We don't visit the doctor's office very often. We are savers. These two qualities make us perfect for a high-deductible health plan (HDHP). The HD clearly stands for high-deductible, but it also is to remind you that your yearly deductible could buy you a nice HDTV.
Why would we want such a high-deductible? For us, it is because of the low premiums. For example, a single person could pay $9/month for a HDHP versus $90/month for a standard plan. A family could pay $70/month for a HDHP versus $390/month for a standard plan.
With our HDHP, we pay 100% for prescriptions and doctor visits. Again, this is OK for us because we rarely need either. The amount we save per month more than covers these costs. And that is the theory: pay the low premiums, and save the rest for minor health care issues.
The HDHP became even more attractive with the creation of the health savings account (HSA). The government allows people with HDHPs to put pre-tax dollars into an account known as an HSA. The limit for HSA contributions in 2007 is $5650 for families if you have a deductible that they consider "high" (in 2007, at least $2200 for families). You can then use the money in your HSA -- which was never taxed -- to pay for doctor visits, prescriptions, over-the-counter drugs, etc. That is a pretty big benefit!
Many institutions allow you to invest some of your HSA balance in mutual funds, which means that your HSA can grow. Right now, we have a large enough balance to invest in mutual funds, but the fees don't make it worthwhile yet. We plan on having a portion of our HSA invested within the next couple of years.
Don't confuse the HSA with the MSA. You have to spend all of your MSA every year, or the money is gone. Not so with the HSA. The money is yours, whether you use it or not.
What if you end up having a large balance in your HSA? Again, you can always use the funds tax-free for qualified medical expenses. If you use the funds for non-qualified expenses before you are 65, you pay taxes AND a penalty of 10%. But, once you turn 65, the HSA functions a lot like an IRA. Your money has grown tax-deferred, so you pay taxes on withdrawals that are not qualified medical expenses, but you don't have to pay any penalties.
If a high-deductible health plan would fit your needs, it may be worthwhile to switch to one and save some money in the process. The HSA makes the deal even better. As heath insurance premiums continue to rise, the HDHP+HSA can be a good way to keep your costs under control.
Tuesday, May 22, 2007
Friday, May 18, 2007
Eight Good Things About Rising Gas Prices
Don't get me wrong. I am disappointed that I have to spend more to fill up. But this reminds me of the book "Boundaries," and how we should avoid letting external forces control how we feel. Here are some ways that we can adapt to rising gas prices and perhaps become even better off.
1. Get a tune-up. This is standard advice, because this is an easy way to improve gas mileage. New spark plugs, proper air pressure in the tires, oil changes, etc. all help out. But don't forget to realize that this also helps your car last longer and is good preventative measure against breakdowns.
2. Rethink routes and trips. Another standard suggestion. Is there a way you can go to the grocery store, Wal-Mart, and Home Depot in one trip, instead of separate ones? If you make frequent extended trips (say to the mall in a nearby large city), it may be worthwhile to go half as often.
3. Carpooling. I remember this being popularized years ago to save the environment. Now, there is also an economic reason, which will hit much closer to home for most people. Do you ever run into traffic in the morning? Imagine if instead of having one person per car, there were two people per car. That means one of every two cars would not be on the road. Traffic could be greatly reduced.
4. Pressure to improve/add public transportation. I always enjoy going to larger cities because most have well-developed public transportation, such as buses and subways. Smaller cities may feel more pressure to add bus routes as fewer and fewer people will be able to afford to drive as much. Done properly, this could reduce traffic and benefit many commuters.
5. Improve technology. When consumers have a problem, a real problem, with paying for gas, the demand will increase for more fuel efficient vehicles. Hybrids, electric vehicles, and alternative fuels will begin to gain popularity as it becomes profitable for the companies to produce them. It will become profitable when consumers decide they will spend money on these products -- instead of gas.
6. Pedestrian/cyclist friendly roads. Another alternative is to walk or ride a bike. This is difficult in many locations because there are no sidewalks or bicycle lanes. These public improvements can become more worthwhile as gas prices climb. Lots of people have begun to get in shape by walking or riding a bicycle instead of driving.
7. Pressure to look at or create a budget. This is a huge step in adapting to the cost of gas, as opposed to sitting around and complaining. Are you being wasteful in your budget anywhere? Freeing up $50 in one area would mean that you could spend $50 extra dollars in gas. If the $50 came from something that wasn't worthwhile anyway, then you haven't really lost anything.
8. Eventual reduction of dependence on oil. It all boils down to how much we depend on oil. And how things could grind down to a halt without it. This period of rising gas prices may be the right time to make some initially painful adjustments to prepare for what could be the future. If you can make changes in your own life to reduce energy consumption, then a rise in energy prices won't hurt as much.
As many people have pointed out, the various chain emails regarding not buying gas on May 15 (or whatever date) can't really do anything. We'll just buy gas on the 14th or 16th, and they still make their money. That is not to say that we as consumers can't change anything. The problem is that the first step is not quick or simple: We first need to change ourselves.
And there's nothing like gas at $4+ a gallon to make those changes finally seem worthwhile.
1. Get a tune-up. This is standard advice, because this is an easy way to improve gas mileage. New spark plugs, proper air pressure in the tires, oil changes, etc. all help out. But don't forget to realize that this also helps your car last longer and is good preventative measure against breakdowns.
2. Rethink routes and trips. Another standard suggestion. Is there a way you can go to the grocery store, Wal-Mart, and Home Depot in one trip, instead of separate ones? If you make frequent extended trips (say to the mall in a nearby large city), it may be worthwhile to go half as often.
3. Carpooling. I remember this being popularized years ago to save the environment. Now, there is also an economic reason, which will hit much closer to home for most people. Do you ever run into traffic in the morning? Imagine if instead of having one person per car, there were two people per car. That means one of every two cars would not be on the road. Traffic could be greatly reduced.
4. Pressure to improve/add public transportation. I always enjoy going to larger cities because most have well-developed public transportation, such as buses and subways. Smaller cities may feel more pressure to add bus routes as fewer and fewer people will be able to afford to drive as much. Done properly, this could reduce traffic and benefit many commuters.
