My Leap Year Post

February has ended up being quite the fun month for me. Between finance committee meetings at church, valentine’s with my wife, get-togethers with a few friends and hosting a weekly small group, I’m ending the month looking back on it as a socially active one, but still energized.

I’ve made good on a resolution to put myself “out there” more to build friendships and it appears to be working. The odd thing is that I’m enjoying all of it. Even better is that on the horizon my wife and I are cleared to host Dave Ramsey’s FPU at our church and will be facilitating our first class in the spring. And we’re going to get our first look at everything that is Charlotte during the spring. Oh, and we might have an awesomely cool roommate for two months in the summer, but more on that later if and when it happens!

But so far I’ve loved and enjoyed playing host to people at our apartment. I suppose opening your home to people is a pretty decent metaphor for opening yourself up to other people. I have felt really relaxed and confident lately in myself and my abilities, and that’s even before taking into consideration the monster January and February jump in the stock market!

Baby talk has also kind of dominated our household as of late. One of my brother’s and his wife are expecting their first around St. Patrick’s Day, and my wife’s youngest niece, 4 months old, for the first time in her young life is off medications and relatively healthy. With the topic being fresh on our minds almost daily, my wife and I have had our share of family planning discussions. For me, I wouldn’t be disappointed or sad one bit if my wife told me she were pregnant right now. In fact I think I would be really happy. 9 months from today, we will be 2 months into a debt free marriage, we have had our costs under control for years now and we’ve had lots of practice to master our budgets. Although ideally this is something I would specifically want in 2-3 years, it wouldn’t hurt if our hands were forced to bring a life into the world today J

I’m looking forward to the rest of this year and in fact this time next month. I expect to surpass the quarter of a million dollar mark by the end of the quarter and will happily provide my insight and forecast to the market. But for now I say bring on Spring!  

My Thoughts on...Home Mortgages

Home mortgages are a rip-off. Working in combination with credit cards, I believe they are the reason national mega-banks have the biggest buildings in major metropolitan areas. These “Goliaths” have built their empires off the backs and dollars of the uninformed and unprepared public. But rather than rant and rave like an “occupier,” I’m going to offer my anecdote: informing and empowering the same public so that we can make the best decisions for ourselves.

Personally I will never pay anyone or any entity another penny in interest ever again. I do not and will never borrow money again for the rest of my life. I cannot stand the idea of adding a monthly payment on top of paying interest rather than investing and making interest for myself.

I will admit though that most people are not as fanatical as I in their hatred of debt. So in an effort to inform I will play the “if I were to take out a mortgage” card. My ultimate goal would be to pay as little interest as possible. Arm(s), variable rates, balloons and jumbos are all out of the question. I would want to control as much as I can every month which includes the interest rate paid and the monthly minimum payment. Sure rates are at historic lows today, but why would you want to buy a variable interest rate loan when rates are at the bottom? Because take a wild guess at where they are going to go?!

Dave Ramsey advocates only taking out a 15 year fixed rate mortgage, putting at least 20% down and having monthly a minimum payment that does not exceed 25% of your household take home pay. Personally, I advocate as well with “The Ramsey Way,” but would recommend putting as much as humanly possible down. Also, when shopping for a mortgage, use fees as a screener to filter who you want to buy your loan from. If the geniuses at a bank have an option for bi-weekly payments and want to charge you a fee for the privilege, then kick them to the curb and look for someone not trying to take advantage of you. The goals here are simple: pay as little interest as possible and pay little to no fees. Putting at least 20% down helps you avoid PMI (prepaid mortgage insurance), but don’t let these bastards pick at your pockets all the way home. Between the costs associated with inspections, land surveys, appraisals, home insurance, replacement costs and earnest money, the last thing you need is the mortgage provider nickel and diming you to setup a “special payment schedule.”

Why a 15 over a 30 year fixed rate mortgage? In two words, interest savings. Using Dave’s handy-dandy mortgage calculator we’ll take a look at a $200,000 mortgage, using fixed rates as of today from a nation-wide mortgage lender. As of today, a 30 year fixed stands at around 3.75% If taken out today, paying monthly minimum payments of over $900, when everything is said and done and the balance stands at 0, I would have paid $133,446.41 just in interest to the lender on top of the principal borrowed: this is not a smart plan. So you see, it’s in the lender’s INTEREST to chain you inside a 30-year mortgage. The illusion of paying a lower monthly payment versus a 15-year mortgage generates more income for the lender thanks to the power of compound interest. The end result is that I ended up paying $333,446.41 over 30 years for a $200,000 home.

