Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for March, 2008

Consumer Debt is debt that is taken on to pay for consumption. Typical examples include credit card debt, personal loans, and auto loans. The debt vehicles are all usually used to purchase things that lose value as time goes by. These loans usually have a relatively short duration, higher cost (interest rate, expenses, etc.), and may or may not have a fixed interest rate.

Investment Debt is used to pay for things that increase in value over time, or things that improve income potential. Examples include mortgages, student loans, and business loans. These loans are generally longer term with fixed interest rates for a certain period of time and clearly defined times and circumstances for changes in loan terms.

I currently carry only one example of consumer debt in the form of a car loan. All the rest of my debt is investment debt: student loan, mortgages, and credit card debt that was used to pay for home improvements. All of my debt, consumer or investment, has an interest rate of less than 6.625%. My consumer and credit debt is all less than 5.5%

I have been working hard to pay down my low interest debt. I have been paying far more than the minimum on my car loan for some time now, and plan to finish paying for it in just over a year. In the mean time I will be making some progress on my other debts as well. Once the car loan has been paid off, I plan to put all that money towards my other debts in classic snowball fashion.

When I am done paying for all of that debt, my plan was to start a new car fund, increase my emergency fund, save for a down payment on a single family home, and put anything left in long term investments. Some people might suggest that I use some of the money to pay down my mortgages early. Being mathematically minded, I have often felt that the best course of action is not to pay down a mortgage early, but instead to take the money that I would be putting into paying down the mortgage and instead put it into a stock market index fund. Since the market, on average, earns more than the interest on my mortgage by almost 2 to 1, my money will work a lot harder in the stock market than it will by “investing” in a low interest mortgage.

Lately I have been considering taking this idea one step further: I wonder if I should slow down my debt paydown and take the extra money and put it towards investments that will earn higher returns. Instead of paying $1600 per month towards my car loan, for example, I could instead put $1100 towards the car loan and $500 into a stock index fund. The car loan costs me 5.5%, but the market (in time) should return closer to 10%. The car will get paid for a little slower, and I’ll be that much closer to my savings goal of 20%. Clearly I could extend this even further and reduce my aggressive debt paydown even further.

On the flip side, once I have my “small debts” paid off, I’ll be in a more secure financial position because I won’t have to worry about paying them if my income should dry up for some reason (layoff, extended illness, etc.).

So the question is: Does it make sense to slow down the payoff of a mix of Consumer and Investment debt, all at relatively low rates, in order to increase my savings rate, which should over time result in much higher returns than the interest payments on the debts? What do you think and what would you do in my situation?

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Last year my bank got swept up in the sub-prime loan crises and was about to fail. I knew that my money was FDIC insured, but the deposit accounts were about to be taken over by another bank. Rather than simply accept whatever new bank came along to buy out my old bank, I went out and started to do some research on a new bank.

The last time that I changed banks was in 2000, and my recollection of the options back then was not good. I was an early adopter to the “internet only” style of banking, primarily because internet banking offered better than average interest rates and lower than average fees.

This time around I was prepared for a long, arduous search for the type of banking to which I had become accustom. I started my search at Bankrate.com, where I start most of my searches for banking products. I quickly found, to my surprise, that it was relatively easy to find checking and savings accounts (mostly money markets) that paid high interest rates and had very low or no fees — even at some of my least favorite institutions like Bank of America and Citibank.

It was not until I read a number of posts on some other personal finance blogs and forums that made me realize why it was so easy to find the accounts I sought: I was able and willing to carry a relatively high balance. At EverBank, where I eventually set up banking, the minimum balance required is $1500. In keeping this balance, I do not have to pay a $4.95/month maintenance fee, nor do I pay an additional $4.95 per month for online billpay.

Quite clearly, if I were living paycheck to paycheck, I would not be able to maintain this balance. As it is, I actually earn $6-$7 per month in interest on this minimum balance. As I thought more about this I realized that in my less enlightened days, I used to keep a few hundred dollars at most in my bank account. There’s no way I would have been able to maintain this kind of balance.

Many people I know, and many of the people on personal finance forums, who are struggling to get their financial houses in order are clearly unable to pay the fees associated with maintaining interest bearing accounts, or at best simply earn no interest. Earning no interest is the same as taking a loss when inflation is taken into account.

