applies just as well to investment vehicles:
"Never invest in a business you cannot understand. "
I came across another major annuity type called the "fixed deferred" or "fixed interest deferred" annuity that I wanted to talk about.
A fixed interest deferred annuity is kind of like a savings account, so I'm going to assume we all know what a savings account is and describe the annuity in contrast to that.
1) Like a savings account a fixed annuity gives you a known return on your money. In fact with fixed annuities you generally "lock in" an interest rate for some amount of time (like 5 years) and then after that interval has expired you "lock in" a rate again. One example is that Vanguard has a fixed annuity where if you open today you get a rate of 2.65% for the next 5 years. Note that this isn't a bad rate, in fact it's better than most CD's you can find right now.
BEWARE: I read about places where you get some awesome rate for the first year and then after that it resets to something lame, only now they have your money and you have to go through all kinds of hassle to move it.
2) Unlike a savings account, any interest you get is tax deferred. You don't pay taxes on it until you take it out.
3) Unlike a savings account, you can't just deposit and withdraw money whenever you feel like it. They vary, but it seems like most places have rules about how and when you can withdraw your money. The one through Vanguard for example says you can take out 10% of your savings in a year without penalty (but be careful, as with all tax deferred vehicles there can be tax consequences for getting your money out early). From my research it also seems that in most cases to add money you have to open a whole new annuity.
The above points generally capture what this type of annuity is. It's sort of like a 401k (you get the tax deferred part) and kind of like a savings account or CD (guaranteed interest).
So what are the pros and cons? Here is what I was able to come up with:
Pros: You get all the perks of a savings account PLUS tax deferral.
Cons: This is money you shouldn't plan on touching until the terms of the annuity are met. If you needed to "break open the piggy bank" early then tax and penalties could eat in to your money fast.
Overall, I think that this sort of annuity isn't a bad thing to consider if you've already given all you can to your 401k AND Roth IRA and still have money to sock away. When considering this sort of annuity BE SURE TO READ THE FINE PRINT and make sure you know what you're getting. Key questions to ask are:
1) What is my rate and how long does it lock in?
2) Is this rate an introductory rate?
3) How can I withdraw my money and what kind of withdrawal limits/penalties are there?
4) Is there any way to deposit additional money?
One interesting point is that when you compare this to my previous post:
What the heck is an annuity? Part 1
You'll see that this type of annuity is VERY different from the type I describe in my earlier post. As I mentioned before (and will mention again) that's one thing I REALLY don't like about annuities, it's such a broad term.
Once again I'll close with a quote from Warren Buffett about business investing, but it applies just as well to investment vehicles:
"Never invest in a business you cannot understand. "
Tuesday, September 22, 2009
The 100 Rule For Investment Allocation
Posted By Paul
Have you ever heard of the '100 Rule' for asset allocation? The idea is that you subtract your age from 100 and the result is the percentage of your investments that should be in stocks (as opposed to less aggressive bond funds or the like).
Well I'd heard of it and recently decided to see if I was adhering well to that rule. Well imagine my surprise when I saw that my Vanguard fund (designed to automatically transition to more conservative funds as time goes by) wasn't even close.
A little research took me this article:
Money Savvy Rules of Thumb
Which specifically mentions the '100 Rule' (rule number 3) and says that this formula is too conservative considering the current longer lifespans of people. They suggest using a '120 Rule' which is right in line with my Vanguard fund, but unfortunately not as catchy.
Have you ever heard of the '100 Rule' for asset allocation? The idea is that you subtract your age from 100 and the result is the percentage of your investments that should be in stocks (as opposed to less aggressive bond funds or the like).
Well I'd heard of it and recently decided to see if I was adhering well to that rule. Well imagine my surprise when I saw that my Vanguard fund (designed to automatically transition to more conservative funds as time goes by) wasn't even close.
A little research took me this article:
Money Savvy Rules of Thumb
Which specifically mentions the '100 Rule' (rule number 3) and says that this formula is too conservative considering the current longer lifespans of people. They suggest using a '120 Rule' which is right in line with my Vanguard fund, but unfortunately not as catchy.
