Coffee heat rising

Money management

Budgeting and strategies for saving

by

Some time ago, a financial advisor who was helping me figure out what to do with a small inheritance remarked that I have a special talent for accruing savings by bits and pieces. Well, that does appear to be the case. As we noted the other day, by the end of this year my emergency fund will exceed $24,000—above and beyond the $21,000 squirreled away last year to pay off the Renovation Loan for the downtown house. 

So…how d’you do that?

Truth to tell, I don’t know how others would do it. But here are the basics that work for me:

1. Get out of debt and stay out of debt.

At the outset of my financial journey, I paid off a five-year car loan in 18 months by adding principal prepayments to each regular monthly payment. This freed up the $300/month payments to put into savings. Within a few years, I also paid off the $80,000 mortgage on my house, partly by renting space in my home and using the income to deal with the mortgage.

Debt consumes an enormous amount of your income. Freeing yourself of debt payments effectively “increases” your income even if you never get a raise—you end up with more money to spend or save.

2. Build savings into your budget.

“Pay yourself first” is the operative principle here. This is another way of saying “spend less than you earn.” As I was paying off car and real estate loans, I also set aside a small amount for savings each month. Bare minimum has always been $200 a month. As debts dissolve, some or all of the amount you’ve freed up by paying down debt can be added to the monthly savings.

When you create a budget, an effective way to create savings is to find a place to put every dollar of income. In other words, rather than estimating what you spend on each category (such as food, housing, utilities, transportation) and stopping when those categories are accounted for, build a set categories that will account for your entire net income. One of the categories should be “monthly savings.” This approach is sometimes called “zero-based budgeting.” 

My own approach to budgeting was to carefully track expenditures for a month or two, using Quicken or Excel. This provides a picture of where and how much you’re spending. Expense categories become evident after a month or so of observation. This exercise not only allows you to see where your money is going, it gives you some clues to where you might rein in unruly spending habits (for example, have you run amok at restaurants? did you really need all those clothes?). 

Once I understood my spending patterns, I established reasonable amounts for each category, including a category for savings. Any difference between income and expenditure was added to the “savings” category. Raises in pay resulted in raises in savings; although I might not devote the entire raise to increasing saving (you do have to get a life sometime, after all), I did pay myself better savings on the rare occasions the university gave me an increase.

3. Build side income streams.

Find ways to earn above and beyond the income from your day job. A master’s degree in anything will get you an adjunct teaching job at a community college. Night courses are a lot of fun to teach, because they’re full of adults who are there because they want to be there. Such gigs are not well paid, but every buck counts. I put all my net pay from teaching directly into savings.

You’re not forced to stop with just one side job. If you have a marketable hobby, if you enjoy collecting junk and selling it in yard sales, if you can trade a skill or a product for someone else’s skill, products, or dollars, you can create income that also can build your savings account. In addition to adjunct teaching, I also indulge in freelance editing. Every penny that comes in from that endeavor goes…yep! Right into savings.

Besides helping to build savings, secondary income streams have an enormous potential benefit: you still have them if you’re laid off your day job. Having the experience and contacts in teaching and editing will allow me to ramp up both those enterprises in my coming enforced retirement, and, as we have seen, will support me in the manner to which I intend to remain accustomed even if I never get another full-time job.

4. Take full advantage of your employer’s 401(k) or 403(b) plan.

If your employer  matches contributions to a retirement plan, for heaven’s sake, go for it! Every dollar your employer puts in means twice as much long-term savings for you. 

Allocate these investments intelligently, putting 50 or 60 percent in stocks and 40 or 50 percent in bonds and the money market. You have to assume some risk to make money in your investments; keeping it all in so-called “safe” instruments means your total savings will not keep up with inflation. Though the market does drop every now and again (sometimes with operatic drama!), over time losses and gains level out and and your investments build principal. Put your money in low-load funds to the extent possible (if your employer allows you to invest with Vanguard or Fidelity, these are good choices), because management fees eat into profits at an amazing rate.