Onto the 15! At the same lender a 15 year fixed rate mortgage stands at 3.125% Monthly minimum payments went up to over $1,300, but the total interest paid when the balance hits 0 having only paid monthly minimums is $50,782.98

The difference between a 15 and 30 year loan on the same amount borrowed is over $80,000!!!

Qualifying

The last piece that I want to touch on is a myth regarding qualifying for a home mortgage if you live “Ramsey.” Yes, if you live “Ramsey” you have 0 credit cards, paid off your student loans, buy used cars, and disdain all forms of debt. So yes, a mega-bank that uses a credit score lending for dummies approach to their business will turn you down. Who will lend to you? Responsible lenders that do actual underwriting in their lending business. This means they look at meaningful financial details in your life like: historical payments on utilities and rent, your income over the past few years and that you are not taking on too big of a loan. This mean’s that you will end up shopping around with responsible regional banks, local credit unions and community banks: I.E. ENTITIES SMART ENOUGH TO STAY AWAY FROM SUB-PRIME LOANS AND LEND TO RESPONSIBLE BORROWERS.

Which is now you J

My Tax Bill

11% That is the number that has recently befuddled and amazed me recently. For mega nerds like myself across the United States, most of our 2011 financial information has been finalized and received, and we’ve gotten an excellent jump on starting and finishing filing our taxes.

In our household, my super awesome wife compiles the data and self files for us. Seriously, she has a Master’s Degree, sings, dances, works in her specialty, cooks AND files taxes: there’s seriously nothing this woman can’t do. So when she finalized our return we sat down to recap numbers so I can be on the same page with our year end data. My wife, looking back at me with a loving and heartfelt smile, just about made me choke on my vegetarian crock-pot spinach lasagna when she said the following:

“With all of our deductions accounted for, our tax bill for 2011 is 11% of our combined salary.”

She had a look on her face that said, “I’ve been expecting this the entire time,” the look on my face screamed, “How in the hell did we pull that off?” So I find it fitting to share with you just how in the hell we pulled this off:

Pre-tax contributions

While it’s true that we utilize Roth IRA’s for our retirement vehicles, there are still plenty of other resources we use to lower our tax bill with pre-taxed income. We both participate in our respected company’s 401(k) and each contributed 6% of our gross income in 2011. Also through my employer I pay for my medical insurance and commuter transit pass with pre-tax income, apparently this adds up during the course of a year J

Health Savings Account

 As a precursor my wife and I are both in pretty good physical health and do not have any form of ongoing chronic illnesses. Given this information, we utilize a High Deductible health plan to keep our premiums low and generally go to our physicians for annual checkups. With a high-deductible, we make sure we only go to the doctor when we are border line death J (just kidding, but not by much). But with this health plan we opened and use a health savings account. The HSA rolls over from year to year and thankfully my employer pays the monthly fee. Funds in the HSA can be used to pay for what the KGB US Government defines as “qualified medical expenses.” Contributions to the account up to $6,150, the ceiling for families in 2011, are deductible from your income. This guy may have single handedly helped us keep D.C from stealing our hard earned income, but please, let’s let this be our little secret because they might take it away.

Charitable Contributions

Although dollar for dollar charitable contributions do not lower your taxable income as much as the HSA, it’s still a great tool to use in our plan to lower our taxes. We budget every month our charitable contributions and they too add up.

Conclusion

I was thoroughly appalled when my wife informed me of the belligerent badgering of questions that she got from the Fed when completing the filing process. Are you sure you don’t have interest paid on a mortgage? Student loans? Interest paid on a car? Not only have mega-banks and credit card companies put billions of dollars to work to teach us to use their products, but our culture can’t envision a home without a mortgage and (surprise surprise) the KGB US Government ENCOURAGES AND ENDORSES STUPIDITY. I’d rather have (which I do) my student loan paid off and write a $3,000 check to a charitable organization and myself through an HSA, than PAY SALLIE MAE INTEREST AND A MONTHLY PAYMENT FOR THE “PRIVELEGE” OF CALLING IT A TAX DEDUCTION.

Can you tell I’m slightly upset?! Happy tax filing to everyone!

My Refreshed Motivation

I knew I had some fight left in me. My wife has FINALLY reached the point of compromise and agreed to let us drop an avalanche snowball attack on her student loan. On paper, this is OUR last form of debt of any kind owed. And now that my wife has given the green light for me to set my gun scope on OUR last outstanding debt, I am happy to share this tale with you (as it is a story that is a nice example of what I call the APPROVED Dave Ramsey debt snowball exception).

