Mapgirl’s Fiscal Challenge

N.B. I forgot to post this last Friday.

I’ve successfully been able to budget all monthly fixed expenses into one semi-monthly paycheck. That includes more-than-minimum payments on two credit cards.

Because of my stimulus package payment and some squirreled away savings, I’m able to take almost one entire paycheck and put it towards credit card repayment.

I still can’t nudge the Debt-O-Meter, but at least I’m moving forward on the credit card debt after the set back of a $5K BT for the bathroom remodel/ceiling replacement.

The bathroom is looking pretty sharp though. Almost done. Almost.

My Medical FSA check came and I am trying to turn the money around in my checking accounts. Once it goes through, I will have bumped my net worth back up by almost $5K,

I am also holding on to a lot of cash at the moment and probably through April too. For various and sundry reasons, I may have to loan a friend some money. I know many people don’t believe in making loans to their friends. I’m not one of them. I just pick and choose to whom I loan it, just like a bank does.

My friend, the possible recipient, recently landed a new job and it’s been going very well for her. But she needs to borrow the money since before the landing the job, she was unemployed and burned through her savings during that time. (Hey, isn’t that what it’s for?) Having worked with her and idly chit-chatted about many topics, I know she’s very careful with her money and quite good at saving. Borrowing money from me is a question of short-term need vs having the time to save. There are reasons and situations in our lives where the former is necessary, and I’ll be damned if I watch her get an auto title loan or some other crap like that. And please don’t speculate about her situation. I am the one who offered to loan her money. She didn’t ask me for it.

At this time, she hasn’t decided yet what her best course of action is, and neither have I. She’s living in my apartment till the end of the month and then she’ll figure it out from there. Time is all she really needs now. Day after day, week after week, another pay check means more savings she can build back up and then she won’t have to borrow anything from me. I can offer her a rent-free place to live and that’s the best for now. (Otherwise she’d be paying double rent, which is not tenable, possible yes, but crippling.)

Ultimately, this means that I’m holding off on replacing my laptop for about another month till I know what kind of cash I have to spare. Every month my company sends a list of refurbished laptops for sale. There is usually a decent model available for $350-$400. Since I’m holding on to at least twice that amount for my friend to borrow, hoarding the cash for a month or two will not hurt me too much. If she doesn’t need it, then I can go buy a replacement computer right away!

I’m no saint here. My apartment is a god-awful mess. She knows it too. I did a little clean up so she could have a drawer and some closet space to herself. Moved my stuff off the bathroom counter and let her use the internet connection. She’s sacrificing a TV since I don’t have one and the company of her cats, since I’m allergic.

Basically there are times in your life when you have to ask yourself what is the right thing? For me, being able to give her a place to go is the right thing to do. And if I want to reclaim my space, I can loan her the money so she can go find another apartment. I’m not in a hurry at the moment, but she’s aware that my sense of urgency may change over time. But I think it’s best for her to stay focused on herself so she can think clearly to make a good decision.

P.S. If you are wondering, patient boyfriend is letting me stay at his house for now. Since I’m going away for a few days this weekend, I won’t be there 24/7 to get on his nerves.

Where I live, I can join the local county credit union. I don’t need to do anything but prove that I’m a resident.

Every once in a while, I think about joining a credit union. I started a new job with a large company and I checked out my credit union options. Honestly, there weren’t very many through my company. The strange irony being, that there are about 30 credit unions across the nation that were founded by company employees back in the day. But none of the existing ones are convenient to me.

While perusing the Arlington VA Credit Union website, I see they have 12 month CD’s still paying out 4% APY, with an option to bump up. I’m thinking about it since ING Direct is only paying 3.4%. I still keep about $1200 in CD’s at ING at 5.0% APY or slightly better, but those are about to expire in the next few months without a great rate available. These CD’s form the core of my emergency fund, which I’ve let dwindle and haven’t built back up.

I know I should be constantly building back my savings. But right now the plan is to save by spending. I’m tossing lots of money at my credit cards since the interest rate is much higher than any savings rate I can find. But that doesn’t mean I shouldn’t shop around for these small CD’s I have since I have no intention of cashing them out to leave myself with nothing to fall back upon.

