Posted by Paul
I wanted to share a little system my wife and I put in place that really created a nice way for us to save a little money here and there while still getting our bills paid.
We first chose a dollar amount for our checking account that we considered a "safe amount". Then we decided that if my wife or I view our account balance via our banking web page (which someone checks about 2-3 times a week on the average) and we see that our checking account balance is above the "safe amount" then we immediately transfer $100 to our ISA.
So the idea is that as we save a little bit of money here and there (by not eating out as much or just not buying stuff for a while) our checking account balance goes up, and eventually goes over the "safe amount", and when that happens we move some money over to our savings account. Whenever our savings account gets up to a significant amount we decide how we want to invest the money (or we may decide to use it for home improvements or even a fun trip somewhere).
Of course this plan assumes that you aren't living paycheck to paycheck (see Matt's article Stop planning your life around payday!), and provides a simple way to get a feel for how much you are saving vs spending.
For example my wife and I went on an out of town weekend trip which involved spending more money than usual, so our checking account dropped and it took a good while before it gradually crept back to the point where it reached the "safe amount", but when it did it was a nice signal that we were financially "back to normal".
It's also a nice general way to monitor your spending. For example, I can go back through my transfer history of my account and know how often I put a transfer through to my savings account, so I can get a general feel for how much we're spending (for example if we transferred to our savings account 14 times in 2006, but only 4 times in 2007, then maybe we need to figure out if and where we're spending more money).
Of course the checking account balance fluctuates day to day as checks clear and paychecks get deposited, but by using this simple system I can get a rough feel for how we're doing financially.
Plus it's fun to try to save a few bucks here and there and watch your account balance gradually creep up the "safe amount." It keeps you from running into that situation where your frugality only results in a checking account balance which is huge but earns you no interest, and also avoids the trap of accidentally transferring a huge amount to savings only to discover that you didn't have as much extra money as you thought when the mortgage check bounces.
Thursday, September 6, 2007
Wednesday, September 5, 2007
Is there such a thing as "good" debt?
Posted by Matt
As I've mentioned previously, I'm not crazy about debt. Who is, right? Wouldn't we all love to be debt-free? However, most people make an exception for that one special kind of "good debt": the home mortgage.
Now, I'll stipulate that mortgages are definitely better than other kinds of debt like credit cards, car loans or (shudder) payday loans, but I don't think that I can bring myself to call my mortgage "good". So, why do I have one?
We COULD have saved up and paid cash for a house, but that could easily have taken a decade or more and meanwhile we would have had nothing to show for all the money we'd be plowing into rent (gotta live somewhere). Plus, we're getting great tax deductions on the mortgage interest we pay. So, maybe I can classify mortgages as one of life's necessary evils.
What I'm still trying to figure out is how comfortable to get with the mortgage. We are lucky enough to have a little extra money each month and we're trying to decide whether to aggressively pre-pay the mortgage or not. It pains me to think of how much our house is actually going to cost with 30 years of interest added to the price if we stick to the standard schedule.
On the other hand, most financial guides I've read suggest that it only makes sense to pre-pay your mortgage if the interest rate you are paying is higher than the rate of return you could get if you invested the money. I see the logic at a high level, but I'm working on a spreadsheet to test that theory that incorporates lots of the little details and variables that sometimes get ignored when people try to come up with general guidelines (and yes, ignoring wind resistance did bother me in physics class).
I think that even if the numbers dictate that we are better off investing, I'd probably only do so until the investment account balance was higher than the mortgage balance and then I'd pay the mortgage off.
I WILL be completely debt-free SOMEDAY and I'm really looking forward to it!
As I've mentioned previously, I'm not crazy about debt. Who is, right? Wouldn't we all love to be debt-free? However, most people make an exception for that one special kind of "good debt": the home mortgage.
Now, I'll stipulate that mortgages are definitely better than other kinds of debt like credit cards, car loans or (shudder) payday loans, but I don't think that I can bring myself to call my mortgage "good". So, why do I have one?
We COULD have saved up and paid cash for a house, but that could easily have taken a decade or more and meanwhile we would have had nothing to show for all the money we'd be plowing into rent (gotta live somewhere). Plus, we're getting great tax deductions on the mortgage interest we pay. So, maybe I can classify mortgages as one of life's necessary evils.
What I'm still trying to figure out is how comfortable to get with the mortgage. We are lucky enough to have a little extra money each month and we're trying to decide whether to aggressively pre-pay the mortgage or not. It pains me to think of how much our house is actually going to cost with 30 years of interest added to the price if we stick to the standard schedule.
