Archive for the 'Planning' Category
Can you believe it’s August already? This weekend we’re relaxing with friends at their home in New Jersey. In the meantime, I hope you enjoy the following:
Hank at MyInvestingBlog.com asks the question:
“If you were given $50,000 USD (tax free) today, what would you spend it on?”
I went back and forth on this question. The prudent thing to do would be to pay off the remainder of our low interest debts. The “dream basket” thing to do would be to use it for a down payment on a single family home, keeping our multi-family as an investment property. Paying off our debt would still leave half the money, and with the monthly payments on the debt gone, it would take us only 12 months to save that amount again, which is well within a reasonable amount of time to find and act on a new house. What would you do? Leave a comment here and then head over to the original article to enter for a chance to win an American Express gift card. If you leave a comment there, let me know!
Some other articles that caught my attention this week were:
- Rocketc wonders if a frugal culture exists at your work place. He feels obligated to eat out with coworkers for fear of missing important business discussions that may ultimately further his career. My office is split between go-outers and brown-baggers, but nearly everyone eats at the office. I admit to feeling not so much peer pressured, but food pressured to be a go-outer, but it’s better for my wallet and my waistline to be a brown-bagger.
- Boston.com presents a scary article about how many workers are breaking the retirement piggy bank. It’s almost never a good idea to use retirement money for anything but retirement. But you knew that already.
- J.D. writes about How to Cope with a Lousy 401k Plan. Most of us don’t realize that the plan we have through our job is not the work’s plan, it’s our plan, and we all have the power to change it, especially if we band together with coworkers. Many of these plans aren’t set up by financial experts, and very often the administrators are sold a bill of goods. A little research followed by a little bit of squeaky-wheeling, so to speak, can make a major impact on the size of your nest egg.
- David posted a list of state sales tax holidays. Tax holidays are a great way to save — especially on big ticket items. However, one should be sure that (a) This item is in your spending plan and not a splurge item (since otherwise you will have not saved anything…) and (b) that you know what the regular price of the item is and what a typical sale price is. In my experience, many stores have no sales on Tax Holidays and bring all of their sale prices back to full price. In many cases, you can actually save more money on the weekend before or after the tax holiday than on the holiday itself for this very reason.
- Finally, PaidTwice wonders about how much your time is really worth. I, too, have always been skeptical about arguments like this. The key here is to set the baseline appropriately: the choice is between earning $0 and something, not between your regular hourly wage and something. I don’t buy PT’s advice on earning hundreds of dollars per hour since in most cases you can’t actually do that. Yes, you might save a few dollars clipping coupons for a few minutes, but that’s not the same thing as earning $25/hour.
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Feeding the Firefoxes
photo figure credit: Glutnix
It’s been another busy week in the MITBeta and ScrapperMom household. But I’m feeling like things are a little more under control since I started reading the now well known but still great book Getting Things Done by David Allen. I’ll have more on that in an upcoming post, but in the mean time I wanted to share some of the best articles that I read this week:
In National News:
With this week’s hike in the minimum wage, Nickel examines the historical minimum wage level relative to the value of a dollar and finds that those on minimum wage have been seeing the value of their salaries fall for the last 25 years.
The Freakonomics blog wonders are we a nation of financial illiterates? I’ll reserve judgement for now, but what do you think? Did you answer the quiz questions correctly?
Personal Finance
Shilpan at successsoul.com reposts Warren Buffett’s 7 Secrets for Living a Happy and Simple Life. There’s some great advice here that really forms the basis for most personal finance: don’t try to keep up with the Joneses, be happy with who you are, not what you have, etc.
Mrs. Micah writes about an error in her paycheck and how thankful she is that she is not living paycheck to paycheck. This reminded me of something similar that happened to ScrapperMom a couple of months ago. Mrs. Micah also has some great tips for breaking the paycheck to paycheck cycle.
Home Economics:
EconomistMom writes about “a big family infrastructure day” that took a serious bite out of her bank account. She makes a couple of great points in this article, especially in explaining why the health care problem is such a difficult nut to crack.
J.D. asks readers to help a fellow reader who asks “how can I get my wife to talk about money?“ Chronic disagreements about money are cited as a leading cause of divorce. However many astute readers rightly point out that it’s never just about money. As near as I can tell, open communication is the only way to truly make a marriage work. In fact, that’s the best way to make nearly any interpersonal relationship work.