In its full balance this single debt totaled close to $60,000. It is a personal non-interest bearing loan from a single member of my wife’s family. In Dave Ramsey’s debt snowball rules (Baby Step II), once you’ve finished Baby Step I. $1,000 emergency savings in a bank, you pay minimum payments on all outstanding debts, and every extra dollar that you can squeeze out of your budget you throw extra and focus on the smallest outstanding debt, and once that is paid off you move to the next, and then the next and before you know it you have an avalanche of freed up income helping bust you free of debt.

THE EXCEPTION is that you DO NOT INCLUDE any single debt that, by itself, would take longer than 2 years to pay off using the debt snowball method. In my opinion, Dave wants you to use all out and focused effort which includes: selling things, working overtime, working extra jobs, cutting the entertainment budget, all for a set period of time. If you focus on a single debt for longer than 2 years with ALL OUT gazelle intensity you will burn out. Also, 2 years is too long of a period of time to only have a $1,000 baby emergency fund. Life happens, you will get sick, the car will die, clothes wear out and family emergencies will occur. $1,000 can’t cover you for more than a 2 year time period.

So once we completed our debt snowball (which consisted of about 4 credit cards between the two of us and my student loan), we immediately completed Baby Step III. Establishing a 3 – 6 month emergency fund, and consequently completed Baby Step IV. Saving 15% gross income for retirement. Which brought us to the dilemma which until recently has been resolved.

In my eyes we had two goals before us: (1) pay off the last student loan, and (2) save to pay cash for our first home. There were arguments, theological discussions, feelings hurt, lots of yelling, lots of making each other feel guilty, basically a self-taught crash course in Negotiating 101. Ultimately, over time, I came to understand my wife’s wants, needs and desires. I took to heart her reasons for not wanting to snowball the last debt.

In Ramsey world the decision would have been easy: Armed with a fully funded emergency fund and while saving 15% for retirement, above and beyond all budgeted expenses, attack the LARGE loan with unrelenting ferocity. But in marriage I had to weigh this approach, with the needs and concerns of my wife. So together we made the decision to pay minimums on the student loan and begin saving for our house.

A few years have now passed since that decision was made and our “house account” is flirting with the overall number we would like to see for us to make our home purchase. With all things considered, a little luck and a lot of steering in the right direction from God, my wife confirmed with me today that she would like to snowball this last student loan and projections have us, together for the first time in our marriage, being debt free in October of this year.

I have never been more proud of my wife. I know the decision was not easy and she holds a lot of the issues that kept us from snowballing it close to her heart, but her desire to be debt free is simply inspiring to me. And in turn it’s like I received a cortisone shot and am even more amped up to continue on with 2012. I think I foresee a trip to Nashville, Tennessee in the late fall accompanied with a WE’RE DEBT FREE scream/phone call to my favorite radio show in our future J  

My (kids) College Savings Plan

College planning for kids is another crucial piece to any thorough and complete financial plan. Yes I am currently in D.I.N.K status (double income, no kids) but paying for my kids’ college is always in my mind and, as with just about everything else in life, it’s so important to have a plan.

I’ve hit on this subject a little in how I would do college over again for myself, and I’ll reiterate here again as well. College is not a one-way ticket to success. A degree only shows that you have successfully passed a series of tests. It allows you to compete in the marketplace for white collar jobs, it does not guaranty you job placement. College is a luxury, not a necessity. I would never cut back on retirement planning before kids’ college. With that said, college is the first luxury on my list that I would like for my family. So if we’re going to plan for something, my rule of thumb is to maximize it to the tilt!

ESA’s are going to be my tool for funding kids’ college. Formally known as the Coverdell Education Savings Account, you can think of this as the “Education IRA.” Like a ROTH IRA, an ESA can be opened and funded with after-tax dollars and all growth, when used for college related expenses, is TAX-FREEEE! I prefer ESA’s over 529 plans because of the flexibility in mutual fund options. 529’s can stick you with only a single family of funds, i.e. only FIDELITY mutual funds, and an ESA allows you to choose from an ocean of mutual funds similar to options through an IRA.

Funding wise I plan to max out what the KGB US Government allows me to in the current year. As of now, an ESA can be funded up to $2,000 per year per child. Broken down into a monthly budget (because you better believe I will) that comes out to $166.67 per month for each kid from 0 through 18. My biggest beef is that I can’t open and start funding an ESA until the kid is born, but that’s the KGB US Government for you.

