Real World Finance$

Today ends the first 2 weeks of our new budget plan (Yes, I get paid on Thursdays).

 Our plan was to keep our estimated 2 week spending money in a separate account.  All other money from my paycheck hits our E*Trade account and I leave enough in the checking account there to pay bills and keep anything remaining in the savings account to earn us interest.

Anyway, so our new account was stocked with $600 two weeks ago.  As of this morning, we had about $40 left before the new direct deposit.  That’s not too bad.  We’ve been very conscious this last week of how much we had left before we did any grocery shopping or other expenses.  Considering we did have a $100 plus expense during last week taking the dog to the vet for his 3 year rabies shot.  Hopefully we won’t be coming so close in that account in weeks to come.  I’d like to have extra left over that we can move to savings and pull back out as we save for larger expenses, but that’s also not necessarily the case I built for the budget either. 

All in all, I think it’s going pretty well.  In the past, we would have all of our money in one account and we’d go through the same process of keeping a close eye on how much we had before pay days.  This is shaping up to be a great way to budget by giving us a set amount and stocking away all other funds elsewhere.  If we have it readily available, we won’t worry about the balance in our account and keep spending.  By limiting how much we can get quickly, we are learning to keep our spending in check (pun intended).

Don’t be intimitaded by the title of the post.  I’m not going to go that heavy!

I’ve been home from work today with a sick wife and watching the kid.  I was taking him over to a friends’ house for a birthday party and listening to NPR on the way.  Talk of the Nation was on the air.  The discussion was starting off talking about the most recent rate cut by the Fed this morning and what effect it will have on mortgage rates and the US Economy as a whole.

I was happy to hear a Yale Economist say that we really just don’t know.  His point of view was realistic in that there is no controlled experiment to know what would have happened without the rate cut, so actually make the cut is still an unknown as to it’s effect.

What really piqued my interest was a caller who asked about, what he considered to be, an obvious link between the national debt and economic growth.  The caller admitted he wasn’t an economist (he was a general contractor), but said he thought it seemed pretty obvious that whenever we control the government’s national debt the economy is much more stable and things go bad when the government over spends and goes further into debt.

This is the exact same discussion I’ve had in both my Economics and Quantitative Analysis courses I teach.  I was a little disappointed it wasn’t handled better by the guy from Yale.

The answer is really pretty simple.  Yes, the national debt and the economy are linked very strongly, but not the way the caller suggested.  It’s actually in reverse.  It’s the poor economy that urges the government to spend more money in order to prop up the economy and sit back and reap the rewards of a strong economy by not having to borrow and able to balance the budget/pay down debt.  You see, the government relys on taxes for it’s income.  If we are having a poor economy, there is less tax revenue and the government will continue to spend the way it was prior and thus run a deficit.  That extra spending helps to keep the economy going somewhat.  Then, when the economy turns around, the government is able to have a surplus of funds from taxes and can spend at normal levels and use the surplus to pay down debts. 

That’s the spiel from my Econ class.  Now, for the Quantitative Analysis viewpoint.  Just because two variables are correlated (meaning they move in similar or opposite patterns) does not mean they are a cause and effect.  In short “correlation does not mean causality.”  Just because the debt goes down as the economy goes up, does not mean either one causes the other.  In fact, both of those could be effects of a third, and unmeasured, cause.  Just because you see a relationship between two events, it does not mean you should jump to conclusions about them. 

That is why in designing scientific experiments it is crucial to isolate each variable involved in the study to see their individual effect on the whole.  Then, you can use that data to try and pick some combinations of changes that might have the desired effect when put together. 

I have an update to make to our 2008 Goals. 

Originally, my goal was to get our Credit Card Debt below $30,000.  We currently have about $54,000.  That number was assuming we would be moving $16k over to a HELOC of some sort.

Well, it seems that we will NOT be doing that and instead be moving it to a low interest credit card in the next couple of months.  Now, rather than just raising the goal number by $16k, I have some more math to do here.  When we had planned on the HELOC, we also planned on having at least $4k to pay off of the $16k when we did the switch.  We’ll still have that money and plan to pay it off of debt as well.

Also, because the credit card interest will be lower than a HELOC, and the minimum payment will be higher, we will be paying off more principle each month. 

So, with all that said, I’m going to revise my Credit Card balance goal to $40,000 for the year.  By doing that, I’ve added $16k to the starting number, but only increase the goal by $10k.  That means we will be paying off more debt than we had planned on this year and keep us on track for being out of debt in 5 years.

