Real World Finance$

I couldn’t resist posting a link to this article on Smart Money:

A 2008 Year in Review a Year In Advance

Of course, they are really just talking about predictions for the next year, but writing it as a Year in Review makes it more fun!  Here are some of the highlights and predictions I found interesting…

Who would have dared to predict during the summer dog days … Or that crude would crash 50% all the way down to $80 a barrel?

Yikes!  Down 50% to $80 a barrel.  That’s a bit scary.  Good thing we have a more fuel efficient car now and that I take the bus to work (run on bio-diesel no less).  In reality, I take that line as a bit of a jab at all those doomsayers crying about how high gas prices are going to go.  I’m not sure what makes some news reporter an expert in oil and gas prices in the future.  Maybe they’ll eventually learn they are always wrong and shut up for once!

Mike Huckabee has already been forced to acknowledge that his campaign pledge “to completely eliminate all federal income and payroll taxes” will require much Christian patience given the political realities.The very notion of a President Huckabee had seemed so far-fetched in June, with Hillary Clinton holding a commanding lead in the polls as the recession deepened and consumer confidence continued to plummet. But Michael Bloomberg’s late entry into the race changed everything, splitting the block of voters who believe in evolution while underscoring the creationist candidate’s god-given homespun charm.

In the end, Huckabee attracted a respectable number of college graduates thanks to the wily choice of Ron Paul as his running mate. Paul’s presence on the ticket caused the August gold crash once the polls began to shift in their favor, though bullion is now back above a grand an ounce following the leak of plans to cut IRS staff in half.

Yep, I admit, the idea of a President Huckabee seems a bit far fetched at present.  Though, as a Republican myself, I don’t see a strong candidate in the party at present and it could really be up for grabs at this point.  I admit that his idea of a national sales tax is interesting, but it’s probably not something this country will ever do instantly.  If we were to take that route, I’m sure there would have to be a phasing out period over time as the sales tax increases and the income tax decreases.  They’d have to be sure to work out the bugs on collecting the sales taxes before they could completely drop the income tax.

As 2009 dawns we can toast the nation’s willingness to address longstanding problems head-on and to forge a new consensus out of adversity. U.S. stocks have never been this cheap relative to the rest of the world. And it’s been a long time since real estate has been this affordable. So go ahead and lift a glass to 2008. After a year like that, we deserve a drink.

From the looks of things now, I can hardly disagree with this sentiment.  Next year does not seem to be a smooth road ahead at this point.  Then again, how did things look at this time last year?  Whatever your take on the coming new year, make it a good one for yourself and forget about all the junk predicted by the media. 

Your life is to be lived for you. 

Your money is to be saved for yourself.

As I have mentioned before, I work as a contractor/consultant in the IT field.  This means I do not work at my employers site, but instead work at a client site and enter my time online.  I have been with this firm now going on 6 months.  I was a bit surprised today when I went to enter my time for the week.  I saw this notice below my time sheet:

Attention W2 Employees :

A reminder to review your federal/state tax exemptions and 401K deductions for the coming year. Below are the IRS limits for 2008:

Roth/Traditional 401K Employee Contribution: $15,500. No change from 2007.

Roth/Traditional 401K Catch-Up(additional employee contribution for employee turning 50 in 2008): $5,000. No change from 2007.

Social Security Taxable Wage Limit: Increase from $97,500 to $102,000. Tax rate remains at 6.2%.

Medicare: As in 2007, no wage limit and tax rate remains at 1.45%

I have worked for a number of companies over the years, and NOT ONE has ever been this detailed with information like this. Pretty cool I think.  It’s a nice reminder of what’s coming up and the tax law changes. 

It’s getting close to the end of the month.  I’m a little curious how we will end up financially.  With buying the new car and paying end of year personal property tax it will be a little up in the air.  I don’t think we will have slid backward much, if at all.  But I also don’t see us making a big leap forward, if only because of the new car loan.

Cash wise, I know we are doing better.  Our retirement fund is up as well.  And I know our credit card debt will be down as well.  That said, the only change that will effect our net worth is the asset value of the car and the new car loan.  So, in total, we really shouldn’t be bad at all this month (especially considering we made it through Christmas and LOWERED our credit card debt). 

Next month will be an interesting one.  We will need to pay the sales tax on the new car early in January.  However, we will not be making a mortgage payment due to the refinance.  We will also be getting a few thousand dollars cash at closing which we will put in the savings account until we get a HELOC to pay off the AC loan we currently have. 

While we we have a considerable increase in cash next month, the change in mortgage value of the house by about 10k will be a bit of a hit also.  I’m sure that will cause our net worth to drop some next month.  The appraiser did stop by the house yesterday, so I’m likely to get a small boost from an upward appraisal due to much of the improvements we have added to the house, but I still don’t think that will offset the entire extra mortgage amount. 

