Rate Cut Saves Debtors Money

Today, the Fed was nice enough to drop interest rates 25 basis points.

What it means for me?

1. Credit Cars – no credit card debt = no savings
2. HELOC – the rate floats with the LIBOR. As this is my biggest floating rate exposure, any savings could be significant.
3. Unsubsidized Student Loans – the rate cut should save me a few bucks; however, I hope to have it paid off by December, 2008.
4. Savings Accounts – I will get less interest from my ING Direct and my money market mutual funds. Basically, the losses will offset the gains on the student loans.

In the grand scheme of things, it won’t change my life. Once the student loans are paid off, I am redirecting the payment to the HELOC.

Safety Fund - Cash In Hand

For many people, the "Emergency Fund" is the amount of money held in their checking, savings, or money market funds. While it might protect you from a financial setback, it is not the same thing as Cash in Hand.

Imagine you live in a city hit by a hurricane, earthquake, or other disaster, phone/power/internet access is down and you need cash NOW. How much cash do you typically walk around with? Could it get you out of town and rent a hotel for a day or two?

In my case, I tend to get money out of the ATM in $100 transactions. In terms of walking around money, it works for me and I usually have a little left over each week. Nevertheless, I realized I wasn't prepared for a disaster.

Cash in Hand Strategies:
1. Car Fund - after forgetting my wallet a few years ago, I stashed a $20 bill in my glove compartment just in case. When gas was reasonably priced, it would fill up my compact car and get me home in an emergency. Now that I have a SUV and gas is $3 per gallon, I am going to raise it to $50.

2. House Cash Stash - starting last week, I am working my way up to a $500 Safety Fund. Stashed in an envelope in my fire safe, it should provide a nice cushion for most contingencies. To fund it, I am planning putting $20 per week away until the it is fully funded.

Going to the Movies – EXPENSIVE

To be honest, I love going to the movies. Unfortunately, the cost of movie has gotten totally out of hand. For my fiancé and I to attend a first run movie:
1. $18 for tickets
2. $14 for drinks and popcorn
3. $20-50 for dinner before or after the movie

At $30-80 per movie, “movie night’ is not a casual expenditure anymore. While discount tickets and matinees can save some money, “movie night” must be thought of as an “event.”

For all but a few special movies, my bride and I do “movie night” at our house.
1. Cable - I love some of the original programming on Shotime and HBO. Since I subscribe for the original programming, the movies are essentially free.
2. On Demand - for $5.99, Comcast offers HD movies on PPV.

Alternative I don’t use: Many of my friends use Netflix (or the similar product from Blockbuster) to save money. While I have tried both products and they work as advertised, I don’t like having to “pre-plan” my movie watching habits. If you like planning ahead, they are great services.

Saving is Debt Reduction!

Having heard Dave Ramsey on the radio a few times, the man talks a good game. While many of his ideas are sound, I have to point out SAVING money IS debt reduction. Net worth = assets – liabilities.

Lets say you have $30,000 in student loans. By sticking to a budget, you have the option of paying off $5,000 in loans each year or saving the same amount.

Decreasing your debt by $5,000 increases your net worth by $5,000.
Saving $5,000 accomplishes the same thing.

When deciding what to do with “extra” money intended to increase risk, one must balance:
1. Liquidity – people with cash in hand have options. Savings increases liquidity and savings increases it.
2. Interest Expense – if you are paying 20% on a credit card and receiving 4% on your savings, pay off the debt. If the differences is minimal, cash is king
3. Discipline – if you tend to spend “saved” money, pay off the debt.

Law School v. Day Care Expenses

My fiancé and I are considering having children after we are married. Unfortunately, I discovered daycare in Connecticut starts at $1,000 per month per child. In the 90’s, $12,000 per year paid for my law school including living expenses. Thank you instate tuition!!

Simply unreal.

Expected Tax Refund Strategy

Bird in Hand – Tax Refund 2007?

Each year, my goal is to obtain a tax refund in the neighborhood of $500. Any more, I am giving Uncle Sam an interest free loan. Any less, I risk having an unhappy surprise.

Through trial and error, I have figured out the correct number of exemptions for a normal year. This year, I changed jobs and “took” some deferred income from my prior employer. As a result, I know I am going to get a huge refund.

With a wedding to plan and pay for, I have been trying to figure out exactly how much it will be. Using the tax estimator on TaxCut.com and other sites, the estimate varies by up to 3 thousand dollars. Since this year’s version of TaxCut is not available, I used last year’s version and got the largest estimate yet.

Despite the good news, I learned the hard way a bird in hand is worth two in the bush when it comes to taxes. A few years ago, I expected a refund of $2,000 and spent it. Much to my horror, I discovered an error in the returned and ended up paying $1,000. A $3,000 swing to the negative is not good.

As for this year, I will keep the refund in mind; but, I will not “spend” it until it is my ING Direct account earning interest.

If it comes in as expected, I am planning on paying down the balance of my non-subsidized student loan.

Used CD's as source of cash?

For quite a long time, I would purchase a new CD with every paycheck. As one would imagine, I have quite the stash. With the advent of DVD's, iTunes and satellite radio, I never listen to CD's anymore. As a result, I am considering options for the disposal of the collection. After I finish the complete transfer to iTunes, I am considering what to do with them.

Options:
1. Stick them in storage and hope some of them become collectors items.
2. Sell them on eBay. From other postings, used CD's don't seem to have enough value to make it worth the effort
3. Give the collection to charity and take a tax deduction.

Right now, I am leaning towards a combination of 1 and 3. If anyone has other options, I am all ears.

When will Tax Software be ready?

Does anyone know when TurboTax or TaxCut for the 2007 tax year will be ready?

