Monday, April 16, 2012

2012 Financial Focus

Our focus for this year is our mortgage.  We worked Dave Ramsey's baby steps last year, paid off all non-mortgage debt and saved 6 months of living expenses in an emergency fund.

At the beginning of this year, I kicked my 401k contribution up to 6%.  In addition, I am required to contribute 6% of my salary into our State Retirement System.  So, that makes 12%.  I also opened a Roth IRA with some money I made from my side work last year.  I plan on contributing 15% of what I make from my side work towards the Roth.  That was baby step 4.

We've been working on step 5 since each of our boys were born, though, truth be told, we're not putting a lot into college savings yet ($25 per boy per month).  When they get birthday or Christmas gifts from family, they go in the 529 account too.  We'll have a lot more to save for college (or even just cash flow it) once our mortgage is paid off.

So, that gets to our 2012 focus.  The $128,700 we owe on our house.  I want to knock $10k off of it this year.  We've made ok progress through the first quarter of the year, but we've only knocked off $1,940 or so. That leaves us a lot of ground to make up.  We're in the process of trying to refinance, but the initial appraisal we got valued the house as "underwater".  Bastards.

In any event, it looks like our mortgage lender is working hard to secure us a much better rate (currently at 5.625%) under the new HARP program.  We should see some progress towards the end of this week/beginning of next.  I'm hoping to get a rate in the 3%'s.  That will help in the long run, but may put us back $3k or so.

On our current loan, about $200 gets knocked off principal with each payment.  The refi will move that up to over $400 a month, effectively doubling our pace.  We're, of course, going with a 15 year, fixed loan, as opposed to the 30 year we have now, but our payment will only increase $150 or so (nearly the equivalent of the extra we're putting towards principal as it is.)

Seems like we've got a lot of irons in the fire, but are trying to narrow our focus to really make up some ground on this one.

Monday, April 9, 2012

Emergency Fund(s)

We started last year (2011) without a clue what an emergency fund was or what it was good for.  We ended last year with a "fully funded" emergency fund.  How?  Why?  Who?  What?

Exactly.  We followed the Dave Ramsey plan and first moved $1000 into our joint savings account.  That is our "baby" emergency fund.  And, truth be told, it was our baby emergency fund before we knew what that was.  Our next step in this process was to pare our budget down to the essentials and save everything we could.  That money we "piled up" in our Credit Union Money Market account.  With extra money from a longevity pay bonus, side work, and gifts, we managed to save enough to cover almost 6 months of "bare minimum" monthly expenses.

Six months is a good guide to cover a lot of life's hidden challenges.  The fund is set to cover:

  1. Mortgage Payments (the minimum without any added principle)
  2. Utilities (cell phone, electricity, internet, and water for about $260 per month)
  3. Food (we'd cut back but will be approximately $400 per month)
  4. Health insurance (in case something bad happens)
  5. Misc (gas - a relatively minor expense for us, etc)
That's about it.  If I were to lose my job, we'd immediately stop contributions to charities, retirement, Christmas savings, the HSA.  Basically, if we didn't HAVE to do it to keep the house running while I found something new, it would be cut.  I'd also really try hard to pick up some more side work.  

The other thing we've been doing for the last year is saving up in our "sinking fund" envelopes.  (More on our envelopes to come in a later post.)  We have sinking funds for:
  • Clothing
  • Car maintenance
  • Vehicle taxes, insurance and AAA
  • Home maintenance
  • Pre-school (we continue to save during the summer to cover higher costs the following year)
  • Gifts (not including Christmas, for which we save in our Credit Union's Christmas Cash Fund)
  • Races (a now minor expense for us)
  • Travel and Recreation
  • Subscriptions
With these "funds", we've managed to capture all of our annual expenses, as we've been through a full yearly cycle.  These funds also serve the back-up purpose of a further emergency fund.  We store most of these in a money market account and track it with an excel spreadsheet.  We store the rest of it at home in case we need cash (since neither of us have a credit card, and we prefer cash to using our debit card.)  

This plan has worked well for us over the past year and I don't think we've made any major changes since inception.  The amount we regularly contribute has fluctuated based on need/availability of extra cash, but we continue to make good progress.

Tuesday, April 3, 2012

What is a BUDGET?

If the concept of a budget is foreign to you, I've got a good analogy.  A BUDGET is like a DIET.

Think of it like this, a DIET is simply what you eat.  It could be good, bad, or indifferent.

A BUDGET is simply what you spend your money on.  It could be negative, positive, or even.

You could spend less than you earn, more, or the same.  The simplest way to do a DRAFT BUDGET is to start out with the amount of money you make over a known time period (get paid once per month, bi-weekly, weekly).  Then you'd start listing your expenses, needs then wants.  The first DRAFT should not constrain spending.  It should simply be an exercise to capture what you earn and what you spend.

The effort of capturing your expenditures may take a few months, since a lot of costs are factored and paid over longer intervals (weekly groceries, monthly mortgages, semi-annual insurance, annual taxes).

Once you've done this (captured income versus spending), you should be able to see where your money is going.  This is a very important exercise as it sets the groundwork for putting your BUDGET on a DIET!

Sunday, April 1, 2012

Debt for Engagement

I look back, yet again, and wonder what in the hell I was thinking. I bought my wife's engagement ring on payments! I was less than 3 months into my first job out of college, she was out of town for the weekend, and I went to the mall (again, back when I did that).

I nervously walked around a few stores and settled on Zales "the Diamond Store". Perfect! They'd help me out and look out for my best interest. That...or, they'd sell me a nice diamond ring at twice the price I could have gotten it elsewhere. But, but, it came with an appraisal card and I was getting a DEAL!

Luckily she said yes, and we've been happily married for almost 10 years. She also knew I bought the ring on credit and I worked hard to have it paid off before we got married. (I think I even succeeded in doing this.) While it wasn't THE RING she wanted, it certainly served it's purpose. It showed initiative, a trait that still gets me in trouble sometimes. More importantly, it showed her I loved her (the act of proposing, that is), and it worked out well in the end.

If I had it to do over again, I'd have saved the money up in cash and gone to a diamond broker for a better deal on a bigger ring. Luckily, I'll never have to shop for another engagement ring as long as I live.