We’ve been in the process of gradually replacing most of the light bulbs in our home with new Compact Florescent.  We’ve got a half dozen of them waiting to replace lights when the current supply runs out.

A couple weeks ago, both the lights on our motion sensing flood light on the back porch went out.  This happened just a day before we made our trip to Sam’s club.  We noticed they actually had CF flood lights there.  How cool.  They are 14 watts versus a typical 65 for a flood light.  However, they came in a pack of 3 and are said to have a 7 year life.  Well, we only have 2 light sockets there and there is no need to buy 3 bulbs if they last 7 years.  It was just under $14 for the three of them, so we thought we would keep looking.

When we made our weekly trip to the regular grocery store for fresh supplies (Sam’s we mainly use for dry goods, cleaning, paper supplies and frozen stuff) we noticed they too had the CF flood lights available and in a single bulb package.  But, at $8 each we decided to pass on that as well since there was also a trip to Home Depot in the works to cap off a broken toilet.

So, this Saturday we got by Home Depot.  They had a 2 pack of the bulbs for under $10.  Perfect.  Not as good a price as Sam’s per bulb, but the perfect quantity means I won’t be spending $4 extra for something that wouldn’t get used.

At this point, we haven’t had a back porch light for a couple of weeks.  That makes it very hard to track the dogs down outside late at night to get them back inside.  After getting these new bulbs home, I carefully cut through the packaging and began to pull it apart to get the first bulb out.

That’s when it happened, all in slow motion, the first bulb slid right out of the package, tumbled through the air and crashed on the counter!  Guess I should have bought that 3 pack after all.  The bulb is technically still good.  The florescent part didn’t break, only the outer shell that helps focus the flood light on the yard.  It was very disappointing.  After so much work to find an affordable, energy efficient bulb in the right quantity, to watch it shatter on the counter in front of me. 

In making my budget for 2008, I did some estimates for our utilities.  We are on budget billing and had budget adjustments coming up.  Our house is heated mainly with an old natural gas boiler (originally coal fired, but was converted to gas years ago) that heats the radiators.  This past year we also had an electric heat pump installed.  This was mainly for central air conditioning, but it does provide heat as well. 

We use the heat pump for heat in the fall and will use it in the spring when we have cool evenings and warm days.  It’s not worth the 3 hours to fire up the boiler and warm up the house when we can have quick heat from the heat pump in short bursts.  We also use the heat pump set at a lower temp than the boiler so that if it kicks on we realize the pilot light probably went out of the boiler and we should go re-light it.

Because of that, I had estimated that our gas bill would get adjusted down because we would not be using the boiler as early or as late into next year.  I also expected our electric bill to go up to offset some of that. 

Last fall our electric bill, via budget billing, adjusted from $79 to $104 per month.  Partly because of a rate increase and partly because of increased usage.  Here were my estimates for the bills going forward and where we stand at this point as we just got budget billing updates for both this past week.

Estimates

• Natural Gas - I was planning on an average of $145 a month for the year.  Our Budget bill before the update was $165.
• Electric - I was planning on it staying at the $104 for the year on average.  I was not expecting the update we got in the mail.
• Total - Our total budget for the year for both utilities was $3019.

Current Budget (after budget billing update)

• Natural Gas - We will still pay $165 this month.  Next month our budget bill adjust down to $126!  I didn’t expect that big a drop, so that was great news.  They only adjust once per year, so it should be at that price all year.
• Electric - We will pay our $104 bill for this month and next month we will adjust up to $124.  I was kind of bummed about this as I wasn’t expecting the increase.  They do adjust twice a year, so we might get that back down for the next adjustment.
• Total - We will be making 2 payments on our current budget and then 10 at the new budget, so a total of $3038.  Not bad, I was only off by $19!

While I was starting work on our taxes over the weekend, my wife asked a question about some tax terminology.  Why?  I don’t know, she brought it up!

Anyway, we discussed what the different terms meant and when they were calculated.  So, I thought I would share some of this with you as well.

First, you start off with your Gross Income for the year.  From there you get things deducted out such as 401(k) contributions, pre-tax medical insurance, etc. from work.  This give you a taxable income that is reported on  your W-2 that you receive.  You next have the following 3 categories, in order.

