2007 Roth IRA coming to a close

Technically, you can still contribute to your 2007 Roth up until April of 2008. The limit for young middle-income folks like myself is $4,000. Unless you make 6 figures, you need not worry about whether or not you can contribute (or whether your maximum contribution limit is lower). More details can be found here.

If you're like me, however, your 2007 budget ends on December 31, and savings afterwards falls into the 2008 contribution. With little more than 2 months left in the year, it's a good time to evaluate your progress and see if you have reached your maximum or exceeded it (yikes, more paperwork!). If you have exceeded it, be sure not only to withdraw the excess dollar amount but also the dollar amount of the interest that your excess earned. The tax you pay will be more than your earnings! There is no penalty for withdrawing excess contributions. Of course, hold on to it and just figure it in to your 2008 contribution.

A quick glance to my investment spreadsheet tells me that I am in no danger of exceeding my limit. Hopefully next year I can increase my monthly Roth allowance.

God wants you to lower your electric bill

One of the biggest factors of your utility bills is your heating, cooling, and lighting. Surprisingly however, many people don't use what mother nature already gave us - the sun and wind. I notice that whenever I am at someone else's home, they more often than not have the blinds shut tight and all the lights on in the house, in the middle of the day.

At our house we have a pretty good system of heating, lighting, and cooling. During the summer months we adjust our blinds and open windows to keep the heat out, let the breeze come through, and light up the house. During the day we rarely have a light bulb on because all our blinds are open.

To keep the heat out, we shut all the blinds during the day when we are not home to create a dark, cool house. When we get home we fully open all the blinds on the side of the house that the sun is not striking. On the sunny side, we crack them upwards so that light gets in but does not shine on any walls, furniture, or floor (if anything it shines on the ceiling, which of course also helps lighten the room.

We also select windows to open based on the direction of the wind to maximize the breeze coming through the house. If it's cool enough outside, we just open all of them.

The savings on your electric bills are substantial, and as a bonus you get to sit down to breakfast and say things like, "the angle of the sun sure is giving us lots of light this morning."

I might need to get divorced

I had a disturbing conversation with my wife the other night. We were talking about the results of this situation with the medical bills and about our progress on paying down our debt. We threw the idea back and forth of paying off my student loan before her car loan. Now interest-wise this makes no sense, but balance-wise it does. I can pay off the student loan in one big lump payment if I focus all our debt repayment on it for one month. That would kind of simplify things since I would have one less debt to worry about, and would be a nice feel-good victory. The extra interest we would end up paying on the car loan to do this would be negligible. She agreed. Then she gave a reason why she agreed:

"Well, the car loan isn't really debt anyway."

I was floored! What? Not debt? I need to tell the bank to stop charging us interest. She stood her ground; a car loan is not really debt. So I ask her why she thinks a car loan isn't debt.

"Because everyone has a car loan."

I stopped to think about this. Does everyone have a car loan? Of course not. Does anyone need a car loan? Of course not. Very few people absolutely need to buy a car that second...they could easily just start saving a payment and buy a car in a few years. Most people buy a new car when theirs starts having problems, or they just get tired of it. That's certainly not a necessity to borrow money. Rarely do people literally run their car into the ground until the engine implodes and it refuses to move another inch (and those that do have probably been saving for a new car anyway).

Yet there is the mentality that everyone has a car loan, that everyone needs a car loan, and that it isn't really "debt". Why is this? Is it because everyone around us is so addicted to debt that one little car loan doesn't seem like a big deal? Has the automotive industry itself so well marketed buying a car on time that it seems like just another standard process in buying any car? Or are we just so entrenched in this culture of instant gratification that saving money for 5 years for a single purchase just seems outrageous and out of this world?

FNBO advertises a rate that does not exist

FNBO Direct is still advertising its 6.0% online savings account interest rate. I had an issue with this last week, but I really have an issue with it this week.

First of all, all transfers into the FNBO account have a 3-4 day waiting period (in which I assume the company used to complete the transfer gets their cut by taking the interest in the meantime) between the time the money transfers out of your other bank and into theirs. So even if you already have an FNBO savings account, it has been literally impossible to earn the 6.0% advertised rate. At all! Starting about the middle of this week they have been advertising a rate that no longer exists for new customers.

