Financial Decision from a Vulnerable Position

Over the weekend, while my wife babysat the contractors installing our new doors and I “hid” upstairs, I did a little research on the benefits of increasing my contribution to my 401k.

Somewhere online, Bloomberg’s or something, I’ve seen a retirement gauge that indicates that if you have $60k in there at age 30, you’re in great shape.

Well, that’s where I am. And that doesn’t even include my wife’s savings.

But elsewhere, using silly retirement calculators, the end result for, say, retiring at 65 is all over the place. From a number that makes me very happy to a number I’m not sure will cut it. And I’m not planning on working until 65… so that number *REALLY* won’t cut it.

Right now, I’m contributing just under 5% of my gross income to my employers 401k plan. That’s…disappointing. In the past, before I bought my house 5 years ago, I was contributing 15% and that’s what I should be working my way towards again.

For my employer’s 401k plan, the match is 33% up to 15% of your income. So the 15% mark is the ceiling to make the most of the company match. By up’ing (is that even a word?) my contribution to take the most advantage of the match, my take home pay, using some really simplified calculations, would decrease between $325-350 each paycheck.

Can I afford that?

Sounds do-able. Especially when you look at the return.

Playing with the calculators out there, at my current rate of under 5%, and never getting another raise, I’ll hit the one million dollar mark when I turn 55. Jumping up to a 15% contribution, at age 55, it will be over double that! Now we’re talkin…

Is hitting a million dollars in my 401k by age 48 worth around $700/month? Toss in the company match, and it’s really like paying $700 to get over $900 back. That’s one hell of a deal. And that doesn’t even take into account the rate of return.

But again, can I afford it?

Right now… well… I’m not so sure.

I know lots of financial advisors say you should pay yourself first and I agree with that to a certain degree. And, yes, we could get by just fine with a hit like that to our take home pay.

But with the debt we’ve taken on in the past couple of months to finance the siding project and the possibility that the largest client for my side business might not renew my contract, well, I’m feeling especially vulnerable these days.

That monthly $700 (and then some) would undoubtedly be going towards debt. Taking it (the $700) out of the picture, yes, we can still make the minimum payments on all of the cards. But the balances won’t fall fast.

I’m not willing to do the math, but I’m sure that in the end, it would be advantageous to send it to the 401k now and pay down the debts slowly, but for my own peace of mind, I think I need to knock down the balances a lot before I make a move that large.

Add to the fact that we may not have the income we’ve grown accustomed to this fall, and it’s a little unsettling.

Will we be able to down balances like we have in the past? What if a tree falls on the house? What if the fridge dies? What if one of us loses our job? What if my auto insurance rates triple because of the accident? What then?

In any of those cases, I’d rather have a lot of available credit to fall back on over a fat 401k balance that I can’t access until I’m old and grey.

Maybe I’ll just jump to 10% for now. Eh, that’d give me $1.5 million at age 55. And that wouldn’t be so bad.

Posted on July 23rd, 2007 at 9:39 am by Brainy Smurf
Finance, Credit Card, 401k | 2 Comments »

Siding, and Windows, and Doors! Oh My!

With the renovation work at the house still ongoing (an attic window, the basement hatch, and some last minute touch-ups left), we still haven’t made the last payment to the contractor. Progress has been very slow for the past few weeks,

It’s tough because now, over month later, I’d like to have begun putting a real dent in the debt we took on to finance the project… but there is still one payment to go.

Seems like it’s something that would be easy to work around but I’m generally of the type that likes to pay all of my regular monthly bills and then send every last remaining cent, down to a $1000 buffer, to the credit card companies. It’s a method that’s always worked for me in the past.

With a $4k bill looming, I’m not comfortable doing that.

I know, I know… I could make my “new” buffer the $5k mark, but with things still up in the air, I want to make sure I have as much cash on hand for those last minute unexpected expenses. You know, like the additional $2500 we paid to have the porch rebuilt.

I want the house to be done.

I want to write that last check to the contractor.

And I want things to get settled so I can put my head down and start paying it back, aggressively, like we did with the last loan (for the roof) where we paid the last $8k off in a couple of months.

Posted on July 23rd, 2007 at 7:59 am by Brainy Smurf
Finance, Home Improvements, Credit Card | No Comments »

Two Months Later… the BMW Returns

Friday afternoon I received a call from the auto body shop letting me know that the car was ready. I had to pay the deductible over the phone, as I wasn’t going to be able to get there before they closed for the weekend.