Banks clearly need to make money, but it seems to me quite regressive to make the people with the least amount of money pay these fees. The banks obviously make some money from the pass through of lending other deposit accounts at a higher rate, but would the rate suffer that much to reduce the fees, or are most banks simply being predatory? What do you think?

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Frugal Scrapping

Author: ScrapperMom
03.10.2008

This post is for all those scrapbookers out there who are also trying to watch your spending, which can at times seem impossible with the myriad of tools, papers, embellishments available. Since we try to keep on a fairly strict budget and scrapbooking falls into the discretionary category, I have become the Queen of frugal scrapping. It’s not necessary to sacrifice style to cut costs and listed below are some tips for scrapping on a budget.

Throughout this post I have incorporated some examples of layouts from my own collection, so you can see these techniques at work. Hope you enjoy the layouts and tips and can start saving money while still having a great time scrapping and preserving your memories.

Save your scraps.

Color BlockingEach piece is precious. Ok, you don’t have to save every piece, but if it’s bigger than a 1″ x 1″ square it’s worth saving. If you have a good system to organize your scraps by color or theme you can use them later to make cards, punches and small die cuts. A technique I love is color blocking and it is also a great way to use old scraps. Also if you only have one piece of patterned paper using it in blocks can be very efficient and a great way to incorporate a lot of photos. You can also use one smaller piece on a plain background if you don’t have a full 12×12 sheet. Sometimes this is all the pattern you need for your layout. Read the rest of this entry »

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Thursday marked one month of Don’t Feed the Alligators. I would like to take this opportunity to thank you, my readers, for your attention and comments, both online and off. Ultimately it is you that makes this blog what it is, so with that in mind, I would like to ask for your help, comments, and suggestions to the following administrative issues:

Schedule: To date, I have been trying to publish an article approximately every 3 days. I originally decided on this schedule for two reasons: 1. I thought it should be relatively easy to write one article every 3 days, and 2. I didn’t want to exhaust my relatively short list of ideas too quickly.

On Point 1: I was traveling for many days this month, and found this pace difficult to keep up. I have resorted to writing opportunistically and then publishing when appropriate (I am writing this on Sunday…). I also found help in the form of a guest blogger, who already has many great ideas for future articles. I am reasonably sure that I can manage to keep churning out 2 articles per week.

On Point 2: My list of ideas is now growing much faster than I can actually write and publish articles, so this is not going to be an issue until well past October at my current pace.

Question Series 1 for my readers:

Are you happy with the current pace? Would you rather see articles published when they are finished rather than on an arbitrary timeline — even if that could mean that you don’t see a new article for 5 days?

Content and Comments: Nearly half of the articles that I have written so far have been inspired from reader questions. This certainly helps me to stretch out the long list of topics that I have in mind already. I am hoping that more people will become involved in the comments section, however. Good feedback is ultimately going to be essential to the future content, style, and quality of articles here.

I hope that am helping some of you to get your financial houses in order, but I have a couple of articles brewing that will ask you to help me with some advice for optimizing what I’m doing with my own financial house.

Question Series 2 for my readers:

Are you happy with the content of the articles here at DFTA? If not, how can I improve? Is there a specific topic that you would like to see and discuss? If yes, what is it that I’m doing well? How can I promote more discussion in the comments section?

Subscribers: After the initial rise in subscribers at the beginning of last month, subscriptions have remained rather flat. Curiously, nearly every day I lose a subscriber only to gain a new one. Here is where I would like your help. If you have enjoyed reading Don’t Feed the Alligators, please consider subscribing. If you are already a subscriber, please consider sharing a link to this blog with you friends, family, and coworkers. The more eyes reading the articles here, the more likelyhood of some good discussions in the comments sections and therefore the better the information that you will have in the end.

Thanks again for your readership and support. I look forward to hearing from you soon.

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I have spent many years putting together and continually optimizing our financial operations. This article is here to help provide a model, should you find it worthy, as well as provide the background for a couple of future articles in which I will ask for your help in determining the next course of action.

ScrapperMom and I have a number of cash banking accounts:

  • A Checking Account
  • Savings and Money Market Accounts with EverBank, ING Direct, and a local bank in our town
  • 5 Certificate of Deposit Accounts, currently with ING

Our cash accounts and flows look something like this:
Cash Accounts Read the rest of this entry »

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