The rate changes on Sept, 28. Friday. Tomorrow. The real stinger is that FNBO has already announced their new rate of 5.05%. This really isn't bad, considering other banks are reducing their rates almost across the board. ING is down to 4.3% (a .2% difference) and HSBC just lowered theirs to 4.5%, down a whopping .55%. Still, they are advertising a rate that not even their existing customers can take advantage of.

FNBO announces new rate

FNBO has announced the new rate on their savings accounts. 5.05%. Lower than their previous rate, higher than some (like ING). No doubt this is to recoup their losses from their brief 6% promotion.

FNBO's new rate is under lock and key

FNBO Direct, an online bank that the bulk of my savings is in, currently offers 6.0% APY on its savings accounts. That is a limited offer, and the offer is set to expire on September 28. Next week!

No one seems to know what the new rate will be after that. I called customer service and inquired with one of the reps and they couldn't tell me. She implied that she didn't even know herself, so it is possible that FNBO is keeping a tight lid on the news.

The logical rate for them to return to is 5.25%, the same as the rate before the promotion. But there are two problems with that. First is the Federal rate cut, which could trickle down to lower the rate on savings accounts. Second is that they may undercut their previous rate in order to make up for a little on their promotion. Then again, cutting it below 5% would put it below average and may encourage too many customers to transfer their money elsewhere.

What I found interesting was that they are still advertising the rate with less than 5 business days remaining in the promotion. With the time that it takes to sign up for an account, get it verified, transfer funds, and wait for the funds to clear, no one signing up today or anytime next week is going to see that rate! If you are considering FNBO, you need to wait until after the 28th.

If I were to hazard a guess, I would say that FNBO's new rate will fall between 5.00-5.25%.

Can you become too obsessed with your debt?

Probably.

So my wife and I were sitting down last night discussing a few of our current money problems. Namely, a couple a medical bill forced us to dip into our emergency fund and we have a follow-up that is going to cost us again. We still haven't replenished our emergency fund, mainly because I haven't taken our debt repayments to reimburse it. Instead, I've been nickel and diming the fund to slowly bring it back up - using any spare income we have.

Needless to say, our fund is not back up to $2,500 yet. Actually, it is $1,900 now because of that bill. This new bill will set us back another $600. Ouch. Not a good month for the emergency fund.

Of course this discussion lead to how we are going to repay our emergency fund and pay our upcoming medical bill. We have very different approaches.

1) Her plan. She wants to take our debt repayment amount (about $1,200) for this month and pay these medical bills with it. That will of course cover the whole thing and bring our emergency fund back to where it should be, but it leaves us with little extra to put into the debt (not including the regular payments - our debt is a closed term loan and a student loan) for the month of September.

2) My plan. I want to pay the bill out of the emergency fund and slowly build it back up out of our discretionary income without reducing our debt repayment amount.

This lead her to the following conclusions about me:

1) I am too obsessed about repaying our debt.
2) I am wrong.

I don't like the idea of using our debt repayment to pay these medical bills because I feel that's what our emergency fund is for. I don't see the debt repayment as optional. In reality, this would only set our goal of being debt free back a month. Not the end of the world.

This also lead me to once again showing her a simulation of our debt payoff plan, how much we are sinking into this debt, and how wonderful it will be without debt. None of this affected her conclusion that I am wrong.

So, we compromised. We will wait it out until the end of the month and put as much as we can into the emergency fund to bring it back to snuff and save extra for the upcoming bill. If we're short, we'll use a portion of the debt repayment.

Charged for bill pay? Let the bank pay you

I was being charged $7/mo for online bill pay by my brick & mortar bank. For a long time it was worth it. Bill pay is just plain convenient. But now online bill pay has come to be expected from any major bank.

Some have started to offer free bill pay to all their normal checking. I thought seriously about switching to one of those until I took a look at my existing account with the online bank ING Direct.

ING Direct has a checking account with free bill pay and 4% interest. That worked out for me! Since I keep a lot of money reserved for annual bills, I have a bit of cash sitting in the account at any time. By transferring the amount of my bills from each pay check and then paying them from ING, I also get to earn a little interest on my bill before it gets sent out. Now that the system is running smoothly, I see that I am earning about the same that my old bank was charging me.

This is how banking should be!