Friday, September 18, 2009
What the heck is an annuity? Part 1 - Single Premium Fixed Immediate Lifetime
Posted By Paul
As I try to become better at understanding the financial world, one word that pops up every now and then is 'annuity'.
I realized recently that I really don't have any idea what one is. I have this vague sense that I'm not interested in them, but that's not really based on anything rational, so I thought I'd do some research and share what I've found.
Here's what I've learned:
First of all, annuity is a REALLY broad term. To define it in terms that apply to all of the different flavors you end up with something like:
An annuity is an agreement (generally with an insurance company) to pay out money for a period of time.
Pretty general huh? Well it is, and that's probably why annuities get such a bad reputation, there are so many different flavors of annuity (not to mention many providers) that it's really easy to end up with a bad one.
So I'm going to start off with what I consider to be the simplest type of annuity: the single premium fixed immediate lifetime annuity.
Quite a long name, but the terms make sense if you take them individually:
Singe Premium - means there is one premium (essentially you buy it with a lump sum)
Fixed - means the payments don't vary
Immediate - means that the payments start immediately
Lifetime - means the payments continue for as long as you are alive
This type of annuity is essentially a policy that you buy with an insurance company that says that the insurance company will pay you a certain amount of money for the rest of your life.
A hypothetical example, if I were an insurance company, I might say that if you pay me $50,000 today then I will pay you $100 a month for the rest of your life.
I found a very simple web annuity quote calculator and asked it the question:
If I were age 40 (the calculator had 40 as the minimum age) and wanted an annuity that paid me $200 a month until I died, what would it cost me?
The answer? About $41k. So the question then is, is it worth it? If I just took my $41k and stuck it under the mattress and took out $200 a month, how long would that last? The quick math says I would run out of money in about 17 years. So from that calculation it seems like a pretty good deal since I plan on living longer than 17 years.
But of course if you didn't buy the annuity you probably wouldn't just put the money in your mattress, so how best to compare that?
That gets difficult, but luckily I found a savings calculator that you can use to see how long savings will last assuming a certain APR and monthly withdrawal.
If you're curious the savings calculator is here.
Using this calculator, if I start with $41k and take out $200 a month then the amount it will last depends on the APR, but for a few values comes to:
24 years at 3% interest
28.8 years at 4% interest
38.6 years at 5% interest
Interesting. At this point you start to see the trade off between having the annuity and keeping the money for yourself. Here are some of the pros and cons of the annuity:
Pros:
1) Takes some of the uncertainty out of retirement savings, with this sort of annuity you know exactly how much you'll having coming in for the rest of your life.
2) Low risk, assuming the insurance company stays solvent, you'll get your money.
Cons:
1) It's possible that you could meet or beat the returns by just managing the money yourself.
2) If you die an early and untimely death, no money is paid to beneficiaries the money is just gone (note that there ARE annuities that include a death benefit but they cost more).
3) Your lump sum is gone, so if something happens where you wanted that lump sum back, you're out of luck.
Overall, this type of annuity doesn't seem like a terrible thing from an investment standpoint, but remember, this is just ONE type of annuity, there are so many types of annuities out there that you REALLY need to be careful to make sure you're getting what you're expecting.
I'll close this (and probably all my annuity related posts) with a quote from Warren Buffett (he uses it to refer to investing it in a particular business, but I think it applies just as well to any investment vehicle):
"Never invest in a business you cannot understand. "
As I try to become better at understanding the financial world, one word that pops up every now and then is 'annuity'.
I realized recently that I really don't have any idea what one is. I have this vague sense that I'm not interested in them, but that's not really based on anything rational, so I thought I'd do some research and share what I've found.
Here's what I've learned:
First of all, annuity is a REALLY broad term. To define it in terms that apply to all of the different flavors you end up with something like:
An annuity is an agreement (generally with an insurance company) to pay out money for a period of time.
Pretty general huh? Well it is, and that's probably why annuities get such a bad reputation, there are so many different flavors of annuity (not to mention many providers) that it's really easy to end up with a bad one.