From 0 to 18 that comes out to a cost of $36,000 in contributions. Within the ESA I plan to follow the same rule of thumb for my ROTH IRA, mutual funds with excellent track records of over 10 years and average annualized returns of over 12% since inception, spread across 4 types of mutual funds: growth, aggressive growth, international and growth & income. With 12% average annualized returns over 18 years the ESA for a single child will have a balance of $127,575.83, if I’m half wrong, I think the kid can make it through! Dave Ramsey’s handy investing calculator spits out the numbers below:

Now whether I share this information with my future children is another story entirely. I want them to take a realistic and honest viewpoint of how much it costs to attend a four-year university. Ideally I want them to come to the realization that the prices at “prestigious pedigree generating” 4-year universities are absolutely outrageous, and that transferring to a state school from a community college is the most effective way to go. Is this plan dubious? Is it manipulative? Probably, but they’ll be my kids so I’m going to manipulate their thoughts and beliefs as much as I can so that my ideas become theirs (hopefully they vote like me too!) J

A few disclaimers though. Funds from an ESA can be used for college, trade schools, vocational and the like, so if my kid genuinely would rather enter a trade than get a B.A., an ESA can do it! Currently, ESA funds can also be used for grad school but have to be exhausted by the kid by the age of 30. Should the kid not use up all the funds going through school (which I’m counting on) then I can transfer the unused funds to the next kids’ ESA and repeat the process. If I over save because my kids are super awesome and get scholarships and choose cost-effective schools, current law allows me to open and transfer unused funds to related family under 30, which, as the KGB US Government defines in current tax law, includes: nieces, nephews, first cousins and children-in-laws. Financial peace, it’s what’s for dinner.

 

My (thrifty) Clothes Shopping

            A point of pride for many of us in the frugal circles is thrift store shopping. I laugh at my previous self for even considering paying retail for things like clothes, household items and the like. Don’t tell anyone, but I once walked into an “Express” many years back and bought three dress shirts because they were “on sale” for $20 each. Man, I’m sure glad that I caught the light of frugal living before any long term financial damage could be done. Nowadays, my wife and I allocate funds every month to fill our clothing envelope. We estimate at the beginning of the year how much we expect to spend on clothes, divide by 12 and every month put in the allocated amount. For the retail shopper, if you take our envelope at the end of the year and do some personal shopping for yourself, you might end up with a sports jersey, or maybe a really nice suit, that’s about it. So we turn to thrift stores. I’m talking Goodwill (in Michigan though, the one’s in Chicago are pricey) and Salvation Army stores.

            At these places our dollars stretch so much further, and in a metropolitan city, with the number of people transitioning in and out of the area, I have found that our local Salvation Army carries a ton of great apparel in excellent shape at awesome prices. The ultimate of all trifectas! One of the best tricks that we have up our sleeves, is again, my amazingly awesome wife. Having grown up in Michigan and being in 4H (whatever that is), my wife learned from an early age to be self sufficient. One of the best benefits of this is her ability to alter clothing. So I can grab those great pair of slacks that are a tad too long on the length, and she works her magic, and suddenly it’s a perfect fit. The same for dress shirts, coats and just about anything I need. Like I’ve said before, behind every frugal man, is an even more frugally efficient wife! On a recent trip (we may go 2 or 3 times a year) we stocked up getting ready for the winter season. My wife picked up some boots, and we picked up winter coats, some jeans and dress slacks (I am proud that my wife is a member of the sisterhood of travelling pant-suits). We even splurged and each grabbed a pair of sunglasses for $2.06 each. And with receipts like this, I am never ever going back to retail.

My Thoughts on...The Facebook IPO

A lot’s been made just about everywhere you turn regarding the most anticipated IPO launch this century, so I find it fitting to add my two cents to the discussion. Essentially I have a love/hate relationship type of viewpoint with “liking” the facebook IPO. The euphoric frenzy that has pumped up the masses has artificially instilled consumer confidence into the market in general. Specifically, the tech industry has seen a nice broad lift in the past few weeks since news went out over the wires of all happenings related to facebook. So on a broad macro level, I appreciate the frenzied lift of a lot of sectors across the board with the increase in investor confidence. What I absolutely hate about this is that it will be another instance of single stock pickers swinging for the fences rather than investing for long-term growth.

If you’ve been following my musings you know how I feel about single-stocks in general. They quickly go up and down, and neither you nor I have the expertise or research at hand to anticipate who the next Microsoft, Wal-Mart or Apple is going to be. You’ll lose your tail chasing after smoke and mirrors. I advocate investing in solid mutual funds and PARKING your hard earned money there for at least five years to ride out market cycles. Solid mutual funds, that have been around for at least 10 years and have average annualized returns of greater than 12% since inception, have proven themselves through various cycles, provide diversification across many companies and industries and over time curb-stomp inflation and taxes with their growth.