Not living paycheck to paycheck

When my wife and I married 2 years ago, we were literally living paycheck to paycheck. A paycheck would come in and we would pay the bills we had received, the minimums on the cards and loans, buy the essentials like food, splurge a little, and then try to save whatever was left over.

After we were married we decided to tackle our finances. We wanted to manage our personal finances, not just sit along for the ride.

One of the best feelings I got was when I realized we no longer lived paycheck to paycheck. We started saving off the front end of our paychecks instead of the back end, saving money for bills that did not arrive regularly (like insurance), saving for retirement, delegating a huge chunk of our savings rate to paying off debt after having established an emergency fund, stopped carrying balances on the credit cards, and only splurging after all those things (and food and bills) had been paid.

Now that we have money sitting in a bank in emergency fund and our bill savings, we have funds sitting there that we use to pay the bills. This is our "bill pay account", formerly what I called our "readjustment account" - still trying to come up with a good name for it. Now when we get a bill, we just pay it. When a big bill like insurance comes it, we just pay it. No sweat.

It's a great feeling, because we really feel like we're making progress.

Does "my house" = "my money"?

A comment in one of my articles reviewing a mortgage product got me thinking hard about the way we view our homes. What does a house represent? Sure its our homestead, where we raise our families and build memories. But is it an investment? Is it an asset or liability? Is it an ATM machine? Anonymous wrote:

in the 30 yr, I have to apply for HELOC 2nd or refinance again to get that money (MY MONEY) back!" Thus, I HAVE TO PAY (MORE MONEY)TO GET MY MONEY BACK!

What struck me about this was this idea that the HELOC was allowing us to get back "our money".

Is a house a source of cashflow? Let's look at that for a second. A house worth $200,000. You own it, you may or may not have a mortgage on it (so technically the bank owns most of it), you have (hopefully) "equity" in it. A HELOC is a "Home Equity Line of Credit".

If I buy a house, I've purchased something. The only way to really get my money back is to liquidate it. To sell it. Real estate is an "investment" because unlike just about everything else you buy, its value usually appreciates. So where do equity lines of credit fall in? Well, based on the value vs what I owe on the home, I can take out a loan using my equity as collateral.

How, may I ask, is this any different than going to a pawn shop and taking out a loan with a Rolex as collateral? Is that really "my money"?

It's a fallacy, I think, to regard your equity as money. It's not; it's simply the value of something you own. The only way to cash it out is to liquidate it. Anything else is simply a loan, a loan granted to you based on the presumed ability for you to pay it back because you have a large asset that you can liquidate.

However real liquid assets (cash) sitting in the bank earning interest does not equal a loan, where you pay interest. In fact, by taking out loans on your house instead of saving money and using that as your purchasing power and/or emergency fund, you are killing whatever "investment" your house might represent.

Borrowing money does not build wealth. A house is not an ATM. It is not "your money". When you take out a loan, any loan, you are paying someone else for the privilege. How is that "my money"?

What will a brand new car really cost?

If you're anything like me, you balk at the very idea of paying more than $15k for an automobile. The value of these things sink like a rock. The depreciation is even worse on a luxury car. I wonder what this guy felt like when he traded in his car. If the link doesn't work, it's a 2002 Volvo S80, very nice, full leather interior, with only 87k miles on it selling for $12,000. Guy probably traded it in for around $9-10k. The MSRP on this vehicle brand new was around $45k. Over 5 years that's a depreciation of $6,600 a year!

Assuming a no-down zero-interest loan (we'll assume the guy has awesome credit since he's buying a luxury sedan) he was paying $750 a month on the car while it was going down in value $550 a month. So over 5 years, this vehicle cost him $583 per month to own, not including all his maintenance costs.

Compare this to the person buying the car now. When people take care of their vehicles, they can last forever (I've had plenty over 150k that looked and ran brand new). There will be some increased maintenance costs for an older car, but the preventative maintenance is about the same as with a new car. Oil changes, adjustments, etc.

Figure paying $12k for the 5 year old luxury car with 85k miles on it. After another 5 years the vehicle is 10 years old with, say, 170k miles. Its probably nearing a good retirement age by that time. So sell it for a few grand. My 2002 Volvo has now depreciated $150 a month during my ownership, as opposed to $550 a month. Oh, and by the way, instead of a $750 car payment while waiting for the beautiful 02 Volvo to go on sale after 5 years, I was stashing away $400 a month in a nice 5% savings account.

