Tuesday, March 30, 2010

What to do when you're New Money!

So, if you've already figured out what to do with your savings, and you're aware that you should pay yourself first. But the question is what to do when things get busy and you're already on automatic with your money?

Even the best plans need some occasional changes and tweaking. So, make sure that you're taking the opportunity to revamp your freedom fund and expense estimates each year. I find that the best time to do that is tax time.

This year, I reduced my additional increase from 3.0% to 2.0%. Inflation seems to be in check and fortunately, things seem to not be expected to change in the near term. So, I determined that I needed to save approximately an additional thousand dollars in my freedom fund in order to stay current.

Then I did something similar for my emergency fund (or e-fund as some like to call it). Once those two were satisfied, I had to decide what to do with any additional funds that I might have available. One option that many like to use is to finish up contributions to the ROTH. I have not maxed out my retirement accounts and there certainly could be no good argument against doing so.

Furthermore, I still have some student loan debt which could be paid off rather easily. However, I have a debt snowball on this debt and I didn't want to accelerate the payments further. So, instead, I opted for a taxable account invested in mutual funds at Vanguard. I've had good experiences so far and I chose a very low risk account and decided that this would be better long term than leaving it in a bank with a paltry 1.25 or so interest rate.

Along with the minimum to open the account based on that type of fund, I also set up a monthly automatic investment. I like the idea of this being automatic just like my 401k and Roth IRA so that there is no temptation to skip it some months. So far, I'm pleased with the dividends and since it is a relatively lower risk fund, I think that it will easily outpace my ING direct account...and for money that I can afford to take some risk with, that is not too bad.

What do you do when you come into new money at this point?
Would you ever forego retirement contributions with extra money?

Friday, March 26, 2010

Is European Debt Greek To You?

The press has been covering various countries and their possibilities of defaulting on their debt for some time. Last year, Iceland had a financial crisis that caused many to become quite nervous that it could cause a series of defaults across Europe.

Lately, the big target has been Greece. For quite some time, the burgeoning levels of greek debt have made many investors nervous. A country, like a company or a person, can spend more than they have, but must borrow in order to do so. Companies can borrow by issuing stock or bonds. Countries can borrow by issuing bonds or other similar securities. All are forms of IOUs.

In the case of Greece, the increased debt levels have made people nervous because they seem to be at a level that could never be repaid. This fear was lessened to some extent today with a new agreement that provides some backing for Greek debt. Read Bloomberg's Greek European Union Accord article to learn more.

What does this all mean for the average personal finance enthusiast? In reality, there is not much we can do about the government spending in other countries. However, we CAN and should hold our own government accountable to the tremendous spending that we're undertaking as a nation. At last count United States Debt was at an astonishing 41,000 dollars USD per citizen. This is not sustainable and the amount of interest paid daily on that debt is staggering. Over 6,100 dollars US is just the interest on that debt.

In simple terms, we can view the United States as a company. And we're competing with European, Asian, and Latin American countries to produce goods and services and get the best price for them. However, we're not doing well if we have a huge debt burden because it leaves us over a proverbial barrel when it comes to spending on real needs down the road. That is what has caused Greece to need this bailout. Unfortunately, the US is too big for anyone to bail us out. Even China, a large consumer of the US debt, is starting to buckle under the weight of its dollar reserves.

I hope this was an interesting post for you; I know that it had been a long time since I'd thought about the crisis in Iceland and this has certainly motivated me to become more aware of the political landscape in advance of the November elections!

Monday, March 15, 2010

Trimming Subscription Costs

One of the easiest ways I find that you can spend money is through recurring expenses. Although it is something that I am aware of, it is something that recently began to creep back up. When I first became really interested in personal finance a few years back, I really thought that there would be a bit of work to be done and that a simple magazine might help. I subscribed to Money magazine and probably got something like 16 issues for like 12 bucks, who knows? Even after factoring in the entertainment value, I have decided to not renew. Much of the content feels recycled and the choices that they are highlighting seem to really be geared to people in retirement or with kids which doesn't really fit my life at this point.

Another subscription I've curbed is my World of Warcraft. I really enjoyed playing the game for a few months and also seeing all of the new content that had become available but the game has lost its appeal for me so I've quit. Perhaps I will go back, but not right now.