5. Improve technology. When consumers have a problem, a real problem, with paying for gas, the demand will increase for more fuel efficient vehicles. Hybrids, electric vehicles, and alternative fuels will begin to gain popularity as it becomes profitable for the companies to produce them. It will become profitable when consumers decide they will spend money on these products -- instead of gas.
6. Pedestrian/cyclist friendly roads. Another alternative is to walk or ride a bike. This is difficult in many locations because there are no sidewalks or bicycle lanes. These public improvements can become more worthwhile as gas prices climb. Lots of people have begun to get in shape by walking or riding a bicycle instead of driving.
7. Pressure to look at or create a budget. This is a huge step in adapting to the cost of gas, as opposed to sitting around and complaining. Are you being wasteful in your budget anywhere? Freeing up $50 in one area would mean that you could spend $50 extra dollars in gas. If the $50 came from something that wasn't worthwhile anyway, then you haven't really lost anything.
8. Eventual reduction of dependence on oil. It all boils down to how much we depend on oil. And how things could grind down to a halt without it. This period of rising gas prices may be the right time to make some initially painful adjustments to prepare for what could be the future. If you can make changes in your own life to reduce energy consumption, then a rise in energy prices won't hurt as much.
As many people have pointed out, the various chain emails regarding not buying gas on May 15 (or whatever date) can't really do anything. We'll just buy gas on the 14th or 16th, and they still make their money. That is not to say that we as consumers can't change anything. The problem is that the first step is not quick or simple: We first need to change ourselves.
And there's nothing like gas at $4+ a gallon to make those changes finally seem worthwhile.
Thursday, May 17, 2007
Take a Hint
The government is really trying to help us out. Actually, it's probably trying to help get itself out of a pinch, but we benefit as well. I am talking about the various tax-advantaged savings plans that are out there: 401(k)s, Roth 401(k)s, Roth IRAs, HSAs, etc.
Many of these savings vehicles, such as the 401(k) and Roth IRA, are for retirement. But doesn't the government provide Social Security benefits? I am no authority on the Social Security system, so it will make things much easier on both of us if we just pretend Social Security is not there. If you realize that and take the necessary steps to fund your own retirement, in all likelihood you will be much better off in the long run anyway.
These plans are tax-advantaged, not tax free. So the government will take their cut, and how they do so is one of the main differences between a "Roth" account (e.g., Roth IRA, Roth 401(k)) and a regular account (e.g., 401(k), 403(b)).
Your money goes into a regular account (e.g., 401(k)) before any taxes are taken out. Uncle Sam is very patient in this case. Taxes are not assessed until you withdraw this money during retirement. More often than not, the money will have grown, so he gets more taxes. And don't try to beat the system by not making withdrawls -- there is a certain amount that you have to withdraw once you reach retirement age (specifically, April 1 of the year after the later of: the year you turn 70 1/2 years of age, or the year you retire).
With the "Roth" versions, you first pay taxes on your income. Then you put the after-tax money in your account. From that point on, that money -- and the gains it produces -- is tax-free.
With the Roth IRA you are never required to make a withdrawl. Because this is such a good deal, only people making below a certain income limit are even allowed to contribute to a Roth IRA. (in 2007: adjusted gross income below $166K married filing jointly, $109K single). And, each person can only contribute a maximum of $4000 for 2007.
Let's add to the confusion. With your employer, you can have both a Roth 401(k) and a 401(k). The combined contributions cannot exceed $15,500 in 2007. Plus, the adjusted gross income (AGI) limitations do not apply to these plans. This allows those whose AGI excludes them from a Roth IRA to benefit from tax free growth in the Roth 401(k). But, with the Roth 401(k), you are required to take the minimum distributions.
There is some of strategy involved with regard to taxes; namely, do you want to pay taxes now or later? If your retirement income will be low, then you will have a lower tax rate. Thus, you will pay a relatively small amount of taxes on 401(k) distributions, so the pre-tax contributions (not to mention your company match) here may be more valuable than having tax-free withdrawls.
On the other hand, if you expect to have a large retirement income, one of the Roths may be better for you since your higher tax bracket won't come into play.
We are taking advantage of these plans as much as we can. My wife contributes to a 403(b), and I contribute to a Roth IRA. Ideally, we would start a Roth IRA for her, but we still need some money to live on!
With all these ways the government graciously lets us slide without paying taxes, you would think they're trying to tell us something...and it's not just retirement. Next time: health care.
Many of these savings vehicles, such as the 401(k) and Roth IRA, are for retirement. But doesn't the government provide Social Security benefits? I am no authority on the Social Security system, so it will make things much easier on both of us if we just pretend Social Security is not there. If you realize that and take the necessary steps to fund your own retirement, in all likelihood you will be much better off in the long run anyway.
These plans are tax-advantaged, not tax free. So the government will take their cut, and how they do so is one of the main differences between a "Roth" account (e.g., Roth IRA, Roth 401(k)) and a regular account (e.g., 401(k), 403(b)).
Your money goes into a regular account (e.g., 401(k)) before any taxes are taken out. Uncle Sam is very patient in this case. Taxes are not assessed until you withdraw this money during retirement. More often than not, the money will have grown, so he gets more taxes. And don't try to beat the system by not making withdrawls -- there is a certain amount that you have to withdraw once you reach retirement age (specifically, April 1 of the year after the later of: the year you turn 70 1/2 years of age, or the year you retire).
With the "Roth" versions, you first pay taxes on your income. Then you put the after-tax money in your account. From that point on, that money -- and the gains it produces -- is tax-free.
With the Roth IRA you are never required to make a withdrawl. Because this is such a good deal, only people making below a certain income limit are even allowed to contribute to a Roth IRA. (in 2007: adjusted gross income below $166K married filing jointly, $109K single). And, each person can only contribute a maximum of $4000 for 2007.
Let's add to the confusion. With your employer, you can have both a Roth 401(k) and a 401(k). The combined contributions cannot exceed $15,500 in 2007. Plus, the adjusted gross income (AGI) limitations do not apply to these plans. This allows those whose AGI excludes them from a Roth IRA to benefit from tax free growth in the Roth 401(k). But, with the Roth 401(k), you are required to take the minimum distributions.
