Tuesday, May 22, 2012

Lookback: 11/8/2012 - Getting Back In Control With A Regular Update

I found this post recently and I thought it was quite interesting to look back and see how reasonable and accurate it was since about 2 years have passed since it was written. So, I leave the full post here for you to read and my ideas/comments are at the end.

To say that this month has been difficult with the spending would be a huge understatement. Just this past weekend I went overboard on the spending with clothes and christmas shopping. What's more, the car needed new brakes this weekend--420 dollars! Yikes! Yes, Christmas shopping. I know that it is early, but I still intend to be prepared and get it out of the way. That said, there are huge cutbacks this year. I'm hoping this update with help me get some perspective.

First off, in our own families, we are keeping the gifts much smaller. Even though I normally give bonds to my nephews and neices I have decided to not do that this year. The bonds are normally quite small and we need to make sure we're being more careful with our money in this economy. No one knows what the future holds.

While the stock market has bounced back, it certainly seems like we cannot feel certain about anything. Volitility seems to be quite high over the past few years, so who knows what will happen in the future. And as for personal finances, I continue to be conservative to a point. I continue to maintain a large sum parked in non-interest bearing accounts just for safe keeping. Besides this, some money is in a relatively safe mutual fund geared toward income.

A recent check of my budget showed that I was dramatically out of whack with what my expenses and my income was and that makes me really strongly want to rethink some of the purchasing that I was planning on doing in the near future. When the home was first purchased, I was told that you should expect to put in about two percent of your home's value each year as upkeep in addition to the costs of your mortgage, insurance, taxes and fees. Even with the home prices having declined as they did recently, this seems pretty steep. I don't know. I certainly wish that I had the money to both continue to improve the house and also aggressively pay off debt.

While debt is continuing to be paid off, it has been difficult to get excited about the progress. And opportunities to make a little extra money like I did a few years back seem to be fewer and fewer so that I don't feel as confident about my ability to pickup a few hundred extra dollars to pay down a bill. But then again, it seems like this is the case with everyone.

All of those things said, I am doing the following to get back in control:

1. Bring lunch from home.
2. Attempt to eat out of the office no more than once a day.
3. Track the paydowns of loans aggressively to stay motivated.
4. Continue to stay active/positive at work and life because the implications are far-reaching.

So, I think it is interesting to note that I am actually quite lucky and the things have been going quite well. For #1, I frequently bring breakfast and lunch from home. Probably about 2 days per week for breakfast and 1 day per week for lunch on average.

For #2, see one.

For #3, all items have been paid off except the mortgage which was recently refinanced! Woohoo!

For #4, I've recently been working on a new way of approaching life and it has really been working for me for the past 6-7 weeks so I am really looking to keep it up.

What about you? How have you done on your goals? Do you make good progress? One of the classic tips to achieving goals is to write them down, and honestly, until very recently, I had forgotten that I wrote this. So, that is pretty good advice--it seems to have worked for me!

Friday, May 11, 2012

Buying a New Car

Thankfully, I have been debt free except for mortgage for over a year, and without a personal car payment on my own car for more than two years. My car is approaching 200,000 miles and knowing deciding what kind of car to buy has consumed a lot of time for me and I find myself wondering what the best kind of car is to get when the time comes.

Budgeting the money for a new car is a major motivation for this. And in order to know how much to budget, I have to consider what kind of car I will purchase which is the subject of this post. In terms of changes since I last bought a car, I now have a pug. As a result, there is more fur than you can shake a stick at and I am considering a car with a hatchback/cargo area for the dog where he could be safe and comfortable as opposed to being stuck with having a bulky crate in the back seat.

Other than that, I know that I want to maintain with either a small or mid-size car, but nothing larger (although truth-be-told, I'd love to have one) but I just refuse to spend the additional cash on it at this point. My results for consideration also have gas mileage in mind since I have about 20 miles of commuting each way.

