What's Your Corporate Jet?

Earlier this month, the three CEOs from Chrysler, Ford, and GM were summoned to Washington, D.C. to explain their situation and beg for some good ol' taxpayer cash. Three companies. Three jets. Three CEOs. Begging for cash. Three people. Three jets. Anyone else see a problem?

Gary Ackerman (D-N.Y.) really nailed the sentiment:

"There's a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands," "It's almost like seeing a guy show up at the soup kitchen in high-hat and tuxedo. . . . I mean, couldn't you all have downgraded to first class or jet-pooled or something to get here?"

These big-three CEOs got in front of congress, whined and complained about how high expenses are, how much they're hurting, and how badly they need government money, all the while ignoring the ridiculous luxury expenditures they authorize and enjoy. This is an extreme example to be sure, but I'm willing to bet that we've all got a "corporate jet" in our own personal finances.

It's that one luxury item that we've started to take for granted. It's the expenditure that while expensive and unnecessary, we just don't give it up, even if money is tight. Maybe it's the satellite TV with premium channels that stays activated while you miss credit card payments. Maybe it's the high-dollar cell phone plan you maintain while you contemplate bankruptcy. Maybe it's the case of beer that's purchased while you struggle to buy groceries.

With tough economic times here for some, maybe it's time to evaluate your expenses and see what can be pared back or eliminated, before you start whining about your plight.

Harsh, but true.

YFNN

Daily Interest & Motivation

What does a 14% interest rate on a $3,000 credit card balance really mean?
What does a 6% rate on $22,000 car loan balance really mean?

Sometimes, to fully understand the impact that debt can have on your life, you need to break it down into more meaningful chunks. For me, breaking down that interest cost to an estimated daily amount was very beneficial and eye-opening!

Let's say you have a credit card with a $3,000 balance and an interest rate of 13.99%. We can get a decent estimate the your daily interest rate by merely dividing your interest rate by 365 (days in a year).

13.99% / 365 = 0.0383% per day

Now, that 0.0383% sure doesn't sound like much, but when you multiply by your balance:

0.0383% * $3,000 = $1.15 per day!

By itself, you may say "it's only a little over a dollar a day!", but think of it this way: that's a $1.15 every day, whether you work all day, sleep all day, go on vacation, whatever. EVERY DAY. How would you feel if you woke up every morning and as soon as you walked out the front door, somebody would hold out their hand and demand $1.15? I'd get sick of that pretty fast! But, that's exactly what you're doing, just in a more deceptive way.

Want an even more extreme example?

Let's say you bought a shiny new car last year and owe $22,000 at 8.5% interest. I'll do the math again:

8.5% / 365 = 0.0178% per day

0.0178% * $22,000 = $5.12 per day!

In other words, you're forking over a Lincoln every single day just for interest on that loan! $5.12 a day would pay for my lunch every day!

Fortunately, every payment you make drops that daily interest down a bit more. Making extra payments on the principle drops it even faster.

As you can see, it wouldn't take long for your daily interest to add up to $10, $15, or even $20 a day. Couldn't you use an extra $10 a day?

YFNN

The Ramsey Plan vs. The Nerd-ey Plan

A reader commented on a previous post (thanks!) about my general financial strategy and how similar it is to Dave Ramsey’s Baby Steps. This post is a result of that comment. Also, before reading the details of my family’s strategy, please understand that I am not a financial planner. I don't have a degree in finance or even economics. I don't work in finance for a living (directly, anyway). I’m just a regular Joe that’s lucky enough to have a decent finance understanding and is willing to share my family’s long-term strategy!

I’m big fan of goal-setting, both short-term and long-term. I write them down, check on them regularly, revise them if necessary, and celebrate my successes when I reach them. I truly believe that once you set a clearly defined goal for yourself and write it down, you’re well on your way to achieving that goal. Just merely having a plan to follow makes decisions easier and keeps you focused on what’s really important to you.

