Don’t Feed the Alligators

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

Archive for the 'Debt' Category

03.22.2009
Money

Creative Commons License photo figure credit: borman818

I have just about wrapped up our tax return for 2008 and it looks like we’re getting a pretty sizable refund. This poses two questions: What should we do with the refund?

and

Should we change our withholding to avoid getting such a large return next year?

This post is about the first question, and the second will be covered in Part II.

ScrapperMom and I talked for a while about what to do with the refund. Given the current economic climate and the fact that our emergency fund only has about 3 months worth of expenses in it, we considered simply saving the money. It would add about another 1.5 months to our e-fund. This would give us some extra security, but would not help us to reduce our monthly obligations at all.

The other option is to use the refund to pay down some of our other debts. We’ve got a mortgage, car loan, and low interest, fixed rate credit card. Throwing it at the mortgage would be decidedly unsatisfying for two reasons: one is that it represents about 1.5% of our balance, so I’m not sure it would even qualify as a dent. The other is that it locks up our cash, at least until we sell our house — and we have no short term plans to do that. The credit card debt is the result of a renovation that we made to our rental property, and represents a deductible business expense. The tax refund will pay about 2/3 of this debt. With the low interest rate and the tax-deductibility making the effective rate even lower, low monthly payments, and the inability of this payment to provide relief from our monthly minimum obligation, this is also an unattractive option.

The last option is the car loan, which has about the same balance as the credit card. This loan is through our credit union. We bought our van a few years back and stretched a bit for it. We did save a lot of money by buying lightly used, but we took a 6 year loan on it to keep the payments manageable. Since then we have been pre-paying by about 10% each payment, as well as throwing some extra money at it here and there. So far we have shaved over a year off the loan. An interesting thing about this loan that I have not noticed on other loans is that as we pre-pay, our next payment due date keeps getting pushed out. So according to our latest statement, our next payment isn’t due until next year. The nice thing about this is that if we find ourselves in a position where we can’t make the minimum payment on this loan, we can skip it for quite a while by pre-paying now. The same is not true for the mortgage or credit card: if we pre-pay, we’re still obligated to make the minimum payment EVERY month.

ScrapperMom and I have decided, therefore, that the best option for the bulk of our refund is to pay down our car loan. This will cut another year off of our loan, reduce the number of payments left at our present paydown rate to just over 6, and still preserve the security of knowing that, if we lose some or all of our income, the obligation to pay this loan is pushed back far enough to help keep us solvent while we find ways to replace that lost income.

What do you think? Is this the best of both worlds? Are you getting a refund? How will you spend or save your refund? Share your thoughts in the comments section below!

Holiday

Creative Commons License photo figure credit: muha…

Happy New Year to all!  As we close the chapter on one year and move on to a new one, I find this to be an excellent time to reflect on the state of life in general, and for the purposes of this blog, Personal Finance.  If you’re a regular reader of this blog you will know that I am a big fan of automating personal finance:

  • Our cash back credit cards get billed directly to our bill-pay account at our bank and the bank automatically pays the full balance every month.
  • ING and Vanguard both automatically withdraw pre-set amounts from our checking account monthly to cover various savings goals like increasing the size of our emergency fund, Roth IRA contributions, savings to cover annual payment to insurance, etc.
  • Bill-pay automatically pays all of our fixed monthly expenses like our mortgage, student loans, car loans, etc.

The only things that we ever have to really worry about paying on time are utility bills, gas and electric.

Given this level of automation, it’s easy to neglect our finances.  They’re not really neglected, but they’re not always getting the attention that they may deserve.  Sometimes we’re saving too much or too little.  Sometimes we’re spending more than we should and don’t realize it.  Sometimes we need to shift saving priorities because goals have been met or circumstances have changed.

I’m apparently such a work-a-holic that I had to take the last several days of the year off in order to burn, rather than lose, vacation time.  I spent the better part of one day and small parts of others catching up on our finances — a Personal Finance Holiday of sorts.  I’m not by far the first person to propose such a concept, and I’ve thought about taking a Personal Finance Holiday for a long time, but didn’t think that I had enough personal finance “stuff” to do to fill up a whole day.  Well, after neglecting to even open Quicken since mid-October, it turns out I did have a whole day of catching up to do.