But back to the facebook IPO…I feel that the overall spirit of wanting to get in on the IPO, is for get rich quick swing for the fences home-run style investing that can single-handedly (IF IT GOES WELL)  erase a life-time of stupid investment choices. I have not found one article, belief or commentary suggesting that facebook will be a sound investment choice over the course of one’s lifetime. This entire thing is the epitome of our A.D.D culture.

Look, we work too hard for our money to gamble on something that may or may not be there. Your money, investments and financial future deserve better than chasing a dream. Although Dave Ramsey says (if you absolutely have to) invest in single stocks, do not let them exceed more than 10% of your portfolio as a group, I personally do not own a single, single-stock. I want my money invested in something that has proven itself through bull and bear markets and has proven results and returns. Even if I were to consider buying facebook stock, my same principles would apply. Let’s see how it fares 10 years from its IPO launch date and once (its trading life) is out of diapers, I’ll consider whether its continued growth and value is worthy of my hard earned dollars and sense. My advice: Invest for long-term growth and value, not hype.  

My Super Fun(d) Annual Checkup

February is generally a unique and thrilling time of the year for me. Especially since living in the Mid-West, I’ve grown even fonder of Groundhog’s Day (and yes I LOOOOOVED the movie!), I enjoy the unending fight against the hyper-consumer infused hallmark holiday that we call Valentine’s Day, and most importantly, I run an annual check up on my mutual funds and investment vehicles. Certainly, this is my super fun(d) annual checkup time!

So for your enjoyment and my evaluation, below is my assessment, and all numbers/percentages are reflective of average annualized returns. The assessment allows me to pull back and see how my diversification is faring over time and if to date I am getting enough bang for my bucks for long term investments. So nerds, be ready for some euphoric reading! And to the free spirits, I acknowledge I have probably lost you already. So let the assessment begin:

AGGRESSIVE GROWTH

Otherwise known as Small-Cap Growth Stock Mutual Funds, Aggressive Growth stock funds are one of my portfolio ingredients. These guys go up and they go down and are a piece of my planned mix of investments. My best fund in this group returned 11.51% and the worst -3.07%. Collectively they’ve returned -0.86%. I am not at all worried or concerned though. I am in these investments for a period of longer than 5 years and with proven track records, I definitely expect these numbers to turn around AND continue their already solid footing in the coming year.

GROWTH

AKA Mid-Cap Mutual Funds, this collection in my portfolio is my pride and joy. As a group they’ve returned 12.96% and have given no signal that they are slowing down. Don’t you just love it when numbers speak for themselves!

INTERNATIONAL

As a precursor I will note that my international funds are NOT anywhere near Europe, and given the battering of confidence in that region, to this day I am glad to have made that decision. With that said, my international mutual funds are focused in the Asia-Pacific region (China dually noted J) and South America (emphasis on Brazil). Over the long-term I am expecting continued growth in these regions, and they offer an upside in growth that will beat Europe in the coming decades. If you absolutely have to be in Europe, I’d only grab mutual funds that focus on large-cap growth & income, stability is the only thing you’ll get from Europe, not growth. Given that tidbit in recent time (by comparison) I have gotten battered in these markets, but I do not expect the PM’s on these funds to lose long-term vision in these regions, especially with the Olympics on the horizon for Brazil. Collectively my international funds returned -3.25% and I will be keeping a close eye on these funds in the next year.

GROWTH & INCOME  

Strong, stable and value, these are a few of the words that conjure up when I think about my G&I mutual funds. The stability in these guys is second to none, and if you find a good one you’ll be pleasantly surprised at dividend payouts throughout a calendar year. As a unit these guys returned 7.95%, my best fund of this group brought in 9.63% and the worst 5.63%, not bad during the great recession!

401k

There’s not a better bang for your buck than a company match through the good old 401k. Whether 50% or 100% the instant return on your pre-tax income leaves me salivating for more. As the company I work for has ended the matching program, I will still be contributing at a slightly lower rate and expect this number to come down in the coming years. My 401k has returned 20.49%, and over time should come in line with barely beating inflation, so for now I’ll take the victory.

Diversification has been a very valuable tool for me during the past few years. Some funds are up, some are up nicely, and others lag behind. Over time I whole heartedly expect my funds to surpass expectations and to date, having returns as a whole at around 7.5% is pretty sweet. I’m beating inflation & taxes, and after the best January in the last 15 years in the market and on the forefront of a presidential election year, I’m still bullish J