There is some of strategy involved with regard to taxes; namely, do you want to pay taxes now or later? If your retirement income will be low, then you will have a lower tax rate. Thus, you will pay a relatively small amount of taxes on 401(k) distributions, so the pre-tax contributions (not to mention your company match) here may be more valuable than having tax-free withdrawls.
On the other hand, if you expect to have a large retirement income, one of the Roths may be better for you since your higher tax bracket won't come into play.
We are taking advantage of these plans as much as we can. My wife contributes to a 403(b), and I contribute to a Roth IRA. Ideally, we would start a Roth IRA for her, but we still need some money to live on!
With all these ways the government graciously lets us slide without paying taxes, you would think they're trying to tell us something...and it's not just retirement. Next time: health care.
Wednesday, May 16, 2007
A Financial Clean Slate
I am very lucky in that my wife and I see eye to eye on more than 95% of personal finance issues. Especially considering that study after study concludes that fights over finances is the top reason couples divorce.
We wanted to start our marriage with a clean slate, money included. There was debt here and there ($60K+ total, give or take a dollar). There were non-retirement investments. There was a money market account. There was a wedding to pay for. Perhaps dangerously, a few weeks after our wedding we orchestrated a reverse-big-bang moment of our finances. We threw all the positives at the negatives and when the dust settled, we had $4000 cash and two paid-for cars.
Two weeks later, we had a little over $1000 and two paid-for cars. One of which had a shiny new transmission!
As I look back, I maybe would be inclined to do it a little differently. Maybe keep some of the debt around for a little longer for the sake of hanging on to some extra cash in case, say, a car transmission went out.
But, then again, what's wrong with taking the gamble we did? Why not have financially lean times right out of the gate, when there is unlimited marital bliss to keep us afloat?
As a young couple, it's tempting to want to imitate our parents' lives. They have the house, the nice furniture, nice cars, nice stuff. So, we could have gone the opposite way than we did. Instead of eliminating the debt, we could have added to it in the form of a mortgage and some new car payments.
But in fact, our route still allowed us to imitate our parents, just at a different time in their lives. When they were newlyweds. Except my parents had much less than we did.
Yes, at the beginning we were a little scared, but our hope is that we now have a solid foundation on which to build our lives. I am sure we haven't seen the last of tough times, but our peace of mind stems from the fact that we took care of the things we had control of before they took control of us.
We wanted to start our marriage with a clean slate, money included. There was debt here and there ($60K+ total, give or take a dollar). There were non-retirement investments. There was a money market account. There was a wedding to pay for. Perhaps dangerously, a few weeks after our wedding we orchestrated a reverse-big-bang moment of our finances. We threw all the positives at the negatives and when the dust settled, we had $4000 cash and two paid-for cars.
Two weeks later, we had a little over $1000 and two paid-for cars. One of which had a shiny new transmission!
As I look back, I maybe would be inclined to do it a little differently. Maybe keep some of the debt around for a little longer for the sake of hanging on to some extra cash in case, say, a car transmission went out.
But, then again, what's wrong with taking the gamble we did? Why not have financially lean times right out of the gate, when there is unlimited marital bliss to keep us afloat?
As a young couple, it's tempting to want to imitate our parents' lives. They have the house, the nice furniture, nice cars, nice stuff. So, we could have gone the opposite way than we did. Instead of eliminating the debt, we could have added to it in the form of a mortgage and some new car payments.
But in fact, our route still allowed us to imitate our parents, just at a different time in their lives. When they were newlyweds. Except my parents had much less than we did.
Yes, at the beginning we were a little scared, but our hope is that we now have a solid foundation on which to build our lives. I am sure we haven't seen the last of tough times, but our peace of mind stems from the fact that we took care of the things we had control of before they took control of us.
Tuesday, May 15, 2007
Emergencies: Money Market vs. Credit Card
I know some pro-debt people, some anti-debt people, and people who don't have a side. I am anti-debt, and despite my tone in some previous posts, it is not because I think lenders are evil and borrowing is morally wrong. We choose to not use debt because anything they can give us, we can give ourselves. Usually better, cheaper, and with less hassle.
When thinking about getting rid of their credit cards, a lot of people ultimately hesitate because of the thought of emergencies. In a pinch, they have instant access to a few thousand dollars, graciously provided by their credit card company. What's the harm?
When I am faced with complicated or even simple mathematical arguments that "prove" certain financial decisions are smarter than others, I always remember that there is a human being who actually has to execute the "smart" financial plan. And even if I only had my own behavior to judge from, I know that the human being will find very innovative ways to mess it up.
My stance on the issue of emergencies is to first get rid of debts. The monthly cash flow that you free up will go a long way in taking care of the little emergencies. Then, create an emergency fund. Put a few months worth of expenses in an money market account. If your credit card makes you feel safe, then put an amount equal to your credit limit in there. Except now, somebody is paying you interest instead of vice-versa.
I acknowledge that there are smarter financial investments for that cash. But I still am a fan of the emergency fund instead of credit cards.
First, if you have sacrificed to save all that money up, your definition of "emergency" will forever be different. You will not want to part with that money easily! For all but the worst emergencies, you will find creative ways to take care of things, such as with cash flow or modified budgets.
In contrast, that credit card sure is easy to use. And everything is an emergency.
Second, many emergencies arise because of poor planning. Again, the fact that it's your cash will give you an entirely new perspective. You will save up the money for new clothes this summer. And that trip. Summer comes every year; don't be surprised to see it. But when we don't plan, we do get surprised by many things like this.
Third, while many people tell me that the smart financial investment is to put my money in the stock market and keep the credit card around, I do have other money that is invested, in retirement accounts and otherwise. To me, the emergency fund is a different kind of investment. To the extent that having some money in the bank can provide peace and security, it provides peace and security. And there are a lot fewer things for me to mess up.
When thinking about getting rid of their credit cards, a lot of people ultimately hesitate because of the thought of emergencies. In a pinch, they have instant access to a few thousand dollars, graciously provided by their credit card company. What's the harm?