So it shouldn’t surprise you that I’ve got financial goals...lots of them. I keep monthly, yearly and lifetime financial goals and they’re all meticulously documented, revisited, and revised regularly. They all help me make day-to-day decisions, and keep me moving the direction I want to go. One of the most important is my overall financial strategy.

Dave Ramsey's plan is a great starting point for the majority of Joe Q. Public. It's simple, easy to understand, and effective. But, I certainly don't think it's optimum, at least for us. The plan my wife and I follow to manage our finances and investments is more sophisticated than Dave Ramsey's plan, but I think it's a better fit for us. Yours may be totally different!

For comparison's sake, here's Dave's plan:

1) $1000 for a starter emergency fund.
2) Pay off all consumer debt using the debt snowball.
3) Accumulate 3 to 6 months worth of living expenses for an emergency fund.
4) Invest 15% of gross income into Roth IRAs and pre-tax retirement.
5) Fund college.
6) Pay off home early.
7) Build wealth with mutual funds and real estate.

My family's strategy varies in the steps themselves and in the amounts dictated by each step. Hopefully, I'm able to fully explain my reasoning for the changes I've made. Here are my steps:

1) Save $1000 per member of your family for a starter emergency fund. Personally, I don't think $1000 is quite enough, especially if you have children. It's a great goal for a single person, but if you've got a family, you've got more folks to cover and emergencies have the potential to hit a little harder. I realize for people with large families, this goal becomes significantly more difficult, so good judgment needs to be used when determining your personal amount.

2) If your company offers a match on your 401(k), take it. Invest only up to the amount required to get the entire match. If you don't do this step, you have the potential to leave a HUGE amount of free money on the table. Think of it this way: If on every payday, a man at the exit of your office's building would hand you a stack of 20-dollar bills ($100, $200, or $500) just for investing 5% of your income, wouldn't you take it? That's what your company match is: free money. Even better, it's free money that'll compound as your 401(k) balance grows over the years.

3) Pay off all consumer debt, starting with the smallest amount, using a debt snowball. In this instance I agree with Dave. Even though starting with the balance with the highest interest rate would result in a mathematically better result (minimally in most cases); I think the smallest balance should be tackled first, for a couple of reasons. First, if you go after the smallest balance first, you knock a minimum payment off your books quickly. This could be a big help if your family does get hit with some sort of financial hardship; it's one less minimum payment to make, which means your overall minimum monthly outlay is smaller. Second, there is a significant psychological boost over dropping a debt entirely, which does help to motivate you to keep moving.

4) Accumulate 4-6 months of living expenses for an emergency fund in a high-interest savings or money-market account. . I've written about the virtues of a solid emergency fund in the past, so this shouldn't be a surprise. Once you've got your debt paid off, accumulating this money shouldn't be too difficult. If you've only got one bread-winner, I think a six-month cash cushion is pretty darned important.

5) Invest 15-20% of gross income in Roth IRAs and tax-advantaged retirement accounts, up to federal maximums. I think that you can never have too much retirement income. Dave suggests 15%, but for us, 20% works up to the federal maximums. If you're fully funding two people's Roth IRAs (currently $5000 each), it doesn't take very much additional investment to reach that 20%! If you can make it automatic, so much the better. Fully funding a Roth IRA for one person is only $96 a week!

6) Fund 80-95% of college costs for your children. While you can certainly do 100% funding if you so choose, I like the 80-95% number a bit better. I firmly believe that when someone has a monetary stake in something, they take it more seriously, and in my mind, college is no exception. I fully expect my future son to contribute something to his college education (which is a long way off!).

7) Put 10% of your net paychecks into a mutual fund as a "freedom account". This is your "retire early" account, or your "travel around the world" account, or whatever-big-dream-you-may-have account. For us, it's retire early!

8) Pay off your home mortgage. Obviously, we'd all love to own our homes outright. Since a home mortgage is typically lower interest and tax-advantaged, I think this is the proper step to do it.