For a while there, I thought I might get away without paying anything, since I hadn’t receive anything from Allstate since the week of the accident. But they got me. Oh well… It hurts this month’s budget quite a bit, but I still had it in the back of my mind, so I can’t really call it an unexpected expense.

The car looks… darker. I’m not sure if it was just the light or what, but it looks to be a couple of shades darker than it was. It’s also not as smooth a coat as it was. You know, when you look at it at different angles, there are a few uneven areas, but from a distance, it looks just fine.

The new roof, with a new back window, is great. The back window hasn’t been that clear since the day I bought it.

The new wheels, that supposedly don’t match because BMW no longer makes the 5 spoke wheels I had, look like perfect matches to me.

The damaged areas also look great.

There looked to be a fresh scratch, rather deep too, in the passenger side door (the side that wasn’t involved in the accident at all), but that was the only noticeable blemish. Considering the improvement everywhere else, we decided to ignore it. (I say that now, but my focus will zero in on that scratch for years to come, I’m sure.)

Another downside was that the radio is locked again. A few years ago, I changed the battery myself and it initiated the antitheft “lock” on the radio. Now the radio asks you to enter a password. I don’t have that password.

The last time this happened, we brought it to a BMW dealership and they reset it — but never gave me the code. Sigh… Looks like I’ll be taking it in again. Argh.

In the end, the whole experience wasn’t that bad. I can’t really bash Allstate, and considering the final bill was double their estimate, I almost have to praise them. That is, unless they double my rates when I’m up for renewal later next month.

Posted on July 16th, 2007 at 10:36 am by Brainy Smurf
Accident, Insurance | 1 Comment »

Looking ahead 30 years…

Today is my Dad’s 60th birthday. It got me thinking, he’s pretty well off financially at this point…he was even able to retire to a snobby community in Florida at 55, but where was he 30 years ago?

Am I at roughly the same stage?

It’s tough to make a comparison… Houses in 1976 cost so much less. Salaries were so much less too. My mother was probably making a insultingly low amount at the time. Few had more than one car, let alone three like we do now. I’m not sure there is an accurate way to make a comparison.

My parents never really let me in on their finances… and I can’t say I really had much of an idea about what their situations were like when I was born — nearly 31 years ago now.

I do know that they owned a decent raised ranch style house. And we had a brand new Chevy Malibu. My dad had a steady income. And they somehow managed to afford to have a kid — me. And 5 years later, my sister.

I look at my situation now and we’ve got a house with a payment we can afford. We have three cars — two of which are paid for. And I like to think my job is safe, though my side income is likely to decrease over the next few years. Can we afford a child? I think so.

One thing my parents did, and not something I expect to do, is move every 3 years or so. Each time, as my dad was transferred, we’d move back and forth across the country into a bigger and better house.

I’m not sure if that’s how my parents built a great deal of their wealth, but I’m pretty sure it’s safe to say they never sold a house for a loss. In fact, their last house, which they owned free and clear sold for over 300% of what they paid for it. Possibly 400%.

I’m not sure our current house has that kind of potential, though it has gone up in value nearly $80k in the 5 years I’ve been in it. Maybe, but like I said, I’m not planning on uprooting the family every few years… or even moving within the area to a bigger and better house as I can afford it.

But I think the biggest difference that likely puts me in a better situation, at age 30, than my parents is the fact that my wife and I have both already started saving for retirement. And combined, we’ve got a pretty nice chuck of money locked up for retirement.

Hopefully we’ll be retiring early too. Right now, I think it’s pretty likely.

Posted on July 15th, 2007 at 9:02 pm by Brainy Smurf
Life | No Comments »

Credit Card Debt: Plan of Attack

Now that the money needed to complete the siding project has hit the credit cards, and the first statements have all come in, it’s time to start paying things down.

It’s tough to figure out exactly how to attack it — I’m got a number of spreadsheets set up displaying all of the different scenarios based on who gets paid what and when.

For simplicity sake, I basically have around $7k on each of three credit cards. One is at 0% for another 8 months. The second is at a fixed 4.9% and the third, which is the card I carry, is at a fixed 9.9%.

Obviously, the third card at 9.9% is the one I should attack most aggressively. And ideally, I wouldn’t carry that card — adding a bit to its balance each month.

But that’s where the problem lies.

Card one at 0% was a balance transfer — the purchase APR is something ridiculous, so that card’s out for routine expenses like gasoline.

Card two at 4.9% was also a promo balance transfer rate. The purchase APR on that card is 17.99%. That’s a lot worse than the 9.9% on the card I’m using.