Outside of an employment-related plan, go for Roth IRAs. Although these are after-tax instruments, they have the advantage that withdrawals after you reach age 59 1/2 are tax-free, which is huge. Also, they allow you to pass money to your heirs without the nasty tax gouges inherent to 401(k) plans and traditional IRAs. Here, too, set up your IRA with a low-load provider such as Vanguard or Fidelity.

5. Cultivate a frugal lifestyle.

Try to stay sane about this. You don’t really have to live like Our Hero, Scrooge McDuck. But on the other hand, neither do you have to live like an investment banker riding high. Get over the temptation to buy every new gadget just because it’s out there; to accrue stuff because all your friends, relatives and neighbors accrue stuff; to own bigger things and more things than you really need. Learn to distinguish between want and need, and then train yourself to appreciate the nonmaterial riches of life.

Frugality and simple living are the keys to living within your means. Spending less than you earn makes it possible to build savings and, eventually, to achieve financial freedom.

Layoff: Getting by in unwilling retirement

by

There just may be a way to survive post-layoff with little risk and not too much fear and loathing. A drawdown of 4 percent from retirement savings plus early Social Security plus a modest hand-to-mouth income would support my current lifestyle. Here’s how:

If I move my plan to create a large cash-flow pool from savings in 2010 forward to, say, today, I could pay for the Investment House mortgage out of cash flow + non-tax-deferred savings (thereby preserving tax-deferred savings, if the market improves over the rest of 2009). Assuming I pick up two junior-college classes in the fall and thereafter engineer three a semester, I could continue to carry the mortgage with no problem whatsoever. In fact, not only can I continue to pay the mortgage and live in my wonted style, at the end of 2010 I could be some $3,200 ahead of the game.

And that’s not counting revenues from freelancing and not counting whatever little bit Funny about Money might generate once it’s monetized. It also is figuring the highest monthly expenses year-round: utility costs represent summer expenses, twice the winter rates.

This is a function of longstanding frugality. Because I put about $400 a month into casual savings, plus all the after-tax revenues from freelancing, a fair amount of cash has gathered in the credit union’s money market account. So…next time someone tells you frugality is bad for your psyche and bad for the economy, tell them to think again.

Now, I allow as to how I have indeed said I’d rather eat worms than teach one more section of freshman comp. However, when you come right down to it, we’re talking about a grand total of eight months’ labor a year. Around here, you get about a month off over winter break and three months over the summer.

To make a long spreadsheet short, if I gather all the savings now in the credit union and add the coming federal tax refund, I could “grubstake” a “pool” account with $11,448. By December 31, after paying my $800/month share of the mortgage bill, that base amount will have grown to $14,788, assuming I take on two community college courses in the fall.

The point of this “grubstake” or “cushion” would be to keep from overdrawing my checking account in months when expenses outrun revenues.

So, in January, when I have to start drawing Social Security and 4 percent of what little remains of my retirement savings, I would start with $14,788 plus $1,162 of Social Security and $1,333 of investment proceeds, plus net monthly pay from the community colleges, which is about $500 per course.

If I teach two sections, at the end of 2010 I end up $1,276 in the hole.

But three sections produce $3201 worth of black ink.

The fly in the proverbial ointment, however, is income taxes. While the $500/community college course represents net pay, the amounts for Social Security and investment income are gross figures. Assuming just 18 percent (an optimistic guess if ever there was one), taxes on investments and Social Security combined would come to around $5,400. So the truth is, the reward for teaching three courses could be a $2,190 annual deficit. I’d probably have to make around $4,000 in freelance income to pay for that. Impossible to tell, though: taxation in this country is so frigging complicated there’s no way an ordinary taxpayer can make any such projection without professional help.

Well, the taxes come under the heading of “tomorrow’s another day.” Money happens: I’ll find a way to cover it.