I need to run some "what/ifs" before the year is over and want to test the outcomes?

Hillary's 401k Idiocy

After 8 years of running "against Bush" the Democrats are finally running for office. As a result, we are finding out what kind of ideas they really have.

Hillary's Idea - "Give" everyone $1,000 for their 401k. Why is this idiotic?
1. It is based upon the idea - somebody else will pay for it. Of course, we all know everyone always pays. Under this plan, the government will take $1,200 in taxes, waste $200 on pork projects, and give you $1,000. Of course, you should be greatful to "them" for giving it to you.

2. If $1,000 is a good idea, $1,500 is a better idea. Why not give us $10,000?

Bottom line: Beware of politicians who want to give you money. Every dime they give you came from money they take from you.

Carpool to save $240 per year

Although I love my SUV and the room it provides, I miss my compact car and its 28mpg. To keep fuel costs down, my fiance and I take her Corolla whenever possible.

Starting next week, I am going to hitch a ride to work with her on Wednesdays. My job is about 1/2 of the way to her job and she can drop me off on the way.

This carpool arrangement will have two key benefits:
1. I get to spend an extra 40 minutes per week with the most important person in my life. Big Win for Me.
2. I figure to save $5 per week through reduced fuel expense and reduce wear and tear on the SUV.

Next step, I am going to try to figure out how to take the bus at least one time per week.

Improving ING Direct Online Bill Pay

While I love the service at ING, one thing about their bill payment program needs improvement.

Let's say you schedule a bill payment for December 1, 2007 for $100. ING will allow you to change the amount to $100 or to $120. It will not; however, allow you to change the date without cancelling the original transaction.

Saving too much in 401k?

Sometimes I wonder if I am saving too much in my 401k? Although I will have a small pension from an old employer in 25 years, my new employer has no pension of any kind. No defined benefit, No cash balance, No Nothing.
Luckily, they compensate for the lack of a pension with a very generous 401k program. Up to 5%, the company match is 150%.
Including the company match, I am saving 15% of my pre-tax earnings.
Why I should save more?
1. Due to law school and B-School, I got off to a slow start.
2. Without a significant pension, I am on my own.
3. The fiancé is moving in. With our combined incomes, I have more flexibility to save.
4. The tax deferral is a huge benefit. Even with the penalty tax, having a large amount of money in the 401k is a nice risk reduction tool.

Why I should save less?
1. The emergency fund is getting a little low. After getting the engagement ring, it is not where I want it to be.
2. In addition to spending on the wedding, I am spending more money fixing up the house for the fiancé. I expect this spending spree to continue into 2008. In addition to living room furniture (I have none), the house needs about $5-10,000 in repairs and upgrades.

Although I am not going to reduce my contribution, I am starting think about it.

Target Matches $4 Generics

One of the dirty secrets of the prescription drug market is many common prescription drugs are dirt cheap.

A few months ago, Walmart began offering a 30 day supply of many common generics for $4 for a 30 day supply. Since I despise Walmart, I am happy to report Target has matched the offer.

If you have a common 10 retail or $20 mail-in copay, it is cheaper to buy a 90 day supply without using insurance. Just make sure you get credit toward your deductible.

Banning Sub-Prime ARM’s

A few years ago, I bought my house using a 5 year ARM. With the credit crisis upon us and my house having devalued, I wish I had the foresight to get a fixed 30 loan. Nevertheless, I don’t have it bad. With 2.5 years left on the fixed portion of my loan, I will probably sell the house before it resets. More importantly, my loan resets are capped a maximum of 2% per year. Although it would hurt, I could make the payments if I had to.

In my reading about the sub-prime fiasco, I learned that most sub-prime ARM’s do not have a cap of any kind. Considering the poor credit history of the borrowers, the rates can be expected to reset into the 18-20% range.

Frankly, I am coming to believe sub-prime borrowers should never be allowed to have an ARM. Because these borrowers have/had money problems, allowing them to face enormous interest rate risk is irresponsible.

Emotional Investing and the IRA

Because I was with my old employer for a long time, my 401k balance never really went down. In addition to the strong market, my contributions plus company match meant it grew almost every month. In terms of asset value, it is my largest account.

After leaving, I moved my 401k to a Fidelity IRA. Because all my new contributions are going into the new 401k plan, the IRA doesn't have the benefit of additional contributions to make it appear to grow.

After tanking with the market (and causing me angina), the runup in the market has pushed the account into positive territory.

During the downtime, I had to fight the urge to sellout and go to safety. Emotional investing is the path to ruin.

Personal Finances and the Fiancé

Because we are paying for our wedding and honeymoon next year, my fiancé and I have been forced into significant conversations about personal finance. Thankfully, the conversations gone well and we have reasonable expectations about post-marriage financial life. We know where we stand and where we want to be before the wedding.

Nevertheless, our conversations woke me up to how different our personalities are. A teacher and an artist, her emotional approach to problem solving is in stark contrast to my black/white approach to life. She calls me relentless and she is right.

Last week, she faced a financial aid problem related to her Masters program. Explaining what happened, she told me what happened and started asking "what if" questions about her options:
1. Will the school allow me to pay off the balance on a payment plan? What is the interest rate and/or fees associated?

2. Should I reduce my savings/debt reduction plan temporarily?
3. Should I charge in on a credit card? (we decided no)
4. Should I raid my emergency fund?
5. Should I ....

Talking about it, she mentioned how proud she was of her new approach to dealing with financial problems. Instead of "hating money," she is learning to get what she needs from what she has. This "new" approach to financial problem tells me she "gets" my approach.

As for me, I trying to take more joy from things like watching her grade papers on my back porch while I work in the yard.