On the other hand, most financial guides I've read suggest that it only makes sense to pre-pay your mortgage if the interest rate you are paying is higher than the rate of return you could get if you invested the money. I see the logic at a high level, but I'm working on a spreadsheet to test that theory that incorporates lots of the little details and variables that sometimes get ignored when people try to come up with general guidelines (and yes, ignoring wind resistance did bother me in physics class).
I think that even if the numbers dictate that we are better off investing, I'd probably only do so until the investment account balance was higher than the mortgage balance and then I'd pay the mortgage off.
I WILL be completely debt-free SOMEDAY and I'm really looking forward to it!
Tuesday, September 4, 2007
Tracking Your Net Worth
Posted by Paul
One of the most valuable steps I have taken in recent years as I try to become more financially responsible is setting up a system where I can track my net worth.
This may seem like something that only an extremely uptight person would do, but I actually think that tracking your net worth is simple, useful, and (dare I say it) fun!
So why bother tracking your net worth? If you're interested in things like saving and investing and the accumulation of wealth, then your net worth is an excellent way to see how things are progressing.
So how do you determine your net worth? It's very simple:
1) Determine all of your assets. These are all of your retirement accounts, savings accounts, savings bonds, CD's, precious metals, as well as the value of your house. Pretty much everything significant in your life that has some worth.
2) Determine all of your liabilities. These are all of your outstanding debts. They include things like the remaining debt on your house, all credit cards balances, student loans, car loans, and essentially any other debt in your life.
3) Your networth = your assets - your liabilities.
A few interesting points when gathering all of this info:
a) I would recommend not bothering to include any account that changes a lot (like your main checking account for example). If most of your money is in your main checking account, then you have a problem.
b) Don't include your car as an asset (but do include your car loan as a liability). The only exception is if you have some sort of collectible car that you actually plan to have increase in value.
c) Do include the value of your house as an asset, but also include the money you still owe on your mortgage as a liability (in other words, you should only count the equity in your house as part of your net worth).
d) Don't include things like TV's, computers, furniture, etc, as your assets. As nice as they are, it's nearly impossible to accurately judge their value and it's probably falling all the time anyway.
Here is an example net worth calculation (with totally fictional data):
Assets:
401k balance $10000
Savings Account $3000
Savings Bond Values $1000
House Value $300000
Total Assets = $314000
Liabilities:
Credit Card Debt: $2000
Car Loan Debt: $8000
Mortgage Debt: $272000
Total Liabilities = $282000
Networth = $314000-$282000 = $32000
Once you start tracking your net worth, you can do some interesting things with it like:
1) Make sure your net worth is positive. If your net worth is negative this is a BIG problem. It means you owe more than you own, and that is definitely not a place you want to be.
2) See how your net worth changes over time. The hope is that over time your net worth should be trending upwards.
3) See how different things relate to your net worth. For example if you finance a new car, your net worth will probably drop significantly at the beginning (the loan will be a large liability) but over time as your pay off the debt it will be less of a factor in your net worth.
4) Does your net worth fluctuate more than you would like from day by day? Then perhaps you need to change your investments to less volatile investments.
Hopefully this will motivate you to calculate your net worth if you don't already. After all, most financial decisions are based on increasing your net worth, so if you don't track it how do you know how well you're doing?
One of the most valuable steps I have taken in recent years as I try to become more financially responsible is setting up a system where I can track my net worth.
This may seem like something that only an extremely uptight person would do, but I actually think that tracking your net worth is simple, useful, and (dare I say it) fun!
So why bother tracking your net worth? If you're interested in things like saving and investing and the accumulation of wealth, then your net worth is an excellent way to see how things are progressing.
So how do you determine your net worth? It's very simple:
1) Determine all of your assets. These are all of your retirement accounts, savings accounts, savings bonds, CD's, precious metals, as well as the value of your house. Pretty much everything significant in your life that has some worth.
2) Determine all of your liabilities. These are all of your outstanding debts. They include things like the remaining debt on your house, all credit cards balances, student loans, car loans, and essentially any other debt in your life.
3) Your networth = your assets - your liabilities.
A few interesting points when gathering all of this info:
a) I would recommend not bothering to include any account that changes a lot (like your main checking account for example). If most of your money is in your main checking account, then you have a problem.
b) Don't include your car as an asset (but do include your car loan as a liability). The only exception is if you have some sort of collectible car that you actually plan to have increase in value.
c) Do include the value of your house as an asset, but also include the money you still owe on your mortgage as a liability (in other words, you should only count the equity in your house as part of your net worth).
d) Don't include things like TV's, computers, furniture, etc, as your assets. As nice as they are, it's nearly impossible to accurately judge their value and it's probably falling all the time anyway.