When I am faced with complicated or even simple mathematical arguments that "prove" certain financial decisions are smarter than others, I always remember that there is a human being who actually has to execute the "smart" financial plan. And even if I only had my own behavior to judge from, I know that the human being will find very innovative ways to mess it up.
My stance on the issue of emergencies is to first get rid of debts. The monthly cash flow that you free up will go a long way in taking care of the little emergencies. Then, create an emergency fund. Put a few months worth of expenses in an money market account. If your credit card makes you feel safe, then put an amount equal to your credit limit in there. Except now, somebody is paying you interest instead of vice-versa.
I acknowledge that there are smarter financial investments for that cash. But I still am a fan of the emergency fund instead of credit cards.
First, if you have sacrificed to save all that money up, your definition of "emergency" will forever be different. You will not want to part with that money easily! For all but the worst emergencies, you will find creative ways to take care of things, such as with cash flow or modified budgets.
In contrast, that credit card sure is easy to use. And everything is an emergency.
Second, many emergencies arise because of poor planning. Again, the fact that it's your cash will give you an entirely new perspective. You will save up the money for new clothes this summer. And that trip. Summer comes every year; don't be surprised to see it. But when we don't plan, we do get surprised by many things like this.
Third, while many people tell me that the smart financial investment is to put my money in the stock market and keep the credit card around, I do have other money that is invested, in retirement accounts and otherwise. To me, the emergency fund is a different kind of investment. To the extent that having some money in the bank can provide peace and security, it provides peace and security. And there are a lot fewer things for me to mess up.
Monday, May 14, 2007
Do You Really Need A Credit Card?
I got my first credit card when I started college, and man, was I proud. I had a $500 credit limit. But I must say that I never really "got" the concept of credit cards. In my naive world, I never would have dreamed of spending money I didn't have. So why would I use my credit card to buy stuff, only to turn around and pay off the credit card at the end of the month? That seems like an unnecessary step.
I was "building my credit," of course!
I remember one month my bill was due on a Sunday. I tried to pay my balance online, and it didn't look like it went through. I thought I messed up, so I tried again. The next day, I found out that in addition to taking both payments, I was charged a late fee because processing didn't take place on Sundays. I called the company and explained that I tried to pay my bill (twice) on time, so I shouldn't have to pay the late fee. Eventually, the representative conceded a "one-time" removal of the late fee. That was close!
A few years later, I got a card that had "Rewards." I never made the All-Star team in little league, but I was a winner now! Even better, I was taking advantage of the credit card companies big time!
Still Naive
The truth is that a credit card is not necessary to build credit. If you can show proof that you pay your bills and rent payments on time, you qualify for the best mortgage rates. The trick is to find a lender that does manual underwriting, instead of a lender that uses ">" and "<" as its main tools in determining whether or not you get a mortgage and what your rate is.
Since my small victory with getting my late fee removed, I have heard countless stories of credit card companies being extremely difficult to work with. They waited until after the due date to apply someone's payment (a check), thus producing a late fee. I have heard some cryptic rules, such as: if your online payment is made before 11:59AM of the due date, it is considered on time. Otherwise, it's late.
But I saw these companies at their worst when I tried to cancel my cards. I really couldn't believe that a business would spread so many outright lies in order to intimidate me into not canceling. They told me that I need a credit card to book a hotel room. Which was funny, because I had used my debit card numerous times. Well, you can't rent a car without a credit card. Wrong again. I had rented several cars with my debit card. And on, and on. I didn't think she ever cancel my card. After forty-five minutes, my account was finally canceled. And if there was some doubt in my mind before, it was gone: I was forever done with credit cards.
But wait! Wasn't I robbing the bank with all those reward points? Well, not really. I am not accusing anyone else of doing this, but from time to time, I found myself buying something that cost a little more because I was getting reward points. Or maybe I'd buy one or two more things to increase my points balance. Once I realized this, I felt sort of stupid. Mainly over the things I would do for some more points, to "win" more.
Then, I took a big step back, looked around, and thought about what was going on. Who was winning? The people that pour almost limitless money into focus groups and consumer research to figure out our every move, or the guy spending $100 on stuff he doesn't need so he can get $1 back?
They know what they are doing. As consumers, we often do not. But I knew exactly what I was doing when I emptied out my wallet, had several forty-five minute conversations with some nice ladies, and made some plastic confetti.
And now I get to keep $100 for every $100 I don't spend on junk, and that sounds like a real reward to me.
I was "building my credit," of course!
I remember one month my bill was due on a Sunday. I tried to pay my balance online, and it didn't look like it went through. I thought I messed up, so I tried again. The next day, I found out that in addition to taking both payments, I was charged a late fee because processing didn't take place on Sundays. I called the company and explained that I tried to pay my bill (twice) on time, so I shouldn't have to pay the late fee. Eventually, the representative conceded a "one-time" removal of the late fee. That was close!
A few years later, I got a card that had "Rewards." I never made the All-Star team in little league, but I was a winner now! Even better, I was taking advantage of the credit card companies big time!
Still Naive
The truth is that a credit card is not necessary to build credit. If you can show proof that you pay your bills and rent payments on time, you qualify for the best mortgage rates. The trick is to find a lender that does manual underwriting, instead of a lender that uses ">" and "<" as its main tools in determining whether or not you get a mortgage and what your rate is.
Since my small victory with getting my late fee removed, I have heard countless stories of credit card companies being extremely difficult to work with. They waited until after the due date to apply someone's payment (a check), thus producing a late fee. I have heard some cryptic rules, such as: if your online payment is made before 11:59AM of the due date, it is considered on time. Otherwise, it's late.
But I saw these companies at their worst when I tried to cancel my cards. I really couldn't believe that a business would spread so many outright lies in order to intimidate me into not canceling. They told me that I need a credit card to book a hotel room. Which was funny, because I had used my debit card numerous times. Well, you can't rent a car without a credit card. Wrong again. I had rented several cars with my debit card. And on, and on. I didn't think she ever cancel my card. After forty-five minutes, my account was finally canceled. And if there was some doubt in my mind before, it was gone: I was forever done with credit cards.