Now I could always apply for a new card, but I’m not real keen on adding yet another card. That, and I’m not sure I could get a fixed rate lower than 9.9% anyway.

Adding to the dilemma is the fact that I still want to be contributing to my ING Direct savings account.

Mostly due to the fact that once the contractors from the siding project are gone, I want to call in an electrician to do a little rewiring, then have a whole room redone — sheetrock, ceilings, floor refinishing.

Nothing huge financially, compared to the last two projects we’ve done, but I don’t want to pile it on as additional credit card debt. I want to pay for it with cash on hand from the savings account.

The problem is that my ING Direct only grows at a 4.41% rate. So, really, it would save me more money to abandon the savings account in favor of paying down the 9.9% credit card balance.

Taking the $2500 that I have in savings right now and throwing it at a $7000 balance is, in fact, the smartest thing to do.

When you do the math, the savings account right now will earn around $9 each month. The $7000 balance will cost me $58. Total, that’s a $49 loss each month.

Wiping out the savings account and paying down the balance will earn me nothing in the savings account and cost me $37 each month.

Okay, that’s a $12 difference. I realize I’ve over simplified the numbers in this case — in addition to the big payment, I’d also continue to aggressively pay in down, but is a $12 savings each month worth more than $2500 in your back pocket?

I don’t think so.

So I guess the plan is to continue aggressively on the 9.9% card, throw $250 each month at the 4.9% card, and $100 each month at the 0% card (while keeping in mind that it will jump to 13.49% in 8 months). If I don’t wipe out the 0% card before the promotional rate expires, well, I’ll have totally failed in saving any money, but I’ll worry about that in about 6 more months — and then go aggressively at it.

Looking at my Microsoft Money file, over the past three years, I’ve averaged credit card payments of $2196/month. With monthly payments like that, I should be able to payback my current debt in a flash, right?

Wait a minute! With payments like that, how could I possibly be in debt in the first place? Well, the problem was that I was also charging $1536/month. And when I started keeping track of my credit card balances, I was already $23k in the hole. Ouch.

The good news is that, until I charged the siding project, this year I’ve only be charging an average of $811/month. That still seems high to me, now that I look at it, but it still means I’ve cut my spending nearly in half.

The bad news is that I’m not paying back as much as I have in the path. I think this is due to the fact that I was putting so much into the savings account at the start of the year, and building up my checking account balance as well to pay for as much of the renovations as I could.

I hope that now that I’m not “saving”, I’ll resort back to my old ways and start averaging payments in excess of $2000/month to the credit card companies. And if I can cut that $811/month down some (I’ll look into what the hell I’m spending that much on later today), I should be able to snowball these debts down Dave Ramsey style, wiping out the 9.9% card first, and then the 0% card just before its rate jumps.

Posted on July 13th, 2007 at 8:40 am by Brainy Smurf
Finance, Credit Card | 1 Comment »

What’s the best kind of stuff? FREE STUFF!

Last week in the mail I received a copy of BMW Magazine. It’s come in the mail sporadically, I guess, since I bought my BMW.

I never paid much attention to it.

Actually, I take that back, I believe I planted my very first issue on my coffee table, displayed prominently at a ‘casual’ angle (like the one pictured) back when I was single and living in an apartment to give off the image of being a high roller. Sadly, I’m the only person who saw it sitting on that coffee table.

Anyway, it’s certainly not something I’d ever subscribe to on purpose and I can honestly say that since that first issue, I’m not sure I’ve taken the plastic wrap off of another issue… until this past weekend.

My wife opened it up and started flipping through. Wow. Can’t say I’ve been exposed to many magazines that have Cessna advertisements in them. Not that I need a new Cessna or anything…

How about an article about installing a clear floor in your private jet to showcase your 7-series in the cargo hold? Seriously, this stuff should be in a Bentley Magazine.

I guess I don’t consider your typical BMW owner (or Mercedes, Porsche, Lotus, etc…) to be in the same class as folks who own private jets large enough to park a car in. But hey, if someone out there wants to group people like me in there, I’m not going to complain. No matter how far from the truth it is.

So, you know those annoying thick paper stock cards magazines have in them that “force” you to flip to certain pages? Well, BMW Magazine has them too, but get this… One of them was to request your own free DVD of Al Gore’s movie, An Inconvenient Truth direct from BMW.

Postage-paid even. I mean, this is really free. No strings attached. I don’t even have to test drive a car or anything?!

Now, I’m not really on the forefront of going green or anything, and I’m sure the movie has been on Discovery Channel a few times at this point, but I still haven’t seen it. And I am kinda interested in seeing it. And for free? On my own time? You can’t beat that.