1. Adjustments - These are things such as student loan interest that come directly off of your taxable income before you calculate taxes.  There is no minimum here to take advantage of an adjustment.  We’ll have about $700 of adjustments this year, which will save us $175 in taxes (or 25%).
2. Deductions - After your adjustments, you arrive at your Adjusted Gross Income (AGI).  From here you now take off deductions.  A standard deduction for a married couple is current about $10,700 per year.  You receive that as a minimum.  If you have deductions such as mortgage interest and real estate taxes that are greater than that minimum, then you file the “long form” and specify those deductions to reduce your taxable income further.  This year it looks like we will have deductions of around $19,000.  Because the standard deduction was $10,700, we only save in taxes for the deductions we have above that amount, so this will save us an additional $2,075 in taxes (25% of 19000 - 10700).
3. Credits- These are the mother load here.  After you’ve factored out your deductions and calculated how much tax you owe, these come straight off of your tax bill.  For instance, if you would owe $10,000 in total taxes for the year and you receive the $1,000 child tax credit, your tax bill is only $9,000.  If you are taxed in the 25% bracket on the last bit of income like I am, then you would have had to have an additional $4,000 of income to pay the $1,000 in taxes you just saved.  A pretty sweet deal I must say.  This year we’ll have about $1,500 in credit due the child tax credit, some final payments for my MBA and a credit for installing our high efficiency heat pump this year.

Now, around St. Louis (well, Missouri in general) there is a wonderful Historic Preservation Tax Credit.  It is a program that allows qualifying properties to be rehabbed to historic specifications and the rehabber can receive up to 50% of the rehab cost back in tax credits.  So, let’s say you buy an old house and spend $40,000 to fix it up and barely squeak out a profit when you sell it.  You’ve now got yourself $20,000 in tax credits.  You can now apply those to your taxes (these are state only, though there are some federal programs as well) and likely not pay any taxes for several years. 

 Some preliminary entries into my tax program and it looks like we will be getting a small refund this year of about $1,500.  This is equivalent to the credit that we will be receiving.  So, we would likely break even or so on taxes if it weren’t for credits.  That’s the way I like it to be.  We also had a bit of liability from my wife’s babysitting job.  She made just a few thousand this year and we never bothered to pay estimated taxes.  Turns out our liability is only like $700, and will be half that or less this year as she is only babysitting through the end of the school year and calling it quits. 

I’ve also got a small business start-up I’ve been working on with some friends of mine.  I funnelled somewhere between $500 and $1,000 into this last year that I will get to write off as a loss once I get the final number.  That might make things a bit better as well.  We are working now to get in touch with some VC guys to bring a salesman on board as our product development is done and the provisional patent is filed.  Wish us luck!

Anyway, have fun starting work on your taxes.  I’ll likely not get a chance to file mine as early as I’d like, but we’ll get there and get that money in the savings account to make some extra debt payments this year!

Well, I don’t know about you, but I’m getting a little tired about all the worries of how the stock market is doing.  People get so obsessed it seems when the market goes through big swings.  They don’t realize it is not affecting their retirement because it’s only short term changes.  Still, people tend to spend more money when the market is going up and they get worried and sell off their investments when the market is going down.  Just doesn’t make sense to me.  I just wish I had some more money to put into some index funds about now, I’m sure they will be great investments for when I retire in 35 years!

That being said, I was a little bored with all the doomsayer news stories and took some time to review our financial status so far this month.  Already I see we are up quite a bit on our cash account.  That’s good news considering I have another paycheck from both my regular and part-time job coming at the end of the month! 

So far we are over budget already in one category… but it’s okay, it’s the budget for debt payments.  We are under budget and under the pace for the budget in all the other areas, so we are pretty safe with putting a little extra towards the debt.

I know our net worth will look a little screwy next month thanks to the closing costs rolled into the new mortgage (including new escrows and thing we should get refunded next month), but despite that, the rest of our debt reduction progress looks pretty good.

The wife and I have been talking and debating still what to do when we roll the debt from our AC out of the current credit card.  We financed it last year with a $0 payments 0% interest for a year.  We’ve tossed around the idea of a HELOC or HEL to keep the payments down and focus on our major credit card / personal line of credit.  We do have a credit card with a $0 balance an enough credit limit we could transfer it over.  Our main concern was the 3% minimum monthly payment.  However, looking at our budget, the starting payment would only put us like $20 over our monthly budget for debt payments.  At 5.9%, that seems like a better deal than a HELOC and lets us safely keep the equity in the house.  So, we’ll probably talk with the credit card company soon about balance transfer offers to see if we can get a no cost transfer to move that balance maybe in March or April.