But wait! Wasn't I robbing the bank with all those reward points? Well, not really. I am not accusing anyone else of doing this, but from time to time, I found myself buying something that cost a little more because I was getting reward points. Or maybe I'd buy one or two more things to increase my points balance. Once I realized this, I felt sort of stupid. Mainly over the things I would do for some more points, to "win" more.
Then, I took a big step back, looked around, and thought about what was going on. Who was winning? The people that pour almost limitless money into focus groups and consumer research to figure out our every move, or the guy spending $100 on stuff he doesn't need so he can get $1 back?
They know what they are doing. As consumers, we often do not. But I knew exactly what I was doing when I emptied out my wallet, had several forty-five minute conversations with some nice ladies, and made some plastic confetti.
And now I get to keep $100 for every $100 I don't spend on junk, and that sounds like a real reward to me.
Friday, May 11, 2007
Pay Now, or Pay Later
Until about two years ago, we subscribed to the "Pay It Later" philosophy. College, cars, and stuff in general were financed by Sallie Mae, Ford, and Visa, respectively. The plan was to pay for everything once we get jobs. Sounds good at the time, until it's time to pay! Every month, Sallie wanted $450, Ford wanted $250, and Visa wanted $100.
What exactly were we paying for again? In order of least stupid to most stupid, I'd rank them: Sallie, Ford, Visa. Notice I didn't call any of them smart, but that's for another day. I am going to start with that little plastic genie. Some people want a security blanket, some people want a time machine, some people want to beat the system, and some people want a little too much. The credit card all too often seems like the answer. Because, let's face it: Life takes Visa.
If the commercials wouldn't conveniently end after we hear that, the next sentence would be: And Visa takes your money.
There are really two camps when it comes to credit cards: Those that are accumulating credit card debt, and those that buy things with credit cards but pay the entire balance each month.
I think the biggest problem with accumulating credit card debt is that one day you wake up and you have a few hundred or thousand dollars in credit card debt and you have no idea what you spent it on. So let's group all that unknown stuff together and call it nothing. That's right, you're paying all that interest on nothing. Your payment was late last month? Another $30 in late fees for nothing.
Wait! You remembered that you used the cards for groceries a few times and to go out to dinner every now and then. We can finally put a name to what the balance, interest, and fees are going towards. So what can you show for all that stuff now...umm...nevermind, we'll stick to calling it nothing.
For the accumulators, it boils down to the fact that this is a very expensive way to live. The situation is worse when you add the fact that credit cards make it easier to buy more stuff than you really need. It is almost universal that if you pay later, you always pay more, and this is very evident when you are carrying credit card debt. You may as well be flushing your hard-earned money down the toilet. (In some cases, as we almost discovered above, you are.)
It is not easy to break this cycle, but it is worthwhile. Then you can live a much less complicated life, the way people used to do it before credit. When you want something, you save up for it. If you're in a hurry, make some extra money by doing some extra work. Maybe we can just call sweat the "early fee." Imagine: no more statements, no more paying interest on everything, and a wallet with more paper and less plastic.
If you are an accumulator and would like to stop being one, I recommend Dave Ramsey's plan. It has worked for thousands of people who were probably in much worse situations than you are. If you are an accumulator and would like to continue being one, wow.
But the full balance payers have it all under control, right? Well, as a former member of this passionate group, I would have to say, "No!" I will give my reasons next time, and you will earn one point for every minute you wait.
What exactly were we paying for again? In order of least stupid to most stupid, I'd rank them: Sallie, Ford, Visa. Notice I didn't call any of them smart, but that's for another day. I am going to start with that little plastic genie. Some people want a security blanket, some people want a time machine, some people want to beat the system, and some people want a little too much. The credit card all too often seems like the answer. Because, let's face it: Life takes Visa.
If the commercials wouldn't conveniently end after we hear that, the next sentence would be: And Visa takes your money.
There are really two camps when it comes to credit cards: Those that are accumulating credit card debt, and those that buy things with credit cards but pay the entire balance each month.
I think the biggest problem with accumulating credit card debt is that one day you wake up and you have a few hundred or thousand dollars in credit card debt and you have no idea what you spent it on. So let's group all that unknown stuff together and call it nothing. That's right, you're paying all that interest on nothing. Your payment was late last month? Another $30 in late fees for nothing.
Wait! You remembered that you used the cards for groceries a few times and to go out to dinner every now and then. We can finally put a name to what the balance, interest, and fees are going towards. So what can you show for all that stuff now...umm...nevermind, we'll stick to calling it nothing.
For the accumulators, it boils down to the fact that this is a very expensive way to live. The situation is worse when you add the fact that credit cards make it easier to buy more stuff than you really need. It is almost universal that if you pay later, you always pay more, and this is very evident when you are carrying credit card debt. You may as well be flushing your hard-earned money down the toilet. (In some cases, as we almost discovered above, you are.)
It is not easy to break this cycle, but it is worthwhile. Then you can live a much less complicated life, the way people used to do it before credit. When you want something, you save up for it. If you're in a hurry, make some extra money by doing some extra work. Maybe we can just call sweat the "early fee." Imagine: no more statements, no more paying interest on everything, and a wallet with more paper and less plastic.
If you are an accumulator and would like to stop being one, I recommend Dave Ramsey's plan. It has worked for thousands of people who were probably in much worse situations than you are. If you are an accumulator and would like to continue being one, wow.
But the full balance payers have it all under control, right? Well, as a former member of this passionate group, I would have to say, "No!" I will give my reasons next time, and you will earn one point for every minute you wait.
Thursday, May 10, 2007
In Case You Only Knew Him From Comedy Central
Ben Stein is an established economist. How do you think he had all that money for people to win? I enjoy reading his weekly articles on Yahoo! Finance.
Here is an article from a couple of weeks ago on the benefits of financial simplicity. I thought it went well with some of my previous posts. Ben (yes, we're on a first name basis) provides two contrasting examples of how the choices we make now can either add unnecessary financial risk to our lives or create additional barriers against risk.