So the first owner has sold his brand new car, spent $33,000, and is back in another new car with a loan.

I waited 5 years, kept the clunker I had, stashed $400 (leaving me with, btw $350 extra a month to maintain my old clunker) and bought the same car for $12k with $15,800 left over in my pocket, not including the extra $350 a month that I doubt went entirely to maintenance.

The difference between the same car purchase brand new vs 5 years old is $48,800!

Letter to their daughter

All Financial Matters posted a letter from a couple of financial-savvy parents to their daughter. I loved it and wanted to spread word of it around. These parents had $1,000 saved up for their daughter when she was 14, via her allowance. The letter details some investing and saving advice for their child.

Memorable quote

As you can see, when the interest rate doubled (from 5% to 10%), your earnings over a 51 year period grew by more than a factor of ten – from about $11,000 to about $128,000!!

Trivia: Albert Einstein discovered the Rule of 72.

What would you do with $30,000?

My goal is to have over $30,000, cash in a savings account, by the end of 2009. What would you do with $30,000? Assume no debt except a mortgage. Off hand:

• Keep it in savings, let it earn 5% interest or so
  
• Divide it up, keep an emergency fund in cash and invest the rest in the market
  
• Pay a huge chunk of mortgage principle with most of it, retaining some as emergency funds
  
• Fund a Roth IRA, 529, or some other retirement fund with the interest it earns in a 5% savings account
  
• Buy a Lexus
  

What is an emergency fund anyway?

A post about "How much emergency fund is too much" over at The Simple Dollar blog got me to thinking about my own emergency fund. How much should you have in an emergency fund? No Credit Needed says 12 months. Smart Money recommends 3-6 months. I personally feel a good 6 months is ideal.

But when I say I need 6 months of expenses, I'm thinking of what would happen if we had a sudden loss in income. A layoff, or illness, or anything that puts us out of work. 6 months of income would keep us afloat while we tried to rebuild.

Is this really an emergency fund? When I look at its primary purpose, I think its much more important than a simple emergency fund. For me, an emergency fund is for unexpected bills that suddenly come up, or small disasters that happen around the house. If my transmission fails and I have a $2k repair bill in my hand, that's an emergency. I need to have money that I can access pretty quickly. That convenience means that it needs to be somewhere like a high yield savings account, something with zero risk that is not going to offer very good returns.

The job-loss situation though is quite different. That's not really an emergency, its a temporary income replacement. It also has to have a principle quite a bit higher than an every-day emergency fund. 6 months of expenses. Is an "emergency fund" a one size fits all fund? I tend to think not. I feel you need to have 6 months of income replacement stashed away, but certainly you don't need to have access to it like you would a fund for smaller disasters. You can put it into an index fund or other safe but healthy return investment, and more than likely it will just sit there. Though layoffs are more common now, the chance of being suddenly fired is somewhat small.

The odds of my water heater dying, a tire blowing out, or something in the house breaking and needing replacement [insert any appliance here] is far more likely. I need to have that money pretty quickly. Even if I "floated" the balance for a month with a credit card, do I really want to dig into my income replacement fund for every day emergencies?

I say defining our emergency funds and splitting them into short term and long term safety nets is a better plan than lumping it all together into one.

How do you manage your emergency fund?

Boomers put off retiring

Is it any real surprise that boomers can't retire? At 27, I'm worried that I'm not putting enough into my retirement funds. I can't imagine waiting until 35-45 to start really thinking about where my retirement funds are going to come from, but apparently many baby boomers did just that. Worse, they had fewer children to support, more education, and greater access to jobs (a family could double its productive hours after the 1960's thanks to women entering the workforce in droves).

So what happened? Were they too busy buying consumer electronics, driving up the cost of home ownership with the housing pricing wars (increasing their % of wages on houses to buy into "good" neighborhoods with "good" schools) or going on vacations? Did they neglect their company retirement vehicles or embrace only the company match and fail to save other funds on their own?


What makes me go "hmm" is the fact that boomers nearing retirement are also less likely to be married. Is it at all surprising that you are not going to do well financially (or physically and emotionally) when you have decided to do it all on your own?