Here is an example net worth calculation (with totally fictional data):
Assets:
401k balance $10000
Savings Account $3000
Savings Bond Values $1000
House Value $300000
Total Assets = $314000
Liabilities:
Credit Card Debt: $2000
Car Loan Debt: $8000
Mortgage Debt: $272000
Total Liabilities = $282000
Networth = $314000-$282000 = $32000
Once you start tracking your net worth, you can do some interesting things with it like:
1) Make sure your net worth is positive. If your net worth is negative this is a BIG problem. It means you owe more than you own, and that is definitely not a place you want to be.
2) See how your net worth changes over time. The hope is that over time your net worth should be trending upwards.
3) See how different things relate to your net worth. For example if you finance a new car, your net worth will probably drop significantly at the beginning (the loan will be a large liability) but over time as your pay off the debt it will be less of a factor in your net worth.
4) Does your net worth fluctuate more than you would like from day by day? Then perhaps you need to change your investments to less volatile investments.
Hopefully this will motivate you to calculate your net worth if you don't already. After all, most financial decisions are based on increasing your net worth, so if you don't track it how do you know how well you're doing?
Saturday, September 1, 2007
Your vacation is not a savings account
Posted by Paul
Over the years I have been surprised by how many people I've met that use their vacation time as a savings account. The idea is that many companies will pay you for any accrued vacation when you leave the job.
Because of this some people specifically avoid taking vacation so that their accumulated time piles up, giving them a nice fat check when they leave the company.
I think this mindset can be a huge mistake especially when I see people using their accrued vacation as an excuse to not build up an emergency fund (figuring that their vacation time pay can be their emergency fund).
If you don't take that vacation, then after a while you'll miss having that recharge time and you'll probably start burning out at work.
Setting aside the issue of your own happiness, I think that taking your vacation makes sense from a purely long term financial standpoint. Ever see those coworkers who let themselves get burnt out? They're crabby, pessimistic, and generally not very productive, right? Do you think these people are the ones who get promotions or raises come review time?
When you see that you have a bunch of vacation time saved up, don't start calculating how much money that'll be when you leave. Instead take some time off and recharge! No one says you have to spend a ton of money on some jet-setting vacation. If you want to be frugal, then go camping, or even just stay home and have fun by seeing movies or going to your local museum.
Over the years I have been surprised by how many people I've met that use their vacation time as a savings account. The idea is that many companies will pay you for any accrued vacation when you leave the job.
Because of this some people specifically avoid taking vacation so that their accumulated time piles up, giving them a nice fat check when they leave the company.
I think this mindset can be a huge mistake especially when I see people using their accrued vacation as an excuse to not build up an emergency fund (figuring that their vacation time pay can be their emergency fund).
If you don't take that vacation, then after a while you'll miss having that recharge time and you'll probably start burning out at work.
Setting aside the issue of your own happiness, I think that taking your vacation makes sense from a purely long term financial standpoint. Ever see those coworkers who let themselves get burnt out? They're crabby, pessimistic, and generally not very productive, right? Do you think these people are the ones who get promotions or raises come review time?
When you see that you have a bunch of vacation time saved up, don't start calculating how much money that'll be when you leave. Instead take some time off and recharge! No one says you have to spend a ton of money on some jet-setting vacation. If you want to be frugal, then go camping, or even just stay home and have fun by seeing movies or going to your local museum.
The Roth IRA: A tax shelter for your golden years.
Posted by Matt
I hope I wasn't the only person who took advantage of the free financial advice opportunity I mentioned last week. I spoke for about ten minutes with a financial adviser who essentially told me that my wife and I should have a higher proportion of our portfolio in retirement accounts.
Towards this end, I'm finally going to open a Roth IRA. I haven't thought about these in years, but I remember that when I first heard of them, they sounded like a really good idea. Everything I read this weekend seems to back that up.
So, what's my excuse for not having one already?
One, I consider myself a minimalist (meaning I'm mentally lazy and don't like to keep track of a lot of things) and didn't want to open a separate retirement account when I already had a 401k.
Two, I'm not maximally funding my 401k yet and thought I should do that before moving on to a Roth.
I explained this to the adviser, but he convinced me by adding a new consideration: If I put ALL my retirement money into a tax-deferred account (like the 401k), I risk pushing myself into a higher tax bracket when I withdraw that money in retirement. The Roth is funded with after-tax dollars, so you avoid taxes on withdrawals.
I like the theory around using the 401k to reduce my taxes while I'm working and the Roth to reduce them in retirement, but I could still imagine that a scenario might exist where I could retroactively crunch numbers and determine that it wouldn't have mattered which investment vehicle I chose.