EDITED: To include a link about the Lenten piggy bank.

Oink! Oink!

I still have my Lenten piggy bank, and for most of the year, it’s empty. For some reason, this year, I decided to throw small bills in there and much to my surprise, sometimes I have a nice stash of about $40. It always sort of surprises me how much is in there when I bother to count it up.

When I am running out the door to go somewhere and I don’t have enough time to hit the ATM, I will reach into my piggy bank and grab some money out. Saves me time and usually saves me money because I don’t use a non-network ATM or charge dinner. $40 is more than plenty for dinner and movie.

The other night, I decided to count it up and found out I had $30 in it. I pulled out half because I was running low on cash for the week and consolidated the rest into larger bills. ($1’s for $5’s, not so large, eh?) I ‘topped off’ my wallet, which is good because I needed $10 to park at a downtown parking garage while I went to the theater. I would have been caught short if I hadn’t done that.

This blog has really transformed me. I don’t think I would be using cash as often as I do without realizing through blogging that cash is king. My experiments during Lent to save some petty cash around the house has turned into a small habit of tossing money into the piggy bank all year. It’s helping me avoid using credit for buying food, which cannot be returned or resold. Heck, even just withdrawing wads of cash in $100’s instead of $20’s has left me with small bills to toss into the bank. That’s a major change for me because I never used to pull out that much money at once. It was always twenty here and twenty there.

What about you? Have you changed your small habits with blogging? Can you point concretely to something that’s different about you since you started your involvement reading or writing a PF Blog? Has it stuck with you?

Hat tip to JD for pointing out that it’s National Save for Retirement Week.

For individuals, they have a resource page of Adobe PDF documents you can download and read. I especially liked the one-sheet files for young people under 35 and for those earning a low income.

I encourage everyone to save some money this week, even if it’s only a little bit.

1. I will be putting in my weekly $5 to short term liquid savings. (Something I do on top of my retirement savings and some other monthly savings I do.)

2. I also put $5 into my piggy bank after I got back from my trip this weekend.

3. I will be saving money indirectly by being frugal this week and dining out less. (Yesterday I spent $2.50 on some lunch, and $1.40 on breakfast. Two more Almost No Spend Days)

As I talk with my girlfriends about money, I find that most of them learned how to be good savers from their moms. So if you are a mom, do something this week to teach your kids to save money. You’re the best example your child has to build a good habit.

Remember, as Boston Gal says, “Today is a great day to start saving.”

UPDATE: Voting closed. In 12 hours, consensus seems to be option #3.

Alrighty, here’s the scenario. I owe my friend $500 for a nice used laptop. I have paid her a good chunk of the agreed price, but now that I have the computer in hand, I need to pay her the rest.

Now, when I agreed to do this, I didn’t have a $3000 dental bill. I had $500 in an account ready to give to her. But now, that $500 is long gone to my oral surgeon so I wouldn’t be tossed into collections. I would like to pay my friend before Thanksgiving, but the question now is how to do that. (I am buying the laptop for my blogging business as this is no longer considered a mere hobby with casual income after the advertising deal I signed earlier this year. So ultimately, a chunk of its cost is a write-off expense.)

I am in a short term cash crunch and I foresee myself doing 3 things.

1. Take a balance transfer/credit card check and write myself a check myself to cover both the dental surgery and the laptop. ($2066.50) There would be likely a 3% fee and 7.9% interest for doing this. I figure if I am going to bother doing an advance, it should be for a large amount, rather than a small one. (Or is my thinking wrong on that?) And that I am suffering this cash crunch because of the dental bill so I might as well pay that off now, and then use the extra cash flow for the rest of the year to pay off the debt faster.

2. I could write myself a check from my HELOC, again for the combined amount of two debts, but the interest would be 10.3% and I would be lowering my home equity to a point that makes me really uncomfortable. Ditto the reasoning above on why I am considering combining amounts again.

3. Break one of my emergency fund CD’s for $404.99, losing interest for 3 months at 5.2%, but at no other cost to me. The remaining $95.01 I can pay out of my short term savings and next paycheck. But I would still owe the doctor money rather than a bank. (Mind you, they don’t charge me any interest or late fees for the payment plan I am on.)