The article also reminded me that I wanted to clear up another misunderstanding about budgeting and saving. It is not wrong to buy that nice car if you want it. It is not wrong to go shopping. The issue is the timing of your purchases. If we had no money in the bank, my wife wouldn't spend $100 of her paycheck on some new shoes. She knows that there is no barrier between us and the unexpected. Unless she were able to kick our way out of an unforeseen problem, the shoes would be of no value to us.
On the other hand, if we had been diligent and had $200,000 in the bank, we wouldn't bat an eye if she bought ten pairs of shoes. Because she wasn't using money we may need for groceries if our car breaks down.
So our circumstances dictate what would be irresponsible. The item itself is irrelevant.
By starting to budget and grow savings, you are not embarking on some gloomy journey of denial for the rest of your life. I encourage you to become financially ready before you begin fulfilling your wants. You will then be able to purchase without guilt and enjoy your things more.
Though, if you're like us, the process of taking control of your finances will take you a long way towards taking control of your life. And you may realize that the things you truly want do not cost money.
Here is an article from a couple of weeks ago on the benefits of financial simplicity. I thought it went well with some of my previous posts. Ben (yes, we're on a first name basis) provides two contrasting examples of how the choices we make now can either add unnecessary financial risk to our lives or create additional barriers against risk.
The article also reminded me that I wanted to clear up another misunderstanding about budgeting and saving. It is not wrong to buy that nice car if you want it. It is not wrong to go shopping. The issue is the timing of your purchases. If we had no money in the bank, my wife wouldn't spend $100 of her paycheck on some new shoes. She knows that there is no barrier between us and the unexpected. Unless she were able to kick our way out of an unforeseen problem, the shoes would be of no value to us.
On the other hand, if we had been diligent and had $200,000 in the bank, we wouldn't bat an eye if she bought ten pairs of shoes. Because she wasn't using money we may need for groceries if our car breaks down.
So our circumstances dictate what would be irresponsible. The item itself is irrelevant.
By starting to budget and grow savings, you are not embarking on some gloomy journey of denial for the rest of your life. I encourage you to become financially ready before you begin fulfilling your wants. You will then be able to purchase without guilt and enjoy your things more.
Though, if you're like us, the process of taking control of your finances will take you a long way towards taking control of your life. And you may realize that the things you truly want do not cost money.
Wednesday, May 9, 2007
Why Not to Budget
Our first budget worked. Eventually. Maybe it was the 10th version. The sheet of paper that it was written on was not, however, full of scratch-outs and erasures. That's because my wife insisted on a total rewrite each time.
It took that many attempts because we didn't really know what to expect. How much were the utility bills going to be in our new apartment? I don't know? $100? $500??? We also wanted to be realistic with the cash we allocated in our envelopes. Should we put less money in the clothing envelope to pay off debt faster, or should we allow ourselves more so we at least wouldn't look broke?
Rest assured, the process does get easier quickly. If you are truly determined to live by your budget, there are lots of people like us that will be very proud of you. And I hope you take pride in yourself as well, because it probably won't be long until you experience the dark side of budgeting.
What will happen to you may shock you. First -- making the budget will become easy, and you will actually be able to live by it and be very used to the limits that are placed on your money. It may be the first time in your adult life that you made a plan, set out goals, and made positive progress towards them. It will make you proud and happy, maybe even peaceful, inside...
Until you have to deal with your family and friends, who, incidentally, are not on a budget. "Why can't you come out to dinner at the expensive restaurant with us? Don't you love us anymore?" "We're going to the movies, and if you were a true friend, you would come, too. No, we're not renting a movie, or even going to the matinee. We're going at night because it costs more." "What is wrong with you?" "Are you happy?"
You will be doing lots of traveling during the first few months of following your budget. But don't worry. Guilt trips are free.
I made most of those questions up, but, "Are you happy?" was indeed asked of my wife a few months before we got married. She was explaining to someone that she did not want to go shopping because she didn't need anything and frankly, she couldn't afford to go. The question hurt her, mainly because of who asked it. It took her some time to get over, and now we are somewhat amused by it. But this brings up two points. First, she was happy. She was taking control of her life and she saw all the possibilities that she was opening up for her future. Second, the emotion and pain brought out with that question could have been enough for her to throw the budget out of the window. But she didn't, and I am proud of her for showing the toughness to stick with it.
In our case, our friends are still here, and our family is still here. Some of them have even been impressed by what we have done and tried it themselves. So it's not all bad.
Getting on a budget is scary because we don't want to give up anything. The decrees are all around us: "Enjoy your youth." "Live in the moment." "Be spontaneous." But we found that a budget does not have to go against any of this. We spend a lot of time outdoors; for instance, walking and jogging. Both are free, we get to spend time together and talk, and improve our health. There are lots of other examples of having fun without spending lots of money.
I prefer the quote: "Youth is wasted on the young." We have time on our side, and we fully intend to use it. To us, this means that we are cleaning up our messes (debts) quickly and not leaving them for us to take care of -- in much worse condition -- when we are older. Instead, we hope to take advantage of the time we have by enjoying the simple things in life...and we're satisfied to wait for the rewards of our labors because we're happy now.
It took that many attempts because we didn't really know what to expect. How much were the utility bills going to be in our new apartment? I don't know? $100? $500??? We also wanted to be realistic with the cash we allocated in our envelopes. Should we put less money in the clothing envelope to pay off debt faster, or should we allow ourselves more so we at least wouldn't look broke?
Rest assured, the process does get easier quickly. If you are truly determined to live by your budget, there are lots of people like us that will be very proud of you. And I hope you take pride in yourself as well, because it probably won't be long until you experience the dark side of budgeting.
What will happen to you may shock you. First -- making the budget will become easy, and you will actually be able to live by it and be very used to the limits that are placed on your money. It may be the first time in your adult life that you made a plan, set out goals, and made positive progress towards them. It will make you proud and happy, maybe even peaceful, inside...
Until you have to deal with your family and friends, who, incidentally, are not on a budget. "Why can't you come out to dinner at the expensive restaurant with us? Don't you love us anymore?" "We're going to the movies, and if you were a true friend, you would come, too. No, we're not renting a movie, or even going to the matinee. We're going at night because it costs more." "What is wrong with you?" "Are you happy?"