So, given my laziness, why am I still going for a Roth?
Because another one of the great features of these accounts is that you can withdraw the full amount of your contributions without penalty (though early withdrawal of earnings is penalized) at any time. While I certainly don't advocate dipping into retirement accounts, I like the idea that the money is not as tightly locked away in a Roth as it is in a 401k (via penalties.) That might let me retire a few years early (if I'm lucky) or serve as a substantial backup to my emergency fund.
So yes, I'm finally going to open a Roth, but still have to figure out some details about the funding process as my wife and I also hope to make accelerated mortgage payments on our new house (we close escrow in two weeks). We're going to meet with a certified financial planner in the next few months for validation of our ideas.
I'll let everyone know the final plan as soon as I do!
Give your savings a "kick"!
Posted by Matt
It's that time of year again; today's Oregonian ran an article about the annual state income tax "kicker checks". For those readers outside of Oregon who've never heard of this, our state refunds all income tax revenue that exceeds projections+2%. This year, that came out to 1.1 BILLION dollars.
Lots of people debate this practice, but I think it is a good way to keep a lid on government spending. I assume that the government would find a way to spend every bit of money we gave them, but it is just important for them to stick to a budget as it is for us individual citizens. Also, as the article points out "...the state's current two-year budget is 20 percent higher than the last one," so I think it is good to have a limit on their spending. Heck, I didn't get to increase MY two-year budget by 20%.
So, I'm excited about the money (the checks should be mailed out in mid-December), but also want to make a suggestion: let's not waste it! The timing is terrible; people will probably take their kicker checks and use it to bump up their holiday spending. I'm going to put mine toward my new Roth IRA (which I plan to discuss in my next post).
I think the Roth is a great place to put "found money" like this, and we'll probably start putting our federal and state tax refunds away here also. The kicker law in our state constitution is in place to keep our state "on budget", so let's all do the same for ourselves. Send a "kicker check" of your own....straight to savings!
It's that time of year again; today's Oregonian ran an article about the annual state income tax "kicker checks". For those readers outside of Oregon who've never heard of this, our state refunds all income tax revenue that exceeds projections+2%. This year, that came out to 1.1 BILLION dollars.
Lots of people debate this practice, but I think it is a good way to keep a lid on government spending. I assume that the government would find a way to spend every bit of money we gave them, but it is just important for them to stick to a budget as it is for us individual citizens. Also, as the article points out "...the state's current two-year budget is 20 percent higher than the last one," so I think it is good to have a limit on their spending. Heck, I didn't get to increase MY two-year budget by 20%.
So, I'm excited about the money (the checks should be mailed out in mid-December), but also want to make a suggestion: let's not waste it! The timing is terrible; people will probably take their kicker checks and use it to bump up their holiday spending. I'm going to put mine toward my new Roth IRA (which I plan to discuss in my next post).
I think the Roth is a great place to put "found money" like this, and we'll probably start putting our federal and state tax refunds away here also. The kicker law in our state constitution is in place to keep our state "on budget", so let's all do the same for ourselves. Send a "kicker check" of your own....straight to savings!
So you want to buy stocks?
Posted by Paul
That was me about 10 years ago. I was recently out of college and had just managed to save enough money that I could actually look around for interesting ways to invest it.
This was when The Beardstown Ladies were at the height of their fame, and it seemed like everyone was getting into the stock market.
As I started contemplating buying stocks, I decided to start by joining an investment club. These are simply groups of people who pool their money, time and knowledge to buy stocks together and share in the profits or losses. I joined a club at my work where people would individually present stocks to the group and we would vote on whether or not to purchase them. If you are new to investing in individual securities I would highly recommend joining (or starting) an investment club for the following reasons:
1) Smaller investment in cash. Many investment clubs require a small monthly fee that goes into the club's account and is used for buying stocks. This fee can be very small (like $10 a month), so you get to learn about the stock market with a very small outlay of cash.
2) Shared pool of knowledge. It's often more fun to learn about something with a group, and an investment club is a great way to do this.
3) Avoids speculative investing. If you are a member of a club that meets once a month, then it forces you to get out of the "time the market" mentality and forces you to think more long term with your investments which is generally thought of as the best way to view the market.
So maybe you can't find an investment club, or perhaps you just want to skip that step and dive in for yourself. Here are a few tips I can give you as far as how to invest in individual stocks:
Tip 1: Find yourself a cheap broker. There are many simple cheap online brokers (eTrade, Ameritrade, etc. ) where opening a brokerage account is incredibly simple. If you are getting into the stock market for the first time I would suggest going with something like this. I've used eTrade before and they were fine.