Usually a Personal Finance Holiday is used to get going on all of the little things that you’ve been meaning to do, but haven’t found the time for (you have been meaning to do these things, haven’t you?):

  • creating a Spending Plan
  • opening a new Savings Account
  • starting an IRA savings account
  • buying life and disability insurance
  • opening a 529 account for your child(ren)
  • writing down or benchmarking your Personal Finance goals

Reading any of the myriad of Personal Finance books available can leave one overwhelmed by the number of things that you realize that you should be doing with your finances.  Taking a PF Holiday gives you the perfect opportunity to sit down and bang all of these items out in one shot.  It also gives you time when you would otherwise be unavailable to do all of the little things that might distract you from actually getting this stuff done, without feeling guilty about it: Can’t do it on Saturday because you have to spend time with the kids; Can’t do it on a holiday because you have to spend time with grandma; Can’t do it on a vacation day because you have to run all those other errands that you’ve been neglecting; Can’t do it on a sick day because, well, you’re sick (right?).

Maybe you’re thinking that you can’t possibly take a PF Holiday because you don’t have any vacation time.  Well, take it unpaid.  That’s right, it might not sound very frugal or financially prudent to do so, but let’s look at what a PF Holiday is worth:

  • If you use your PF Holiday to open an IRA and put just $100 per month into it, you’ll have $1,227 in one year at a modest 5% average return, and $15,528 in 10 years.
  • If you setup a disability insurance policy, you and your family will likely be able to maintain your standard of living should you become disabled.  If you can’t work for 10 years, this might be worth a quarter of a million dollars
  • If you set up an emergency fund, and use this fund instead of a credit card when a true emergency rolls around, you might save $1,400 in interest on that credit card.

If the average person makes $40,000/year or about $20/hour, then the cost of a PF Holiday on unpaid time is just $320.  It’s actually even lower than that since you won’t have to pay taxes on money that you don’t make (or conversely, if you had worked the 8 hours you would have brought home closer to $250).  So a small $250 investment could be worth tens or even hundreds of thousands of dollars over the next decade, and even more beyond that — perhaps even enough to vacation at the beautiful looking spot in the photo above!

In our case, we already have most of our Personal Finance stuff under control, or so we’d like to think, so the PF Holiday was used to catch up on what’s been going on, make sure that everything is going the way it should be.  It was also used to tweak and steer the various Personal Finance vehicles toward their respective goals.

Have you ever taken a Personal Finance Holiday?  Do you need to take a Personal Finance Holiday?  Do you have any new or redoubled goals for 2009?  Let’s hear about your experience in the Comments Section below!

If you liked this article, you may be interested in seeing some related articles:


Christmas Tree

Creative Commons License photo figure credit: SleepingBear

This week ScrapperMom and I started and finished our Christmas shopping.  This was rather easy given that we don’t have many for whom to shop, we budgeted for Christmas just after LAST Christmas, and we already had the money set aside for these gifts.

Several years ago, we agreed with our adult siblings that we would all concentrate our buying efforts on the children in the family.  Prior to this point, we, like most families, would simply trade a bunch of items that we thought others would like.  Sometimes a hint or two may have been dropped over a Labor Day barbeque or Thanksgiving dinner, but for the most part we were left to guessing.  As a result, we all often ended up with well intentioned gifts, most of which never quite lived up to their full potential.

Some might argue that the whole point of gift giving is to know enough about the person to whom your are giving the gift to give something that will truly be appreciated.  This is a great idea in principle, but my experience is that it rarely happens in real life.  Others might argue that it’s not about the gift itself, but rather the thought that counts.  This is also a nice sentiment, but results in a pile of “stuff” that may create guilt on the part of the recipient and resentment on the part of the giver.  Instead, we prefer to share experiences: watching the kids open their presents, sharing a nice meal, and just being all together.

A few years back, we also started setting a pretty strict limit on what we would spend per gift recipient.  The obvious and immediate reason for this is that it limited how much we could spend in total and kept us from going into debt to finance Christmas.  The longer term reason, however, is that it allows us to anticipate how much money we’re going to need to cover Christmas all year long.  Knowing this allows us to begin saving for Christmas next year almost as soon as Christmas is over this year.