Social Psychology:
Steven Levitt at Freakonomics shares a great anecdote about performing a blind taste test to see if his colleagues could tell the difference between expensive and more frugal wines. Can you guess what the results were? Apparently there is now scientific evidence to support the idea that taste can be influence by pre-conceived notions about something. I wonder if this means I can think my way into liking onions…
Giveaways:
Frugal Babe is giving away a $100 jewelry gift card to Diamond Nexus Labs in the spirit of switching away from mined diamond based bling.
Baby Cheapskate is giving away $200 worth of BumGenius cloth diapers. As you may know, using cloth diapers is a great way to save money and save the environment.
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Just about a year ago, ScrapperMom and I decided that we had reached the right end of the Credit Card Contiuum and that it was time to start earning some rewards for buying all of the things that we buy or pay for on a monthly or yearly basis anyway. We went in search of a rewards credit card.
Rewards credit cards come in many different flavors. There are air miles cards, new car purchase cards, free gas cards, free coffee cards, cash back cards, and even dedicated 529 earnings cards. ScrapperMom and I decided that since we could not afford to contribute anything specifically to our daughter’s 529 plan that we would look for a card that would allow us to earn money for her account.
One might think that since we wanted rewards to fund a 529 account, that we would choose one of the 529 rewards credit cards that are available. Unfortunately, the few 529 rewards cards out there have terms that are worse than those available from some other cards. For example, one card we looked at has a limit of $300 in earnings per year. Our goal was to put as many of our purchases as possible on the card, and knew that we would easily exceed the $300 limit. Another card we looked at was linked to a specific 529 plan that did not fit our criteria for such a plan.
Instead, it made more sense for us to apply for a cash back credit card. There are a lot of cash back cards on the market, and they all have different terms. Using the credit card finder at Bankrate.com, we looked through many different cards. Some, like the American Express Blue card have different rates for different spending amounts. You have to spend a lot of money before the rates rise to a level on par with many of the other cards. Most of these cards offer around 1% cash back on all purchases and 3%-5% on certain types of purchases, like fuel, groceries, and fast food.
Ultimately, we chose the Chase Freedom Card. This card offers 1% cash back on all purchases as well as 3% cash back on things like groceries, fast food, and fuel purchases. You can redeem your cash whenever you accumulate $50 worth, but if you are patient then you can collect $200 and trade that for a $250 return (which brings the cash back bonus to about 1.25%). We can’t use this card for most of our big bills like our mortgage, car, and student loans, unfortunately, but we can use it on a lot of the small stuff like cell phones, satellite TV, Netflix, periodic insurance payments, etc.
In the past year, we have earned over $750 in rewards that we have applied to our daughter’s college savings. In a typical month, we earn about 75% of our points at the 1% level and the remainder at the 3% level. Since it only takes about 4 months to accumulate $200 worth of rewards, it’s worth our while to wait until that point to cash out the extra $50, since that’s a much better return than putting $50 per month into almost any investment.
Obviously the key to this whole plan hinges on spending within our spending plan. We pay this card off every month with money from our checking account. Again, we don’t use the card to spend on things that we would not otherwise have purchased. One splurge purchase can wipe out a year’s worth of rewards in no time at all.
Many people have difficulty handling credit cards, and I understand that. However, many others have aquired the self-discipline to be able to handle credit cards without breaking the budget. I believe that not using a rewards credit card for things that we are going to buy anyway is just leaving free money on the table. I have spent years giving the credit card companies my hard earned money, and now it’s time to redeem some of it.
Do you use a rewards credit card? What kind of rewards do you get? Do you find it worth it?
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Our daughter was born in early 2007. Knowing what I know about the power of compounding interest, I knew it was important to start a college savings fund early with something, even if it wasn’t much. We definitely subscribe to the belief that saving for retirement and debt reduction come first in the savings plan and that college savings has to take a back seat to these higher priority expenses. Still, it’s difficult to be a parent and not try to put something away for your kids.
With that in mind, we opened a 529 savings account for our daughter when she was almost a year old. A 529 plan is very much like a Roth IRA — except it’s for kids and their family and friends who are saving for their future college expenses. Money put into a 529 plan grows tax free, and withdrawals are tax free as well. 529 plans are administered by individual states, and some states also offer an income tax exemption on contributions made to your home state’s 529 plan. It’s interesting to note that many states now offer more than one plan.