9) Build wealth with mutual funds, real estate, and businesses. When you get to this last step, you're living the good life. You'll have plenty of cash on hand, solid retirement accounts, a paid-for house, and fantastic cash flow. It's time to build it up even more through investing. If you choose real estate (rentals) or a business, that’s great. Mutual funds are great, too.

As I said before, this likely isn't the path that's right for you. Each individual needs something just a little different. Right now, this path is perfect for us. As things change in the future, our goals and needs may change, too. So, we're going to keep our strategy flexible.

So, what does your financial strategy look like?

YFNN

February Self-Tax Update

Since I haven't written another post on my "Self-Tax" since the initial one, I thought it would be wise to write a quick follow-up.

For those too lazy to click the above link and read the general premise behind my self-tax, it's okay; I totally understand. Here's a nine-word breakdown:

I pay myself a 10% tax on poor purchases.

That's it.

Anyway, it's been four complete months since the implementation of the self-tax, and it seems to be pretty effective. Since January, spending on lunches out has dropped by over 60%, and since MLB doesn't really eat lunch at restaurants very often, it's been mostly because of my choices. I can definitely tell you the decision to eat a packed lunch or a Wendy's hamburger (oh, baby), has been affected by the penalty of the tax. Well, the tax and the fact that I had to move my belt tab out a notch in January. Ouch.

So, for the rest of the data freaks, here are the numbers and the matching lame excuses for January and February:

January: $193.65 paid in tax. This was pretty high for a couple of reasons. First, I threw a small birthday party for MLB, and I had to buy prizes, food, and some other odds and ends. That drove the number up. Also, we replaced our CRT monitors in the office with some pretty 19" LCD ones, which kicked the tax up by over forty bucks. The good news is that the tax from dining out dropped by almost 70%.

February: $254.31 paid in tax. I can blame a sizable portion of February's tax on MLB. She went on a bit of spending spree for clothing (deservedly, though), and had a rather pricey hair appointment, so that punched it up about seventy bucks. Add in a payment to DD's daycare (boy, does that topic deserve it's own post), and a new color printer for the office, and some passport renewal fees, and the result is a sky-high tax. Again though, dining out spending was way down from December.

So, all things considered, the tax has brought down our expenses by more than enough to cover the tax itself, as well as put a little additional money into savings. Both are very good things.

YFNN

Buck Your Brick Bank For Bang For Your Buck, Part One

I'm willing to bet that the average American has a savings account at their local brick-and-mortar bank or credit union, if they have one at all. If you're one of those people with a savings account, you're on the right track, but I think you can do a lot better. The local brick-and-mortar banks around here are offering the following rates on their basic savings accounts, as of today:

If I had a $5,000 balance in their standard savings account, these are the rates I'd get:

5/3: 0.65%
Chase: 0.40%
Huntington: 0.05%
National City: 0.75%
US Bank: 0.17%

Those rates are absolutely awful. Plus, many of the accounts hit you with "maintenance fees" if you carry a balance less that a certain amount (usually $200-$500). With those dreadfully low rates and fees it's nearly impossible to get ahead!

So what's a guy with some cash to save supposed to do? Fortunately, the internet banks come to the rescue with savings accounts with many of the same benefits of a regular run-of-the-mill savings account, but with an interest rate that actually makes money! Some of the more popular ones are ING Direct, Emigrant Direct, and HSBC. These banks still have the important features, like the fact they're FDIC insured, it's easy to perform transactions, and the customer service is top notch, but they have interest rates ranging from 4.5% to 5.5%. Some even offer sign-up bonuses or even higher introductory rates!

"That's great FNN, but what does that really mean to me? Give me some illustrative numbers!"

Okay, no problem. I'll even use myself as an example.

MLB and I keep an emergency fund of cash equivalent to five to six months of living expenses in a savings account. Since we want to have easy access to the money (in case of emergency), we don't want to put the money into a brokerage account, IRA, or other investment. We want a genuine savings account. So, say we trudge on down to our bank, Huntington, and sign up for a "Premier Savings Account" with their interest rate of 0.05% and deposit our money.