The good news is that the new mortgage payment and any HELOC payment we will need to make should put us with approximately the same payment we have on our current house and we will have rolled in nearly 16k of debt from installing central air in the house.  Lucky for me, I’m not hugely concerned about my net worth goal for next year.  I know if we can meet the other 3 goals, the net worth goal will take care of itself. 

On  a lighter side, I have my updated direct deposit form sitting in front of me.  I need to fax it over to my employer and hopefully by mid-January I’ll be using one of my new checking accounts to pay bills and another one for our spending allowance between pay checks.  It should be helpful for us to be on a more fixed budget and more automation with paying our bills from a separate stash of money.  Here’s to hoping all the work I’ve done the last few months starts to show some results in the New Year!

Related Posts:

• The Mortgage Refinance
• 2008 Financial Goals
• Our New Financial Structure

I’ve noticed a sudden unintended consequences of having my money scattered over multiple checking and savings accounts… and it’s a good thing!  At the beginning of next month we will be refinancing the house (the appraiser comes today).  Since we won’t have a house payment in January, that money was to be used to pay for the sales tax on the new car we purchased.

The sales tax is due by the 7th (30 days from the purchase) and I will get paid again on the 3rd, so no big deal.  We’ll be down another couple hundred dollars in the checking account by then, but should still have plenty of money left that, in addition to the paycheck, can pay for the taxes without hurting us at all.

It was when I was looking into that when I realized something.  I’ve now got 3 new checking accounts (1 just for the bonus and the 2 new ones I want to use going forward) and those combined have $250 in them at present.  Then, since I changed the direct deposit on my part-time job, I also have about $600 in a savings account also.  I can’t remember the last time I had that kind of money sitting around somewhere else and still had plenty of money in my spending account.  Life is good! 

It was such a great feeling to know I had that money sitting around.  I can’t spend it immediately if I want, but I can get access to it within a few days should an emergency arise.  I’m going to like this having accounts scattered around thing.  Right now I’m just waiting on my new checks to arrive so I can fill out my change in direct deposit for my current job and have that start by probably the 2nd paycheck in January.  That will be perfect because it will get to me at a time when I have almost no bills to pay yet in the month, so the change of Bill Pay shouldn’t be too painful.

Are you familiar with the Rule of 72?  It’s always something that has fascinated me.  Here’s the jist, if you take 72 and divide it by your rate of return you get the approximate time to double your investment.  Conversely, if you divide 72 by the number of years you want to double, you get an approximate rate of return.

This is not a 100% accurate, number, but it is a great “back of the envelope” estimate.  I’ve always kind of wondered why this works.  Math is a cool thing and there really must be a reason for it… right?

I did some investigation and found this website that shows the mathematical formula for the interest rate calculation and how to solve for N when you are doubling your present value.  In the end, they suggest you graph the formula and the Rule of 72 formula and see how close they are.  So, I did just that.

While you can see the answers are quite close, the absolute percent error increases as the interest rate increases.  This is really only attributed to the fact that your base time is decreasing and so a small error looks larger in comparison.  Though the absolute error does increase when you get outside of the typical range for interest rates.  When you are in the most likely range of 6% to about 10% the estimate is very close to being accurate (within .1 years). 

The graph is also a little telling.  You can see the general shape of the line and realize that the curve is a very typical inverse relationship curve.   From that, I would assume there are probably a number of formulas that could come close to approximating this phenomenon, but with one simple division, this one seems good enough to do the job.

I’ve seen this topic come up on some other blogs from time to time.  Some people track the value of their home and cars in their net worth while others don’t.  For me, knowing there is some real value in both of those assets.  I sold one of our 2 cars last year to get some money for roof repairs after I started taking the bus to work.  We’ve been a 1 car family ever since.

 With that said, it’s keeping an accurate value that is also important so you don’t fool yourself.  Since we just bought a new car and our house is getting appraised for re-finance soon, we’ll start off the year with relatively accurate values of both these assets.  Also, I used to support the tax and accounting department at my last job when it came to depreciation and asset value.  While that method is good for businesses who use that information for tax writeoff’s, it’s only good for that and not a good measure of current market value should you sell.  Here is how I plan to keep these values up to date in the future.

Car:  I’ll update the value of the car on a quarterly basis by making a visit to the Kelly Blue Book online.  Here I can input our mileage, zip code and the features of our car and get the current retail, private-party and trade-in value.  Of course the retail will be the highest and is the current value we have on the car.  What I’d like to do is look at the retail and the trade-in value and make the changes this year to get the value gradually down to the trade-in value by the end of the year.  The difference is a bit big to do it all at once, but I’d like to get it there as that is the most likely scenario for our car when we finally get rid of it in 7 years or so.  If you are more likely to sell it on your own, consider revising it down to the private party value. 

House:  This number I will also update on a quarterly basis.  Since I will have a value as of the end of December, I will update in April when the new figures come out on the median home prices for my area over at the National Association of Realtors.  Be careful here.  Many of the news reports on this data talk about year over year change.  You’ll have to do your own calculations of the median value last quarter and this quarter, see what the percentage change was and make the same corresponding change to your own home. 