You will be doing lots of traveling during the first few months of following your budget. But don't worry. Guilt trips are free.
I made most of those questions up, but, "Are you happy?" was indeed asked of my wife a few months before we got married. She was explaining to someone that she did not want to go shopping because she didn't need anything and frankly, she couldn't afford to go. The question hurt her, mainly because of who asked it. It took her some time to get over, and now we are somewhat amused by it. But this brings up two points. First, she was happy. She was taking control of her life and she saw all the possibilities that she was opening up for her future. Second, the emotion and pain brought out with that question could have been enough for her to throw the budget out of the window. But she didn't, and I am proud of her for showing the toughness to stick with it.
In our case, our friends are still here, and our family is still here. Some of them have even been impressed by what we have done and tried it themselves. So it's not all bad.
Getting on a budget is scary because we don't want to give up anything. The decrees are all around us: "Enjoy your youth." "Live in the moment." "Be spontaneous." But we found that a budget does not have to go against any of this. We spend a lot of time outdoors; for instance, walking and jogging. Both are free, we get to spend time together and talk, and improve our health. There are lots of other examples of having fun without spending lots of money.
I prefer the quote: "Youth is wasted on the young." We have time on our side, and we fully intend to use it. To us, this means that we are cleaning up our messes (debts) quickly and not leaving them for us to take care of -- in much worse condition -- when we are older. Instead, we hope to take advantage of the time we have by enjoying the simple things in life...and we're satisfied to wait for the rewards of our labors because we're happy now.
Tuesday, May 8, 2007
Budgeting: Why?
I suppose it could have made more sense to motivate budgeting before explaining how we do it. But, lots of people give all kinds of reasons to budget without ever giving their idea of what a budget is. And, people have very broad and sometimes loose definitions of a budget. I decided to avoid confusion and give you my idea of a budget first.
Back to the topic: Why do this? I could enumerate reason after reason, but, again, you have probably heard them all before. Instead, I will focus on how our reasons evolved over time as we went through extensive premarital preparations (retreats, counseling, etc.), talked with each other, and read a few books.
Even if you have no intention of following a budget, I would encourage you to write yours down. That way, you can see what is happening to your money every month. A budget is a money map that works in one of two ways. At first, you are standing somewhere and recording what you see around you. In this situation, your money is telling you where you are, and where you're going.
This is scary, until you realize that given some discipline, you can decide where you are going. When you take control of your budget, you slowly begin to be able to change some of the landscape to your liking.
This is where we began. We didn't want to start out our life together in denial about our money, and when we told our budget the truth, our budget told us the truth! This is hard at first. We eventually became more sophisticated in our understanding of finances, so we decided to remove some eyesores to improve our daily scenery.
Once we got married, we had over $60,000 in debt combined. Debt shows up in your budget as big, ugly minus signs. We clearly didn't like to have to make payments every month, but we hated that the payments drastically reduced what we would be able to save. To us, that path looked like us never actually having any money. If anything unexpected came up, we would have to use more debt to take care of it. But then our payments would go up. That path was just a hamster wheel!
Our budget gave us very clear motivation to get rid of that debt. Which we did. Not only do we now have some money in savings, but without those payments, we have great cash flow in our budget and can handle lots of small emergencies on the fly with the extra monthly cash.
Now, we try to look farther down the road. We have begun to ask those philosophical questions of "What is our purpose?" and "What are our goals in life?" One of our goals is to have enough wealth so that we can take care of ourselves and help other people. A lot. Our budget is the key to achieving our goal because it helps us win in the trenches of day-to-day life, and soon those battles add up! (Incidentally, you may be surprised at how many goals ultimately rely on your budget.)
That is where we are, and I still think we have a long way to go. Don't be afraid find out where you are. The sooner you do that, the sooner you can get to where you want to be.
Back to the topic: Why do this? I could enumerate reason after reason, but, again, you have probably heard them all before. Instead, I will focus on how our reasons evolved over time as we went through extensive premarital preparations (retreats, counseling, etc.), talked with each other, and read a few books.
Even if you have no intention of following a budget, I would encourage you to write yours down. That way, you can see what is happening to your money every month. A budget is a money map that works in one of two ways. At first, you are standing somewhere and recording what you see around you. In this situation, your money is telling you where you are, and where you're going.
This is scary, until you realize that given some discipline, you can decide where you are going. When you take control of your budget, you slowly begin to be able to change some of the landscape to your liking.
This is where we began. We didn't want to start out our life together in denial about our money, and when we told our budget the truth, our budget told us the truth! This is hard at first. We eventually became more sophisticated in our understanding of finances, so we decided to remove some eyesores to improve our daily scenery.
Once we got married, we had over $60,000 in debt combined. Debt shows up in your budget as big, ugly minus signs. We clearly didn't like to have to make payments every month, but we hated that the payments drastically reduced what we would be able to save. To us, that path looked like us never actually having any money. If anything unexpected came up, we would have to use more debt to take care of it. But then our payments would go up. That path was just a hamster wheel!
Our budget gave us very clear motivation to get rid of that debt. Which we did. Not only do we now have some money in savings, but without those payments, we have great cash flow in our budget and can handle lots of small emergencies on the fly with the extra monthly cash.
Now, we try to look farther down the road. We have begun to ask those philosophical questions of "What is our purpose?" and "What are our goals in life?" One of our goals is to have enough wealth so that we can take care of ourselves and help other people. A lot. Our budget is the key to achieving our goal because it helps us win in the trenches of day-to-day life, and soon those battles add up! (Incidentally, you may be surprised at how many goals ultimately rely on your budget.)
That is where we are, and I still think we have a long way to go. Don't be afraid find out where you are. The sooner you do that, the sooner you can get to where you want to be.
Monday, May 7, 2007
Budgeting: How?