The big question is whether we, their children, are going to learn from watching their mistakes. Will we save for retirement, stay married (not divorce because we are bored or want a change of pace), and not rely on tax income to fuel our retirement (social security)?

Summer water saving tips

As summer is upon us, here are some helpful water saving tips to reduce your consumption (and your bill).

IN THE HOME

• Use the dishwasher only when it is full
  
• Thaw frozen food overnight in the fridge or in the microwave, don't run water over it
  
• Use the proper load settings on your clothing washer, don't use long wash cycles unless clothes are very dirty
  
• Rinse veggies in a sink full of cold water rather than under running water
  
• Store drinking water in the refrigerator
  
• Use water to feed plants, etc instead of pouring it out
  
• Install flow reducing shower heads
  
• Install faucet aerators
  
• Repair leaky faucets and toilets
  
• Fill baths up only half way instead of full
  
• Time your showers
  
• Don't run water while brushing teeth
  
• Keep a small trash can beside the toilet to dispose of non-stinky uses of toilet paper and tissues
  
• Don't prewash dishes in the sink before putting them in the dishwasher
  

OUTSIDE

• Keep a rainfall schedule to avoid watering unnecessarily
  
• In summer water lawns in early morning or the evening
  
• Don't use sprinklers that spray in a fine mist
  
• Plant native trees and plants that will need little to no special irrigating
  
• Use drip irrigation for shrubs and flowerbeds
  
• Use a broom instead of a water hose to clean debris from your concrete walkways
  

Should I buy or finance a car?

I am already biased; I do not believe in financing vehicles. I decided to sit down and do some math, because while my personal opinion may be enough for me, I need some hard numbers to convince someone else - like my wife - to get on board. Since I do just about all of the maintenance on our vehicles, we can keep them running for relatively little money over their lifetime. Yes, big repair costs do come up, but with a little planning and setting aside savings just for that purpose those big repairs don't seem so disastrous anymore. Plus, until I do need that repair money, I'm earning interest on the balance. Much better than scrambling to find cash to pay it or putting it on a dreaded credit card and carry over the balance.

Here is my 10 year plan for purchasing automobiles. In this example I leave out potential repairs and maintenance, which you would need whether you finance it or not.

Option 1: Financing a car. I want to buy 2 cars over the next 10 years. Not a bad deal. Based on my income, I decide that I only want to spend $15,000 on each car (including tax, license, etc). I finance it and get a great rate, 3% and payments of $269 a month. Over the 5 years I end up paying $1,171.82 and $16,171.82 total. We will ignore the value of the trade, since whether or not I finance the trade in value would be the same. Let's just say I finance another $15,000. I pay another $16,171.82 total. It is now 10 years and I have financed and paid off 2 vehicles.

Option 2: Buying a car. I want to buy 2 cars over the next 10 years. Instead of financing it, I keep what I have (or carpool, ride public, etc) and pay myself $269 for 5 years in an online savings account with 5.5% interest. I now have $18,613.87, and I buy a new car for $15,000. That leaves $3,613.87 and I continue paying myself $269. It is now 10 years so I buy another car with the $23,368.65 in the bank and have $8386.65 left over.

With either option I end up purchasing 2 new cars over a 10 year period. In both cases I am putting in around $32,000 of my earned cash. The difference is that at the end of the 10 years and car purchases, by financing I will have paid more for each car and have nothing left over. If I save up the money myself, I end up paying only the sale price for each car and I have $8,368 in the bank!

What is the kink in this plan? Well, the major one is that in order for option 2 to work, I need to be able to hold on to my existing car for another 5 years, or save up for a year and purchase a small older vehicle. On top of that, I will have higher repair costs due to the age of the existing vehicle.

Okay, but this problem is because I've stuck myself in a financial hole with the car loans. It will be a struggle to get out of the hole, but the rewards for doing so are pretty clear. Even if during the first 5 years I spend more in repairs than I would on a new car, I am still setting myself up for a 10 year plan later on. I plan to be driving at least until I am 70-80 (lets hope), so we are looking at a good 40-50 years of car buying ahead of me. I'd rather struggle a little to get myself out of the rut than be perpetually stuck in it.

Financing cars is a hole. Saving for a car is freedom.

Money saving tip...