For consideration, I am looking at:
Toyota Matrix
Honda Fit
Nissan Rogue
Toyota Prius
Toyota Corolla

The difficulty with such a range is that the price points for the more expensive cars like the prius can be anywhere from 8-10K more than the less expensive cars in my list. One thing is almost certain for me though--I will almost certainly buy new. As someone who has seen that people have a used cars (and had been driven around in used cars growing up), I never cared for the feeling that transportation is questionable. For my purposes, I want it to be reliable without worry. Finance Fox buys only new used cars, but I have found that the idea of having a new car that is reliable, that I hold for the full payment term, payoff early, and then drive for an additional 2+ years can also work out quite well.



Thursday, May 10, 2012

Re-evaluating Freedom Fund

One of the biggest things that has made it possible for me to be able to improve my personal financial situation is the maintaining of a freedom fund. A freedom fund is a different bucket of money that is used for clear and present expenses coming in the next 12 months. This is entirely separate money from your emergency fund.

The Emergency fund is some bucket of money that is set aside as insurance against loss of income for unavoidable expenses. When something happens and the income is lost, it is difficult to adjust lifestyle immediately. In fact, when you typically lose your income, there can be difficulty adjusting because you now have larger amounts of available time and this may coincide with some residual depression/anxiety resulting in an uptick in spending.

If you're anything like me, there are a series of expenses that you'd cut immediately if there was a loss in income. Then there are probably a series of expenses that you'd cut only if absolutely necessary. Then there are the absolute necessities.

When it comes to real costs and real inflation, the biggest problem usually comes down to pure necessities since all optional expenses are usually reduced or traded off and therefore considered highly elastic from the point of view of economics.

Essential expenses are the ones that cannot be avoided:

Food
Shelter
Heat
Clothing
Transportation
Medical Care

The emergency fund should handle the expenses for these categories for some period of time. For me, the emergency fund is a 1 year fund. That is, without any income, I could handle all of the essential expenses for a year.

Non-Essential expenses are those that would be easily cut: Services (haircuts, pet grooming etc.), cell phone, netflix, cable, entertainment, vacations. Obviously, this will be different for everyone.

Recently, I've realized that the amounts that were set aside for freedom fund and emergency fund were smaller than they needed to be for my intended goals. This is largely due to the fact that unemployment is lower in terms of the amount provided than expected and also because the amount of money for healthcare is larger than expected.

In the end, it means that about an additional 5K needs to be added to meet my goal of a 1 year fund. Furthermore, additional monies need to be added periodically in order to keep pace with inflation.

Sunday, May 06, 2012

Will the stock market adjust?

This weekend, Donald Luskin had an interesting and compelling piece in the Wall Street Journal that forecasted the impending doom to stock and bond prices were we to see the adjustments that are slated for the end of the year. I encourage you to read Donald Luskin's piece to see if you agree with him. Then come back here....its ok. I will wait.

For me, what is most interesting about this piece is not the doom-and-gloom scenario that Luskin is talking about. Instead, it is about what to do next? I recently found myself wondering what the correct next course of action would be in light of such a decline and how I might reduce risk to be better positioned.

I am fortunate enough to be in the high end as far as US Household Income is concerned and measured. And of course, these numbers change all of the time and there is very little certainty about things. So, the question becomes, if you are lucky enough to be well positioned, you have more to lose if you're sandwiched. Of course, people with millions of dollars have even more to lose, but they are also less worried about short term volatility because usually they have paid off homes, cars, etc and while they would be smart to downsize in the wake of a major adjustment, many don't have to do this or worry about it.

My question isn't whether or not the stock market and bond market will adjust....the question is what is the correct thing to do in that scenario. Can I change my behavior to improve the outcome ? And, more importantly, can I time the market correctly in order to take advantage of this? For me, the answer is a resounding no. I am unable to trade frequently and there are too many variables for me to be able to maximize this. Perhaps you are different, and maybe you will be lucky. I think it is just as likely that you'll end up taking a bath though.