Our budget is the single most important thing we do to control our finances. We have been following Dave Ramsey's method, and it has worked great for us. Our actual implementation of the budget is a little different, but it makes sense to us. I get paid every two weeks, and my wife gets paid on the 15th and 30th of the month. My paychecks fund the envelopes -- more on that later. Her paychecks fund rent, bills, and charitable giving. We write each paycheck we'll get that month in chronological order on a piece of paper, leaving some space below each to write the expenses that will be taken out of each one. Some of the bills haven't come in yet, but we use last month's bill to estimate this month's for purposes of writing this down. This is an example budget for the month of May:
Income: Wife paycheck (April 30): $100
Expenses:
Rent: $50
Electric bill: $5
Phone bill: $3
Water bill: $5
Savings: $37
Income: My paycheck (May 4): $80
Expenses:
Groceries: $20
Restaurant: $5
Gas: $12
Misc.: $15
Clothes: $12
Savings: $16
Income: Wife paycheck (May 15): $100
Expenses:
Giving: $50
Professional Society membership dues: $5
Cell phone bill: $4
Savings: $41
Income: My paycheck (May 18): $80
Expenses:
(Same as May 4, but I would write it out again on the actual budget)
This is our plan for the month. If things arise, we make the necessary adjustments as we go, but we try to separate things we want to change (like add extra $ to the restaurant budget) and things we need to change (electric bill turned out to be $6, so we only get to save $36). Note that in the budget, all of the money is accounted for. In the first section, we have $100 income, and $100 outgo (technically, we keep the savings, but ssssh! Don't tell that to our budget!).
Living by your budget is hard, and maybe impossible, to do at the beginning. But when we started, we desperately needed those "savings" amounts, so we stuck with it. Now it is second nature. We still sit down around the end of the month and write down the budget for the next month. If we know something is going to happen, like an out of town wedding, the related expenses become items that are written down in our budget. Sometimes we'll use gas, grocery, misc, and/or restaurant money that we have budgeted anyway to offset some of these costs so we can still have some good savings. How does that work? The "E" word.
Perhaps even more frightening than the budget is the envelopes! They give you paper cuts, the glue tastes bad, and now this. As you can see, in my fictitious world, my wife and I have agreed to budget $20 for two weeks of groceries, $5 for going out to eat, $12 for our car gas, $12 for clothing (guess who spends that), and $15 for those miscellaneous expenses that always seem to pop up. To the surprise of many people: yes, we do go to the ATM once my paycheck has been direct deposited. We look to the left, look to the right, and withdraw $64. We take this cash, and divvy it up into the envelopes as outlined in the budget. If there is money in the envelope, we are allowed -- guilt-free -- to spend it. But we better be smart, because once the envelope is empty, all we can do is count down the days until my next paycheck...
A common reaction to this horrific story is, "WHAT?? But...what if we run out of grocery money? Won't I starve to death? Trees are cut down to make envelopes!! And the glue from envelopes killed George's fiancee on Seinfeld!!..." and other things about the world ending. I can think of two responses to this:
1. Be realistic with the amounts you decide upon. The point is not to starve you to death, but to give you the sense that your money is not bottomless. You may even make smarter decisions at the grocery store that could help your overall health (Honey, why can't we get 5 packs of Oreos???).
2. Sometimes it's good to be hungry.
Income: Wife paycheck (April 30): $100
Expenses:
Rent: $50
Electric bill: $5
Phone bill: $3
Water bill: $5
Savings: $37
Income: My paycheck (May 4): $80
Expenses:
Groceries: $20
Restaurant: $5
Gas: $12
Misc.: $15
Clothes: $12
Savings: $16
Income: Wife paycheck (May 15): $100
Expenses:
Giving: $50
Professional Society membership dues: $5
Cell phone bill: $4
Savings: $41
Income: My paycheck (May 18): $80
Expenses:
(Same as May 4, but I would write it out again on the actual budget)
This is our plan for the month. If things arise, we make the necessary adjustments as we go, but we try to separate things we want to change (like add extra $ to the restaurant budget) and things we need to change (electric bill turned out to be $6, so we only get to save $36). Note that in the budget, all of the money is accounted for. In the first section, we have $100 income, and $100 outgo (technically, we keep the savings, but ssssh! Don't tell that to our budget!).
Living by your budget is hard, and maybe impossible, to do at the beginning. But when we started, we desperately needed those "savings" amounts, so we stuck with it. Now it is second nature. We still sit down around the end of the month and write down the budget for the next month. If we know something is going to happen, like an out of town wedding, the related expenses become items that are written down in our budget. Sometimes we'll use gas, grocery, misc, and/or restaurant money that we have budgeted anyway to offset some of these costs so we can still have some good savings. How does that work? The "E" word.
Perhaps even more frightening than the budget is the envelopes! They give you paper cuts, the glue tastes bad, and now this. As you can see, in my fictitious world, my wife and I have agreed to budget $20 for two weeks of groceries, $5 for going out to eat, $12 for our car gas, $12 for clothing (guess who spends that), and $15 for those miscellaneous expenses that always seem to pop up. To the surprise of many people: yes, we do go to the ATM once my paycheck has been direct deposited. We look to the left, look to the right, and withdraw $64. We take this cash, and divvy it up into the envelopes as outlined in the budget. If there is money in the envelope, we are allowed -- guilt-free -- to spend it. But we better be smart, because once the envelope is empty, all we can do is count down the days until my next paycheck...
A common reaction to this horrific story is, "WHAT?? But...what if we run out of grocery money? Won't I starve to death? Trees are cut down to make envelopes!! And the glue from envelopes killed George's fiancee on Seinfeld!!..." and other things about the world ending. I can think of two responses to this:
1. Be realistic with the amounts you decide upon. The point is not to starve you to death, but to give you the sense that your money is not bottomless. You may even make smarter decisions at the grocery store that could help your overall health (Honey, why can't we get 5 packs of Oreos???).
2. Sometimes it's good to be hungry.
About
My wife and I are recently married, and we are quickly finding out a lot about how life works. One huge part of this has been in our finances. This blog will include some of my thoughts on how money has impacted our lives as a young couple. Our point of view stems from two ideas: simplicity and self sufficiency.
I hope the information will be useful, and I look forward to your comments.
I hope the information will be useful, and I look forward to your comments.
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