With so many plans available, opening a 529 plan can be a daunting task. Luckily the folks over at SavingforCollege.com have made the task a bit more manageable with a search function to find the characteristics of a 529 plan that you want. We started with this list of wants:
- low fees — no point in having high fees eat up a large portion of the gains
- a variety of investment options — age based, index funds, etc.
- low startup costs — we wanted to be able to contribute small amounts at irregular intervals
- state tax exemption — your gains only get better if you can deduct the contributions on your state taxes
Another great resource at the time we set up the account was Nickel who did a lot of the homework for us. My search did seem to concur with his assessment. We got 3 out of 4 of our wishes in this search. Unfortunately our state does not have any kind of income tax exemption for contributions made to 529 plans.
We decided on the Ohio College Advantage Plan to get started. This plan offers very low contribution amounts at $15 per contribution. It offers a range of investment options including portfolio blends, index funds, CDs, age based funds, etc. Most of the fees for these options are low. The Vanguard options, for example, start with an expense ratio of 0.23%, and there are no other management fees of any kind.
One nice feature of 529 plans, however, is that you can generally switch from one plan to another with little trouble (the one great exception being after you just got a state tax exemption…). So it’s not only possible, but probably quite likely, that you may pick a plan today but change to a different plan at sometime in the future.
It took until nearly her first birthday, but we finally managed to open an account with $1,100 that we had saved over the course of her first year. Most of this was her money in the form of gifts that she had received. We have since made a couple of additional contributions. Our plan for the near term is to use the cash back from our Chase Freedom Card, as well as any additional birthday, Christmas, or any other kinds of gifts she receives (at least until she’s old enough to understand money…) to fund this account. We don’t expect it to grow like gangbusters, but we expect that every little bit that we are able to save will help. If we get to a point where we are saving 20% or more of our income for our retirement, then we will consider contributing more towards this 529 plan as a savings plan item.
For Part II of this article, we’ll look at Pre-Paid Tuition plans.
The cost of education is already scary, and it feels good to be contributing something to help our daughter’s future, even if it eventually amounts to just a drop in the bucket. Are you saving for your kids’ education(s)? How are you doing with it?
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The 4th of July in the United States marks our independence from British rule. It’s also an appropriate day to declare Financial Independence. What is financial independence? It’s probably something different to each and every person.
For me, financial independence would be the freedom from having to answer to someone else for my livelihood — in other words: I don’t want to have a boss anymore. It’s not that my boss is that bad — he’s pretty good actually (had to say that in case he’s reading… ;). But the simple fact is that on any given weekday I have to get up and go to work for him and not me.
A second level of financial independence would be the freedom from having to work at all — having all of my income come from passive sources. This is a typical definition of retirement where one’s income is derived from dividends and the sell off of substantial investments, social security, rent payments, etc. This would free me up to do what I want to do rather than what someone else wants me to do.
So how do I get from here to there? I’ve been thinking for many years about starting my own business, but that’s about as far as I get. I’ve had a million business ideas over the years, but never had any confidence that someone would actually buy my service(s). The major thing that I’m missing is capital to start the business and/or the funding to live on until the business is up and running and turning a profit.
Therefore, in the mean time, I am focusing on the accumulation of capital part of the problem. With just $100 more each for ScrapperMom and I, we will have fully funded our tax advantaged Roth IRA retirement accounts for the year. So today I will make a new first step on my road to financial independence: I will create savings accounts to use for funding a future business venture, a single family home, and a late model used car. We have no specific time horizon for these expenditures yet, but first things first. Once these accounts are created, I will set up an monthly automatic deposit into each of them following the “pay yourself first” principal.
To help accelerate these savings goals I will begin to divert some of the money that we have been using to pay down low interest debts. I have written previously here and here about the question of investing/saving or paying down low interest debt. So today on Independence Day, I will finally put my plan into action.
Regardless of one’s definition of Financial Independence, most of us are probably not yet financially independent. But as Lao-tzu, Chinese philosopher (604 BC - 531 BC) said:
“A journey of a thousand miles begins with a single step.”
So take a few minutes today to decide what being financially independent means to you, and then make a single step on your journey. It might be your first step, or your middle step. Maybe it’s even your last step. But take a step today, and then share your definition of Financial Independence and the step you took today in the comments section below.
Happy Independence Day to Everyone!
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