Can you believe how far into January it is already!

I heard a really interesting discussion the other night on the NPR program On Point.  The piece was titled “American Banks, Foreign Bailout“.   While I only heard about 20 minutes of the hour long program, what I did hear was quite interesting.

 There seems to be some people who are upset that large corporations like Citibank (C) are being bailed out by foreign dollars.  These are “US” banks and we shouldn’t have to look outside the country they say.  I even heard my brother-in-law mention something about it this weekend.  People are especially concerned about the Chinese and Middle Eastern Countries. 

What really gets me is how much some people think we are still an independent country.  Have you looked at your store shelves lately?  Do you see where the stuff you are buying is coming from? 

To start with, large banks like Citi are not just in the US anymore.  They have hundreds of branches around the world and do a lot of business outside our borders.  Other countries SHOULD be interested in their health for their own systems as well.

As for China and middle eastern countries like Saudi Arabia, what interest would they have in destroying our economy?  Who would China make all their toys and cell phones for if our economy shrank and we stopped buying?  Who would buy all the extra oil produced by OPEC if the US suddenly had an economic shut down and people cut back by even 20%? 

As one of the guests on On Point mentioned, this is just one more step in the globalization of the banking industry.  We’ve come a long way from the days of small, local banks in every town along  the country road.  Today’s world of banking is much more consolidated and global.  There’s no reason to fear some foreign investment in US based banks.  They are just as concerned about our banks and our economy’s health as we are.  There are too many economies in this world that are tightly interwoven with our own for others to let our economy slip and fall. 

I got a kick out of this recent article over at Kiplinger’s:  The Cure For Your Debt Hangover.  The article, of course, it timed to the receipt of the dreaded post-Christmas bills that so many people are receiving about now.  The author, Erin Burt, gives 4 important steps to take care of the debt problem.  While the article is focused on holiday debt, the process is great for getting out of any kind of debt.  Here are some of Erin’s suggestions.

1. Restraint- Yeah!  It’s so great to see this as number one on her list.  We all know that spending less than you make is the first step to getting out of debt.  She gives 2 categories of problems here.  The first is “The Needy-Bugger Virus”.  This is those people who think the NEED that $4 latte and new stereo system.  The other is “The Big-Shot-Itis”.  Though very similar, these people are more concerned about appearances to others with houses, cars, etc. to keep up with the Jones’.
2. Strike a Deal -  Of course, asking for lower rates, or better deals on your debt is always worth a shot.  I’m probably not diligent enough about this to be honest.  I’ll need to be sure and investigate finding better deals to help accelerate our debt repayment this year.
3. Boost Your Income - I’ve done a great job of this in the past, and teaching on the side helps out as well.  My skill at this is one of the things that have kept us afloat the last several years when we should have been working more on #1.
4. Get Professional Help - I don’t think we are ready for this yet.  If we have too difficult a time sticking to our plan this year we’ll have to consider it.  But for now, we’ll work on what we’re doing.

All great pieces of advice from what I know (which isn’t always a lot).  I’m finding that we can stick to #1 pretty good when we don’t have money.  It always amazed me how we managed to not spend money when we didn’t have it in our bank account. 

Yet another reason why I’m putting only our “allowance” money in our bank account.  Bill money and savings money is going elsewhere so we avoid spending it!

We got our money from the closing on the home refinance earlier this week.  I’ll be moving that into our savings account shortly.  I’ll also be making my “mortgage payment” to the savings account next month as well. 

In the mean time, I’m going to be applying for either a HELOC or HEL in order to pay off an outstanding credit card that has $16k from adding our central air last year.  It has to be paid off by mid-May in order to avoid finance charges.  I’ll figure out which method I want to use depending on the rate and terms offered by the bank.

 My question is about the money I’ll have set aside in savings.  We’ll have an extra $4k-5k available by that point and I’m wondering if I should use it to pay down the HELOC or HEL at the start, or use it to pay off a chunk on our personal line of credit (currently about $37k at 10.99%).  We could afford the total payments either way. 

On one hand, we could keep more equity in our house which is a good thing in this housing market.  On the other, I REALLY want to get our consumer credit paid off.  I’m torn.  What would you do?