Sorry that I don’t have a voting widget set up. So leave your vote in the comments. You have until Monday 8pm EDT to vote because I need to resolve this quickly and let her know when to expect a check. (FWIW, like a mad negotiator, I told her that I think I can pay her in two installments but I needed to check Quicken first because I had just arrived at home. She was fine with that, she just needed to know amounts and dates. I told her I had no idea as I had lost my PC for a few days last week.)

Is this all robbing Peter to pay Paul? Meh. I feel like the first two options are mega suck and the last option is probably the best bet.

I have been going through my files and I found my old 401k statements. I had to recreate some of the missing amounts, but basically I started with $289.90 in 401k contributions, and added $38.25-39.02 with each semi-monthly paycheck over 2+ years. My total contribution in cash was $1,890.63.

When I left that company in 2005, I rolled over that money on December 18, 2005 into a Traditional IRA account. It was worth $2,897.47. A 53.25% rate of return!

Almost 2 years later, as of Tuesday, September 25, 2007, it was worth $3,669.48. A 94.09% rate of return on over 4 years of investing! I have added nothing to this account since the rollover. I thought I did, but I can’t find record of it. (Quicken’s Find feature will search all your accounts for you. Nothing. Zip. Zilch.)

I’m not savvy enough at the moment to figure the actual annualized rate of return, but using the Rule of 72, it’s about 18%, which is not too shabby.

So if you aren’t thinking about saving, think on this. I saved about $70-80 bucks a month for about 2 years, did nothing to it for an additional 2 years, and it’s worth $3,669.48 now.

So I am going to make a stink about this article I found via Hedonic Adjustment.

The article is from a trade journal for financial planning professionals. The story is about finding the right savings rates for people. They go through different income levels and different scenarios. I especially love the Monte Carlo analysis. (Table 6, math nerdery that merits its own sidebar at the bottom of the page. Read it if you are a numbers geek like me.) Table 6, Panel A says, guesstimating my salary and age, that at 65 I should have about $603K saved up. I think that is actually low and I am gunning for more like $1 million dollars. (Yes, secretly that is my Number, but I just made that up because I think $603K is not enough. See the next income bracket? The one to which I aspire? That says $903K, so we round up to $1 cool million.) However, that is only at 50% confidence numbers. More realistically, I’ll have only $523K at the 90% confidence number (i.e. more realistic results).

The study shows the importance of starting to save no later than age 35. It shows how higher-income people will have to save more to offset the impact of Social Security, which has a larger impact for low- and moderate-income people. Lower-income individuals who are more dependent on Social Security will also be most vulnerable to political changes in the system. Those who have failed to accumulate adequate savings will need to delay retirement or take a substantial reduction in their retirement standard of living. Finally, it suggests that those whose income increases faster than inflation will have to save an increasing amount to “catch up” so as to be able to provide for the higher assumed standard of living in retirement.

Ok so this means that everyone should start saving before they are 35. How lucky we are to be in a crazy volatile market now. Sounds like a lousy time to jump in, right? But not so. You can start socking away cash for right now. Even that will get you farther than doing absolutely nothing.

Read Table 1 of the article carefully, for 80% income replacement of a $20K annual salary in your 20’s, you can save as little as 6.8% a year. That’s not a lot. I admit, that’s pretty tight, but as your income rises over time, saving more should be come possible with cost control. Remember, spending less than you make?

The closest scenario to me would be 30 at $40K. I think when I turned 30 I was making just over that amount. Sadly, I wasn’t saving nearly 12.8%. I think I was saving 3% with 1.5% in matching funds, so a total of 4.5%. Now that I’m older, and making 70% more than what I was making at 30, I am proudly socking away 19.5% (17% and 2.5%). It’s still less than what I need for 80% replacement, but well over 60% replacement. I’ll take it. The reason is that 60% replacement assumes that your mortgage is paid off. And I certainly could do that if I stay in my little studio for the rest of my life, or upgrade even to a 1 bedroom someday.

Read the article. Think about your financial goals and where you are headed. Are you going to need 80% income replacement or 60%? There was a big stink about oversaving in the US this past spring, but I think that’s related to the assumption about our expenses in old age. I would like to play it safe and have 80% replacement and stuff leftover than 60% and money run out. Jebus only knows that the 20% difference could easily be eaten up by medical costs at that point.