So, apparently ownership does have it privileges. Now I need to add trying to dig up all of the back issues I never opened to my list to see what other freebies I can get…

On a related note, I still haven’t gotten my BMW back. Apparently BMW no longer manufactures the wheels I had and it’s holding things up. Bummer.

Posted on July 12th, 2007 at 9:34 am by Brainy Smurf
Bargains | 1 Comment »

Lists

Back in high school, I had a friend who, each Sunday, would make up a list of what she was going to do each night.

Going to the mall would be Monday night’s activity. Tuesday would be to go to the driving range with Brainy. Wednesday, there was a hockey game. Thursday would be the night to go out to eat then stay in to watch her favorite tv show. Friday would be a movie. Saturday would be an all-day hike.

I used to think she was nuts. Always busy. Always had something to do, somewhere to go — no downtime. None. It had to be exhausting.

Then I tried it about 5 years later.

It was awesome. Each day, I’d sit at work not wondering what I was going to do when I got home, instead I sat there looking forward to something I’d already planned out. Most of the time, I head out and do it straight from the office.

Sadly, for reasons I’m unsure of, it only lasted a few weeks.

Fast forward 10 years… These days I often find myself overwhelmed with things to do — and no “list” or scheduled agenda to adhere to.

Most nights, I come home from work, eat, and veg on the couch watching the news for a few hours before getting things done. And more often than not, I never get to the projects I have in my imaginary list that’s floating around in my head.

A common question that I ask my wife each day, morning actually, is “What’s for dinner?” I know she hates it. It’s like it puts pressure on her to think of something that I’ll like each day, and I can understand that considering my limited tastes. It’s like a last minute project…every day. That’s never any fun.

This past Sunday, we made a list for the whole week. I know what’s for dinner tonight. I know what’s for dinner tomorrow night too. And I’m looking forward to taco night on Friday!

Rewind to last week, at this hour, I’d have been sorta in limbo about what was for dinner that night. Friday, well, I can’t say I’d have even thought about what would be for dinner more than one day in the future.

This new way of doing things is certainly an improvement. And financially it will be an improvement too. My wife knew exactly what to buy at the grocery store this week and we’ll end up throwing out a lot less than we usually do. Not that we threw out a ton anyway, but every now and then the ground beef goes bad, you know what I mean? That shouldn’t be a problem anymore.

From here, now I just have to expand the list to include not only dinner but activities too, so I can get some of these great ideas out of my head and actually done… before I forget about them entirely.

Posted on July 10th, 2007 at 11:40 am by Brainy Smurf
Life, Motivation | No Comments »

July 2007: Quest for $1,000,000.00 Dollars

Not as bad as I thought it would be…

The siding project is nearly finished and there is one more $8k payment due at completion. That will wipe out my cash reserves entirely. I think that’s when it will set in — all gains to this date so far are gone in the span of a month. But… the house looks nice!

The big movers this month, again, were the savings account and the credit cards. Both are 100% to finance the home improvements.

My 401k also tanked this month. Actually, dropping less than 1% isn’t that big of a deal, but with all of the volatility lately, it seems like it’s swung a lot further than that over the whole month.

Something very strange, and something I’ve never seen happen, was that the trade-in value of one of my cars actually went up! It’s a model year 2005, so it’s not like its hit a “collector” status or anything. Maybe the value of cars getting 45mpg is going up? I dunno, but I’m not complaining. It’s likely a fluke. And probably one of the reasons many people don’t include their vehicles in their calculations.

My sneaky plan to pay down the mortgage has already made a noticeable difference in just two weeks. I’m not about to get more aggressive than $25/week because I know paying down your mortgage is kinda stupid at the point I’m currently standing, but even an insignificant amount like $25 is truly putting a dent in it. To think, year to date, I’ve only knocked off a little over $1000 on the balance, but just last month with a couple of $25 payments, it took off nearly a quarter of that. That’s HUGE and it costs nearly nothing to me.

In the end, once the renovations are complete, overall, I think my net worth will have dropped around $16k. Not too bad considering we’ve spent right around $26k on renovations, but it still feels like a kick in the stomach.

I’m trying my best to look at it like a 6-month setback. Hopefully I can keep on the same track (of debt re-payment) that I’ve been on since January, but it might be tough over the next couple of months as I’m not real comfortable being cash poor. And as I said, when we write that final $8k check, we’ll be broke.

Posted on July 6th, 2007 at 8:30 am by Brainy Smurf
Finance, Net Worth Updates | 1 Comment »