Hopefully these two sources will help me keep a somewhat realistic value of these two large assets.  I don’t want to just look good on paper by over inflating numbers, but I do want to have a solid picture of where I stand. 

What do you use when you are keeping track of the value of your assets?

As I’ve said before, I’m a bit of a numbers geek.  With going through the house refinancing, new car purchase and debt repayment plan I’ve found myself making amortization schedules several times so I can see what type of balance I’ll have left when based on payments and rates.

Because of that, I thought it would be a good idea to make one to help out my readers as well.  So, I built a nice little form in Excel that does all the calculations for you and puts together the complete schedule as well.

You can find it over on my Files for Download page.  I realized too that my Loan Consolidation Worksheet was not included when I migrated over to the new website, so I’ve put it there as well.

 Make good use of them and let me know if you find any problems!

I taught my class again last night.  The students had just received their mid-term scores.  One particular student was disappointed in their grade and said they had studied and everything.  Personally, the class did better than I had expected (though I can be bit of a softy when it comes to grading) and the average for the class was around an 80% (MBA program).

That comment got me to thinking about my experience in college and with classmates there.  I realized something I didn’t notice back then.  Those friends of mine who had the best grades, studied for a test by actually practicing the problems they thought they would see.  Those who did okay, but not great, re-read chapters and their notes in hope of picking up more information.  And those who didn’t last long in college chose to do neither.  Don’t forget, I have my undergrad degree in engineering, so the majority of classes dealt with some sort of mathematical problem.  Don’t even ask me how to go about preparing for an English exam!

For me, I’m someone who has always enjoyed reading.  In high school it was fantasy and science fiction books, and now it’s business, economics, finance and other non-fiction.  Since I take the bus to work daily, I typically get a good hour a day too and from work and waiting at bus stops in order to read.  We also have an excellent library in my neighborhood, and the city library system has online reservation so I can have anything I want held or delivered and held for me just down the street. 

I’ve seen several blog posts recently about books to read about personal finance.  I’ve thought about trying some of them out, but I’ve read much of that in the past and never got much out of it.  Then the thoughts above dawned on me.  To really make use of the information, I need to PRACTICE what I’m reading about.  Now that we are undergoing a renaissance of sorts with our finances, maybe it’s the perfect time to start really reading and then studying some books on the topic. 

Here’s a list of some blog posts with some great looking lists of recommended reading:

• Eleven Great Books About Money
• More Great Books About Money
• A Great Gift For The Market Junkie In Your Life
• Ask the Readers: Personal Finance Books as Gifts?

In all the work I’ve done the past few months getting our finances in order, it’s become apparent to me that we are on a 5 year plan to get out of debt.  However I look at it the numbers all lead to the same conclusion.

With our currently budgeted amount of monthly payments on debt, we will get everything paid off in about 4.5 years, except the car.  We just bought the car and financed it for 5 years.  So, that last half a  year we can probably pay the car off a few months early as well, but the total time will still be about 5 years.

I would LOVE to move that date in closer.  I just hope we can start seeing some good results soon.  This month is looking to be pretty good so far (despite the car purchase) and next month should be one of our best of the entire year thanks to a third paycheck.

I do have a few things that will hopefully help accelerate the pay-off over the next few years.  Here’s what I’m hoping to use to speed things up:

• Raises - I’ll be due for a raise this coming July.  I’m a contractor, so I don’t get bonuses, but I am eligible for pay increases on an annual basis.  I haven’t budgeted a raise into my numbers for the year, so anything extra can go right to the debt payments.
• More Teaching - I put in my budget teaching for about 8 months of the year.  If I can keep on top of things I could easily get that to 9-10 months.  At about a $1000 per month, those extra months can add a nice kick to any debt reduction.
• Other Side Work - I’m continuing to attempt marketing myself as a data analysis consultant.  Any side work I can pick up will be some unplanned income that can go straight to debt.
• Savings - I’m planning on building up our savings throughout this year using our new E*Trade account.  I’m hoping to get $5,000 or more in there by year end.  I’m also planning on taking half of whatever we save this year and making an extra debt payment next December.  Then, start with the savings all over again (with a higher goal) and do the same thing the following year.  While I might be better off paying extra each month rather than saving, having more of a cushion is necessary at this point, and the psychological gains of making a big payment like that will help spur me on to be ready for the next year!

If all goes well, that could hopefully get us down to 4 years (maybe less).  In reality, because we are planning on moving in a few  years (I’ll post more later), we might actually be able to make this in 3 years by using the funds from selling our house to pay off the rest of the debt rather than saving for the next down payment.  The feeling of moving to another state with $0 in debt would definitely be worth it to me.

See some more advice here:

Jump-Start Your Debt Reduction Using Christmas Gifts And Year-End Bonuses

Add a windfall to your snowball

Sorry about the recent absence.  I’ve had some problems with WordPress trying to create posts.  Looks like I found the right support link and have it fixed.  I’ve got several posts in the wings, so hopefully I’ll be back on it tomorrow.