I dip wayyy too much. I like the idea of th CDs. I don’t know much about CDs. Anything I need to know when looking for one?
Thanks!
LadyDoughGirl at Finance Psychology

I don’t have a lot of fancy advice for LadyDoughGirl. There’s good stuff on CD laddering by Nickel and also by Jonathan. I highly recommend their posts, but the basics of buying a CD are these:

1) When you buy a certificate of deposit, you are entering a contract to hold your money at the bank for a fixed period of time.

2) The bank agrees to pay you a specific annual percentage rate (APR), which will be slightly different than your annual percentage yield (APY). Because they can be advertised by either one, make sure you read the fine print carefully to compare apples to apples.

3) There are fixed rates and variable rates. For simplicity’s sake, I’m only going to write about fixed rates because those are easiest to understand. My mantra is don’t buy something you don’t understand, and frankly, I don’t understand some of the CD products out there, e.g. “step rates”.

4) Online banks are competitive with brick and mortar places, so don’t limit yourself and shop around.

5) When it’s time for a CD to expire, the bank will usually send you a letter or if you are a high net worth individual, they will call you and tell you when it is expiring. You will have the choice of renewing it or taking out your money.

6) Because these are fixed term contracts, if you want to withdraw your money early, there is usually a penalty of about 3 months worth of interest. ING Direct used to charge 6, but they now conform to 3 months. Keep in mind, this is why most people don’t put their emergency funds into CDs. But I have a way around this, so keep reading.

7) Shop around. I know I said this before, but shop around. It’s worth it. I saw a Wall Street Journal article which told me that Millennium Bank in VA had great rates on 180-day (6 months or so) CD’s. I had never heard of them, but realized that they were close to my office and I could open one at lunch time, so I did! It was very easy. Shop for the best rate.

CD’s usually have minimum amounts. If you go to a traditional bank, this is true. But ING Direct does not. Most CD’s are for $1000.00 minimum, some are jumbo CD’s for much, much more. Keep that in mind, because it segues into my next bullet item.

9) CD Laddering. Read the links above first. Like I said, a lot of people do not like CD’s because it freezes their assets. Locking up your entire emergency fund sounds like a horrible idea. However, to combat long terms, you can ladder CD’s. The examples Nickel and Jonathan use are for 5 year terms, but think shorter. MUCH SHORTER. I have 4 1-year CD’s laddered. It means I have a CD expiring every few months if I really need the money. (Which invariably, I do not. I just make do with what’s available.)

10) One last piece of advice. In a time of rising interest rates, take your interest disbursements monthly so you can use it to buy a new CD at a higher rate. At a time of falling rates, don’t take disbursements. I have noticed with ING, you can’t change this from one to the other, so with some early CD’s, I took the monthly disbursement. On later CD’s, I did not. It’s your choice in terms of management and leveraging interest rates.

Good luck and let me know if this advice was useful!

Over the last few years, I’ve made one observation about myself that I find rather baffling.

First a little history, I used to have a lot of debt. A quick run down of the major stuff from the last 10 years:

Student loans: about $20K
Back taxes: about $5K
Car loan: about $8K
Consolidated credit cards: about $15K

All of those are paid off now and I have $16K in current credit card debt once again.

In the last 3 years, I was able to save $4K in an emergency fund and dutifully contribute to my 401k plan regularly. But I’m not that great at chucking all my money at the revolving debt. I put money away automatically every month into savings, even if it’s as little as $5 out of each paycheck.

I’m still trying to figure out what works for me. What works for me is moving my revolving debt to installment debt and paying that off. For some reason, that is the best way. I have stopped carrying my credit cards and that helps, but it’s not the same as irreversibly paying down an installment loan.

What is it about the psychological nature of building something up versus slowly taking something down? Is my better strategy to save up money and then throw it in a lump sum at the debt, lather, rinse, repeat? I’ve done that, and it’s definitely gratifying to write out a 4-digit check and mail it off. (I know that’s not frugal, but there is a serene ritual of satisfaction that comes from writing paper checks.)

What about you? Are you able to consistently save even though you have debt? Are you better at saving your money than paying down your debt?