Christmas Club” savings accounts are not a new concept, but have fallen out of favor lately with the more prevalent use of credit cards.  Christmas Clubs are simple savings accounts that allow you to allocate a certain dollar amount per paycheck, week, month, or some other period.  The key to the success of this type of account is that the money is automatically deducted from your regular income stream and set aside in an account that is relatively difficult to access.

Many banks and credit unions still offer Christmas Club (and Vacation) savings accounts.  Our Christmas Savings account resides at ING Direct as one of our sub-accounts.  This is not truly a traditional Christmas Club account, and it has some advantages and disadvantages.  The ING account allows us to make it automatic.  Every month, ING automatically transfers 1/12 of our total Christmas budget for the year to the Christmas account.  The ING account also pays interest, which many Club accounts don’t.  Many Club accounts also restrict access to the money in the account, forcing you to leave the money alone or pay a penalty.  This is good for forcing you to save, but bad if you really need to get access to the money for a dire emergency.  The ING account allows me year round access to my money, but since it does not sit at a bank that is involved in our day to day financial business, the temptation to tap into it is very low.

This year we budgeted $800 in total for Christmas, and deposited $66.67 per month at ING.  By early December we had $800.04 sitting in our account, ready to be spent.  We used our new reward card of choice, the American Express Blue Cash card, to make all of our purchases, and will pay off the balance in full when the bill arrives.  Since we actually came in a bit under budget, we will probably not adjust our budget for next Christmas, and will begin paying for it in early January.

How do you pay for Christmas?  Do you take on debt to do so, or are you a Christmas Club user?  Do you set a Christmas budget or spend as the mood strikes?  We’d like to hear about it in the Comments Section below.

Receiver

Creative Commons License photo figure credit: cinz

We have a 10+ year old stereo receiver that I paid $1500 when I was a senior in college (and in all likelyhood paid several hundred more in interest in the years that followed).  The motor that controls the volume knob on the stereo when you use the remote control has been on the fritz for over 4 years.  Now, whenever the remote doesn’t work, I walk over and rap hard on the volume knob until the motor starts working again.

We have a universal remote control that has truly lived up to its name: Harmony.  Logitech makes a line of these remotes that allow not only my wife, but also anyone who visits our house the ability to turn the TV, stereo, DVD, VCR, Tivo, etc. on, off, change the channels, fast forward, etc., with little to no coaching in a very intuitive way.  It even has a help button on it that gets things back on track if necessary.  Over the last year or so some of the buttons have stopped working.  As a stopgap measure I was able to reprogram some of the lesser used buttons to take over for some of the failing ones.

As I look around our house, I see many items that we purchased when we made more money and had less expenses, items that put us in debt, or items whose purchase kept us from getting out of debt: laptops, a big screen TV, stereo, fancy universal remote control, espresso machine, air purifiers, exercise equipment, etc., etc.

Some of these purchases are doing nothing but collecting dust, and that’s okay.  We’re older, we’re wiser.

Others, however, are essential, daily use items.  The stereo and the remote are two examples, as is the TV.  Someday these things are going to wear out, die, or otherwise stop working and require replacement.  What I struggle with now is the question of what to replace these luxuries with.  We have gotten used to having some expensive things, many of which we could not afford when we bought them — but now having done so, paid off the debt, and gotten on with life, find many of these items to be indispensable.  When these items do inevitably die, do we “deserve” to replace them with like items?  Do we need another 43″ TV?  $1500 stereo? $600 coffee maker?

Luckily for us, the nature of technology has made it such that we can buy replacements for many of these items that are many times better than what we’ve got now, and are also several times cheaper.  An eight year old 43″ rear projection TV can be put to shame by a 40″ flat panel display for less than half the price paid for the original TV.  A similar cost reduction and improvement can be found in the stereo market.

Yet despite the ability to replace many of these items with lower cost, higher quality products today, there is still the nag that I feel every time I start to spec out something like this.  I always start to need this feature or that feature that I don’t have today, but can’t possibly imagine living without for the next 10 years.  The truth is that many of the features that I overpaid for on these current items I don’t even use: 800 lines of resolution on my standard definition TV (nobody can even tell me how to take advantage of this…), 7 channel, multi-room capability on the “flagship” receiver, etc.