Tip 2: Avoid speculative trading. When you first buy stocks there is often this desire to want to check your stock every few hours and buy and sell constantly. This sort of timing the market mentality is generally not a good way to start off.
Tip 3: Never invest more than you are prepared to lose. In my opinion, buying and selling individual securities should only be done as either a fun little side hobby or a serious job where you spend a lot of time and energy researching and managing your stocks. Most of us already have serious jobs so I only suggest purchasing individual securities as a hobby.
Tip 4: Consider not doing it. I'm showing my bias here, but this was the conclusion I came to once I had played in the stock market for a while. The problem I ran into was that investing in individual company stocks doesn't allow for diversification. There are many success stories about people investing in securities, but there are even more failure stories. Before you start putting any significant money into individual stocks, I would highly recommend that you take a look at mutual funds or a simple index fund.
As I mentioned I started off by joining an investment club. I learned a lot, made a little money, and had some fun. Then I opened my open brokerage account and bought a few stocks. My few stocks did okay, but not great, and after a while I decided that individual securities were not for me so I decided to sell it all (and by sell it all I'm only talking about $1200 at the height of my portfolio).
Now I only invest in mutual funds (through my 401k and Roth) with the exception of Berkshire-Hathaway.
I've decided that individual securities is just too risky for me.
One last point, I know that there are various places on the internet where you can play "fantasy stock market" where you buy and sell securities with fictional money. If you have the patience, I would recommend doing something like this for a few months. It's another great way to learn about the highs and lows of the stock market without any outlay of cash.
That was me about 10 years ago. I was recently out of college and had just managed to save enough money that I could actually look around for interesting ways to invest it.
This was when The Beardstown Ladies were at the height of their fame, and it seemed like everyone was getting into the stock market.
As I started contemplating buying stocks, I decided to start by joining an investment club. These are simply groups of people who pool their money, time and knowledge to buy stocks together and share in the profits or losses. I joined a club at my work where people would individually present stocks to the group and we would vote on whether or not to purchase them. If you are new to investing in individual securities I would highly recommend joining (or starting) an investment club for the following reasons:
1) Smaller investment in cash. Many investment clubs require a small monthly fee that goes into the club's account and is used for buying stocks. This fee can be very small (like $10 a month), so you get to learn about the stock market with a very small outlay of cash.
2) Shared pool of knowledge. It's often more fun to learn about something with a group, and an investment club is a great way to do this.
3) Avoids speculative investing. If you are a member of a club that meets once a month, then it forces you to get out of the "time the market" mentality and forces you to think more long term with your investments which is generally thought of as the best way to view the market.
So maybe you can't find an investment club, or perhaps you just want to skip that step and dive in for yourself. Here are a few tips I can give you as far as how to invest in individual stocks:
Tip 1: Find yourself a cheap broker. There are many simple cheap online brokers (eTrade, Ameritrade, etc. ) where opening a brokerage account is incredibly simple. If you are getting into the stock market for the first time I would suggest going with something like this. I've used eTrade before and they were fine.
Tip 2: Avoid speculative trading. When you first buy stocks there is often this desire to want to check your stock every few hours and buy and sell constantly. This sort of timing the market mentality is generally not a good way to start off.
Tip 3: Never invest more than you are prepared to lose. In my opinion, buying and selling individual securities should only be done as either a fun little side hobby or a serious job where you spend a lot of time and energy researching and managing your stocks. Most of us already have serious jobs so I only suggest purchasing individual securities as a hobby.
Tip 4: Consider not doing it. I'm showing my bias here, but this was the conclusion I came to once I had played in the stock market for a while. The problem I ran into was that investing in individual company stocks doesn't allow for diversification. There are many success stories about people investing in securities, but there are even more failure stories. Before you start putting any significant money into individual stocks, I would highly recommend that you take a look at mutual funds or a simple index fund.
As I mentioned I started off by joining an investment club. I learned a lot, made a little money, and had some fun. Then I opened my open brokerage account and bought a few stocks. My few stocks did okay, but not great, and after a while I decided that individual securities were not for me so I decided to sell it all (and by sell it all I'm only talking about $1200 at the height of my portfolio).
Now I only invest in mutual funds (through my 401k and Roth) with the exception of Berkshire-Hathaway.
I've decided that individual securities is just too risky for me.
One last point, I know that there are various places on the internet where you can play "fantasy stock market" where you buy and sell securities with fictional money. If you have the patience, I would recommend doing something like this for a few months. It's another great way to learn about the highs and lows of the stock market without any outlay of cash.
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