At the end of a first month with our "Premier Savings Account", we've earned a whopping $0.63. That's right, sixty-three cents. At the end of a whole year, our balance is $7.50 higher than when we started. Seven dollars and fifty cents. For the whole year. Whoopity-doo.

Okay, say instead of going to our local Huntington, we decided to sign up with ING Direct (which we did) and transfer the money from our checking account. We get their standard "Orange Savings Account", and get a rate of 4.5%. At the end of the first month, we earn $56.25 in interest. Yes, you read correctly. $56.25 in one month. That's over seven times more than the Huntington account made all year! After one full year in the ING account, our balance is almost $700 higher!

"Wow, FNN, that's a lot of money!"

Darn tootin'.

"Okay, I'm interested. So what are the drawbacks?"

Well, there's a handful, but they're pretty minor. First, there is no brick-and-mortar building to go to make deposits. You have to make deposits to your regular checking account and then transfer the money to your internet account. Second, it usually takes 2-3 business days to make the transfer back and forth between the accounts and our Huntington checking accounts. However, this can be a positive. Because it takes a few days, it forces me to think a little harder about the reasoning behind the transfer. Since it's a savings account, the money should be staying in there unless I've got a really good reason.

"Are there any other benefits?"

Absolutely, and they're big ones to me and MLB. But, it's a long topic, so I'll go into more depth tomorrow. In the mean time, check out what ING Direct, HSBC, and Emigrant Direct have to offer.

YFNN

Budget Meeting 02/28/07

This post is probably going to seem a little disjointed, but if there's anything that I'd like any reader to take away from it, it's the very last two sentences.

If you’re like the vast majority of the households in America, then one spouse "handles the money" and keeps the other spouse informed of what's going on. This information exchange varies from couple to couple to a wide degree, all the way from almost managing the money together to one spouse not knowing what's going on at all.

I like to think that MLB and I are right in the middle of that group. As you can probably guess, I have a pretty firm (and detailed) handle on our money, managing all aspects of our financial lives. I make sure that every penny is given a job when it comes in, and is tracked when it goes out. MLB certainly doesn't care for doing it and I'm a bit of a money-psycho, so it works well for us.

That said, MLB and I sat down and had our monthly budget meeting tonight. Basically, every month, we sit down together and go over the past month's expenditures and income, and establish the next month's budget.

I'm the biggest nerd at the homestead (okay, the only nerd), so I'm also the main finance guy, or the CFO of the household, as MLB calls it, and I prepare all the statements of expenditures and incomes. I also lay out the upcoming month's preliminary budget, based on the past month's income. We go over the preliminary budget I've created for the next month, and we discuss and make any changes that are necessary. We also discuss any issues we came across over the last month: where we’ve overspent, where we can cut back, and how we can do better. We also talk about any upcoming financial hurdles and how we're doing in working toward the financial goals we've set for the year.

It sounds really detailed and complicated, but since I already track everything, and most information is automatically generated by my spreadsheets, it's really not too bad. MLB gets thoroughly briefed in everything and has veto/approval power over absolutely every aspect of our finances, so it's completely a 50/50 agreement. By the end of the meeting, we're both very clear about where we stand, where we're going, and how we're going to get there.

I know that we're probably a bit unusual in this regard (okay, I'm unusual), but there is no doubt in my mind that our management method works, and works well. We're never surprised by a bill (more on why in the next few days), never seem to come up short, and have been able to put more and more money into investments and savings.

Now, I'll be the first to admit that MLB isn't exactly excited and enthusiastic about the meetings, mostly because she is not a numbers person and she trusts me to get things done right. Let's face it, budgeting is not sexy. But, I know that she's appreciative of the all care that is taken, and is confident that I'm managing our money well. And, I firmly believe that it is absolutely critical that she understand our situation financially. Full disclosure is the only policy.

Finally, and most importantly, maintaining and going over our budget every month gives us each financial peace of mind like you wouldn't believe. And, since more marriages dissolve over money issues than anything else, that is completely critical to our relationship.

Budgeting and sleeping well at night because of it,

YFNN