So I'm going to start off with what I consider to be the simplest type of annuity: the single premium fixed immediate lifetime annuity.
Quite a long name, but the terms make sense if you take them individually:
Singe Premium - means there is one premium (essentially you buy it with a lump sum)
Fixed - means the payments don't vary
Immediate - means that the payments start immediately
Lifetime - means the payments continue for as long as you are alive
This type of annuity is essentially a policy that you buy with an insurance company that says that the insurance company will pay you a certain amount of money for the rest of your life.
A hypothetical example, if I were an insurance company, I might say that if you pay me $50,000 today then I will pay you $100 a month for the rest of your life.
I found a very simple web annuity quote calculator and asked it the question:
If I were age 40 (the calculator had 40 as the minimum age) and wanted an annuity that paid me $200 a month until I died, what would it cost me?
The answer? About $41k. So the question then is, is it worth it? If I just took my $41k and stuck it under the mattress and took out $200 a month, how long would that last? The quick math says I would run out of money in about 17 years. So from that calculation it seems like a pretty good deal since I plan on living longer than 17 years.
But of course if you didn't buy the annuity you probably wouldn't just put the money in your mattress, so how best to compare that?
That gets difficult, but luckily I found a savings calculator that you can use to see how long savings will last assuming a certain APR and monthly withdrawal.
If you're curious the savings calculator is here.
Using this calculator, if I start with $41k and take out $200 a month then the amount it will last depends on the APR, but for a few values comes to:
24 years at 3% interest
28.8 years at 4% interest
38.6 years at 5% interest
Interesting. At this point you start to see the trade off between having the annuity and keeping the money for yourself. Here are some of the pros and cons of the annuity:
Pros:
1) Takes some of the uncertainty out of retirement savings, with this sort of annuity you know exactly how much you'll having coming in for the rest of your life.
2) Low risk, assuming the insurance company stays solvent, you'll get your money.
Cons:
1) It's possible that you could meet or beat the returns by just managing the money yourself.
2) If you die an early and untimely death, no money is paid to beneficiaries the money is just gone (note that there ARE annuities that include a death benefit but they cost more).
3) Your lump sum is gone, so if something happens where you wanted that lump sum back, you're out of luck.
Overall, this type of annuity doesn't seem like a terrible thing from an investment standpoint, but remember, this is just ONE type of annuity, there are so many types of annuities out there that you REALLY need to be careful to make sure you're getting what you're expecting.
I'll close this (and probably all my annuity related posts) with a quote from Warren Buffett (he uses it to refer to investing it in a particular business, but I think it applies just as well to any investment vehicle):
"Never invest in a business you cannot understand. "
Tuesday, July 28, 2009
Article: Stop paying for things you don't need
Posted By Paul
This article reminded me of an earlier post on Frugalize called:
Stuff to look at when it's time to cut back
It was an article that suggested ways to avoid spending money when you don't have to. I especially liked their suggestions for avoiding bottled water (which I mention in an earlier post: Save On Drinking Water) and also their suggestion to avoid buying a bunch of ring tones and apps for your cell phone.
The second suggestion reminds me of a friend that bought a new cell phone but wasn't aware that there was a charge involved when it came to downloading ring tones. My friend happily updated their ring tone at least every day and ended up with a giant cell phone bill at the end of the month.
Here is the article in full:
Stop paying for things you don't need
This article reminded me of an earlier post on Frugalize called:
Stuff to look at when it's time to cut back
It was an article that suggested ways to avoid spending money when you don't have to. I especially liked their suggestions for avoiding bottled water (which I mention in an earlier post: Save On Drinking Water) and also their suggestion to avoid buying a bunch of ring tones and apps for your cell phone.
The second suggestion reminds me of a friend that bought a new cell phone but wasn't aware that there was a charge involved when it came to downloading ring tones. My friend happily updated their ring tone at least every day and ended up with a giant cell phone bill at the end of the month.
Here is the article in full:
Stop paying for things you don't need
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