In the spirit of a project from No Credit Needed, I have decided to make a brief post about my favorite money-saving tip. This tip is for saving the money that you earn from your paycheck while reducing or eliminating the urge to spend it.

Take your savings off the top of each paycheck. Designate a % of your savings to be saved, not a dollar amount. As soon as the check is in the account, immediately transfer your % into another account. Then pay bills. Whatever is left is available for spending.

I feel this tip is valuable because many people get their check, pay their bills and whatever else they need, and then save as much as they can of what is left over. Taking it off the top allows you to adjust to a reduced income while saving consistently. Consistent savings is the key.

Review of FNBO Direct

FNBO Direct is an online division of the First National Bank of Omaha. Thanks to a recent post on the Money Blog Network, I learned that this bank was offering a teaser 6.0% APY rate for their online savings account. This is a fully electronic bank, no paperwork or forms. Even their terms and agreements you need to print out (and you should do so).

With my measly 4.5% rate at ING, I was looking for an online savings account that would offer me more. One of the first questions I had was what the FNBO rate would be after the teaser period, which ends in September of this year. Unfortunately, it does not say, and will likely be tied to the market after Sept. Fortunately they do provide their previous rate of 5.25%. This is very competitive with other online savings accounts, so I am confident that it will be okay. As always, check after the period ends to see what rate you are getting.

You have to sign up online through their website. They are fairly new, I learned, so there were some minor glitches. For one, I couldn't seem to return to my application after submitting a secondary user. It kept telling me that my session had timed out. I also learned that the site is not entirely compatible with Firefox. Indeed, I did run into some problems while using Firefox during the application process (however my specific problem was no better in IE7 either) but for regular access and transactions, Firefox has given me no issues. Fortunately I called FNBO and they were able to help me finish my application over the phone. I ended up calling a few times, as I went through the application, and their customer service reps were friendly and very helpful.

Through some of the sign-up process, you will have to wait until you receive confirmation emails (acct #s, etc) before continuing, so don't expect to finish the application in one sitting. In my experience the e-mails were quite prompt, arriving in a day or less.

My first transaction went smoothly and the funds were taken within a couple of days. Setting up direct transfers was easy and there was no 'test deposits' necessary, as there was with ING. It withdrew my initial funding, a dollar, and after that I set up my checking account for direct transfer within minutes. There is a period of 2-3 days when your transfer does not earn interest. Then it appears in your account. This is somewhat of an indirect 'transfer fee' that you need to be aware of. There is a third party that handles their website and transfers.

Outright fees apply to wire and foreign transfers, so if you use those you may want to shop around more.

The site itself is simple and easy to use, with no distracting junk. Read their membership agreement and privacy policy. They do admit to selling your information (and even your transaction behavior) to affiliated parties. If this concerns you, look elsewhere. So far I have not received any solicitations, but certainly if I did they would be lost in the sea of junk mail and credit card offers I get daily anyway.

Overall, I am satisfied with FNBO. It is FDIC insured and the bank has been around for over a hundred years. Hopefully the post-teaser rate will still be good.

What are your priorities?

When allocating your income to paying various funds, what are your priorities? Obviously savings and retirement should be up there, but with the ridiculous amount of consumer debt on the table (the average American family has $9k in credit card debt now?), paying off credit cards needs to be taken seriously.

Are there any low priority debts? Student loans, mortgages, car loans? Many people describe these as "normal" debt. Am I unusual in believing that all debt can and should be avoided? And if unavoidable, at least attacked aggressively until it is gone as quickly as possible?

Here are my priorities:

1) Pay down high interest debt (credit cards with obscene 15-30% rates need to be eliminated before all else).
2) Begin saving emergency funds.
3) Saving for retirement.
4) Paying short term low interest debt (student loans, car loans, etc).
5) Paying long term low interest debt (mortgage).
6) Saving for spending and high dollar purchases.
7) Additional investments.

I also believe in doing all of these on the front end of your income. Rather than paying bills, setting aside some spending money, and then throwing whatever is left at a debt, I calculate my budget and spending habits, figure out how much I need for bills and casual spending and then figure out a percentage plan for my saving/repayment goals. 10% goes here, 5% goes there, 5% over here, etc as soon as the income checks are deposited. Then I pay bills, and then whatever is left over can be used for spending. Any miscalculation then ends up cutting into my personal spending, instead of my savings or debt repayments.