And the last subscription that I've worked down is the Netflix. I've been using this less and less for several weeks and I am actually finding that the online rental service seems to be the most valuable and I get that even with the lowest subscription level so that is what I switched to.

Overall these subscriptions don't count for all that much, approximately 30 dollars per month in savings which is not the end of the world, but I figured there was not any point in wasting the money. I'm curious to know how the economy has impacted other subscription-based services.

Saturday, March 13, 2010

Suze Orman Goes Too Far!

I've been a fan of Suze Orman for years. When I first started working after graduating college and then I started to make some money, my experience with other members of my family, mostly my grandparents, showed me that I needed to figure this money thing out.

So, I set out to understand how money works and I found Suze. Many financial gurus are out there and for the most part, much of the advice overlaps, but Suze really seemed to be right along my line of thinking. I bought the books, watched the show, and despite the fact that I feel like I've largely outgrown it so long as I follow the lessons, I really wanted to check up on how things were going.

I went to the CNBC website and found an interview where she said this:
"I do really live within my means. I have absolutely no debt. If I don't have the money to write a check, then I can't afford it. I never, ever, ever spend old money, so I'm only allowed by my own standards to buy something new with new money that comes in. So, if I sell a home, I can't take that money to buy a new home. That money I already had, that goes into the investment account. If I want to buy a new home, it has to be with new money that comes in."

Now here, in my opinion, Suze goes way too far, for some people. Many people are very comfortable now with the idea that you're supposed to be spending less than you make and that it is not important to impress people. The great recession that we're in has been a tremendous shift in mindset for the average American consumer. But the idea that you have to only spend new money is something that will fly in the face of most people's thoughts on money.

I agree with this concept. The idea is simple, you need to make sure you're doing everything to live within the means based on what you're making today, not what you made 3, 6, or 12 months ago. This is one of the fundamental problems with many people's personal financial situation.

In the face of a salary cut or a layoff, people continue to live the lifestyle that they had at 100% income levels. What Suze is saying here is a bitter pill to swallow, but it reflects a new economic reality that we'd all be better off accepting now and living by: a loss in any kind of income needs to be balanced more than 100% by reductions in expenses.

Most people have discretionary expenses: cable, internet, cell phone, dinners out and entertainment, the list goes on. However, it makes no sense to spend on these things when you've just lost hundreds or thousands of dollars monthly in income. Where will that loss of income come from? And what if things get worse and you lose your other income or have an emergency?

What Suze says here is advanced, but it is critical. A good credit score and a nice healthy emergency fund makes no difference if it is not managed judiciously in the face of a real emergency like a loss of income.

Personally, I've taken the same principal and applied it the other way. If my income increases, I typically wait until I've gotten 3-5x as much additional monthly income before I commit to a discretionary expense. Then I know that the expense is sustainable and that I'm continuing to save and invest enough extra that I should be able to reward myself.

For example, if I wanted to go out to eat one additional time for 45$ each month, I'd usually wait until I made about 150-200 dollars additional (and that I was saving/investing it), net each month before committing to spending that money.

Thursday, March 11, 2010

Thriving in a bad economy

It has been a very long time since I last updated and I've accumulated some stories that I can share about the past few months in my next several posts. I hope that they will be found to be useful and interesting.

After a very long period of time, the economy has come back. It seems now, although there are some small shifts day to day and week to week, that the stock market has found some sort of steady point. Of course, there are many that think that this could all change and that there is still a chance of a double bottom.

All of this is really a side show in my opinion. What matters most to people is what is happening in their own personal financial life. That is, what is the most important thing in each person's life that keeps them from being happy. For many right now, it is a combination of a lack of a good-paying job and/or an overabundance of expenses.

This past six months has been quite good; expenses remain low and the debt snowball continues as I am working toward paying down my student loan and mortgage. My car which has been paid off for some time continues to run (It's a Toyota) and I am grateful for that. Furthermore, the taxes just got filed and I got a fair return back so I'm quite excited.

My chart on Networth IQ shows the real issue here though...even with all of the recent activity and continued work toward goals, it is still difficult to reach past the prior highs of a couple years ago. However, I continue to contribute and keep the faith that things will be going ok soon. You can keep up with my progress chart here: Net Worth Chart