Additionally, the cost bar has already been set high by these initial purchases, and since we’re in a better financial situation now than we were 5 or 10 years ago, the rationalization starts to creep in: Go ahead, by another $1500 receiver — you’re going to use it every day, you’re going to keep it for 10 years, it’s going to sound so much better than the $750 one — in fact, spend a little more this time since you’re so much better off.

And herein lies the difficulty with keeping our financial house in order: we’re human and we have wants, dreams, desires, etc.  It’s not easy to deny oneself the things one “deserves”.  Many people have estimated what percentage of personal finance is math and what percent is psychology.  All seem to agree that the former is low and the latter is high.

All of this is not to say that if we have the money to do so (which we don’t at the moment), and that we’re meeting or exceeding all of our other personal finance goals, that we should not buy whatever we want.  We most definitely should.  But that still doesn’t mean that we should not approach the replacement of items like this with frugality in mind.  We’re still going to end up with products that are better by our standards than the items that need replacing, but avoiding lifestyle inflation will keep more of our hard earned money in our pockets and working even harder for us on our other financial goals. I hope that when the time comes we’ll have the discipline we need to remember this.

Have you ever been faced with replacing an item that you couldn’t afford the first time? How do you avoid the urge to buy more features than you really need?

ticker

Creative Commons License photo figure credit: zesmerelda

On Monday of this week, I had to leave the office early to visit the home of one of my company’s customers.  On the car ride, I listened to story after story on National Public Radio about the Financial Crisis, and more specifically the fact that despite the passage of the rescue bill over the weekend, stocks were falling through the floor.  The Dow Jones Industrial Average was set to close below 10,000 points for the first time in years.  And all the time I couldn’t think of anything else but to call ScrapperMom, who would likely be near a computer, and ask her to move some of our cash into equities.

Thank goodness I didn’t, because the market has lost almost 15% since then.  But now I’m just salivating more at the prospect of picking up some market index funds at such low prices.  Am I crazy?  I’m not sure.  Everyone is reacting to the market — and all in different ways.  But the truth of the matter is that the rational me knows that I probably should not change my long term investment plan based on what the market did today.  So it really requires me to take another look at my investment plan and then act accordingly.

Here’s where the problem comes in: I don’t really know what my long term investing plan is.  We’ve written here before about many of our financial goals and priorities. Since visiting a financial planner for a free consultation about a month and a half ago (Side story: The planner at the time had hinted at the suggestion of bonds issued by Lehman Brothers since they were paying something like 7% interest… I wonder why I haven’t heard from the planner since our meeting…), we finally decided to reduce the aggressive paydown of our low interest debt in favor of other priorities.

Saving for retirement is certainly one of those priorities, and given this, the current market is the perfect time to invest in order to capitalize on the “buy low” strategy.  Sure, the market could go lower still, but the rebound, whenever it does occur, will almost certainly end up higher than the current market within 20 to 30 years, and therefore money put into the market now should be a good investment.

However, building a substantial emergency fund is also one of our priorities, and given the current state of the economy, cash is probably not the worst position for our money.  While both of our jobs seem fairly secure over the next year or so, the truth is that anything could happen at any time.  I actually have no idea whether my paycheck is dependent on the ability of our parent company to borrow money, and if so, what will happen if it becomes unable to do so.  ScrapperMom works in a field that caters to higher-end tastes, and so far the only effect the slumping economy has had on her line of work is the choice of whether to build the garage to the vacation home now, or hold off until the market rebounds a bit.

I have considered our income position a number of times over the last year or so, and the diversity seemed to pretty much assure that we would continue to have at least 1 out of 3 major incomes at any given time.  I think that is still true, but I’m not as sure as I used to be.  It is unfortunate that it has taken a serious financial crisis to finally drill into my head the need for a substantial emergency fund.

To that end, I think that I will hold off on moving from cash to equities, at least for now.  But, if the market starts to rise quickly, soon, I know I’m going to feel a bit sick over not taking advantage of it when I had the chance.  What’s interesting is that people are often told to take on as much risk such that they will still be able to sleep at night.  For me right now, I feel like not taking on sufficient risk is going to keep me up nights…

What about you?  Are you hanging on tight to the roller coaster ride?  Did you get out of the market already?  Are you plowing cash in?  What would you do in our situation?  Let us know in the Comments Section below!