2008 Financial Strategies: What worked and what didn’t work

by

As the year winds down, this is a good time to take stock of the various events, schemes, and impulses that drive our personal finance strategies, to consider which ones worked and which failed, and to think about how we can use experience to plan next year’s financial direction.

We all had our ups and downs. As we know, it feels like the “downs” took the race. But as I look back over my 2008 personal finance adventures, I see that quite a few ideas and strategies were successful. Like everyone, I took some big hits; some of those were beyond my control, or effectively so.

My Best 2008 Financial Strategies

Bar none, building a second income stream was the smartest move I made this year. At the start of the spring 2008 semester, I agreed to teach two sections of Writing for the Professions, a.k.a. “freshman comp for juniors and seniors.” When, hours before classes were slated to begin, I learned that both sections were double-enrolled and I was actually taking on the equivalent of four sections—the workload of a full-time lecturer—I threatened to walk; backed into a corner, the dean agreed to pay me for four sections.

It was a horrible job, but the pay was as much as I hoped to earn on the side during the entire year. And because the Great Desert University canned all its part-time faculty in the fall semester, the serendipitous overload meant that I made my 2008 side-income goal in spite of the faltering economy.

Starting a side business independent of GDU seems to have been a wise move, too. Between The Copyeditor’s Desk and my own freelance work, I have made an extra $1,000 to $1,200 a month since late last summer. If I’m laid off and so forced to begin taking Social Security now instead of waiting until full retirement age, this will be about as much as I will be allowed to earn. The two income streams—editorial work and Social Security—may (with luck) cover my expenses until I can draw the full amount of Social Security income and forestall having to draw down my sadly depleted savings.

Stashing all my post-tax side income into savings instead of using it to pay down the $23,000 owing on the second mortgage I took out to renovate the Investment House seems to have been a wise move. At the outset, I was uncertain whether I would stay in my own house, given the skyrocketing crime in the depressed apartment complexes across 19th Avenue, the unholy mess across the street from me, and the growing presence of undesirable renters. If I sold, the loan would be paid from the proceeds, and I might be better off with the cash in hand from the side jobs. As the economy began to collapse in earnest and more and more credible-sounding layoff rumors circulated, I was glad I had the 23 grand to double as an emergency fund.

Moving the savings from the side jobs out of stocks and into the money market. As it started to appear likely that I would need the cash to live on, I yanked the side-job money out of Vanguard’s Wellington and Windsor II funds, which were just beginning to stumble, and put it where I figured it would be at least moderately safe. Since then, Vanguard’s funds have followed the rest of the stock market into the tank. At least I managed to hang onto that much of my savings.

Restructuring my monthly budget to put biweekly paychecks into a “pool” account from which contributions are shifted to “piggy-bank” accounts containing enough to cover monthly expenses. This strategy has trumped the wacky disjunct between biweekly pay (which allows the university to keep a chunk of its employees’ pay in its coffers, earning interest on unpaid salaries while the flunkies try to figure out how to stay solvent) and the reality of monthly billing cycles. Over time, it has the effect of accruing part of the two so-called “extra” paychecks (which are not “extra” but simply represent six months’ worth of unpaid salary disbursed out of synch) in the pool, padding the emergency fund a bit.

Continuing to set aside the $200 a month I was saving toward the Investment House Renovation Loan self-escrow account, even after enough was stashed to repay the debt.This effectively doubles my monthly after-tax savings and has restored my savings account to its former, pre-disastrous-expenses glory. That also helps plump up the emergency cushion to fall back on in the event of unemployment.

Taking time to think through how I would survive after a layoff and to build a proposed post-layoff budget. As rumors of impending layoffs intensified, the Bush economy slid into its catastrophic collapse. It became clear I will not be able to use what little remains of my life savings to support myself in retirement; not for a long time, anyway. The prospect that I might soon be out of a salary forced me to figure how I could get by on a fraction of full Social Security—$1,040 a month, as opposed to the $2,094 I would get by waiting until full retirement age—plus whatever I could scrounge by freelancing and taking on part-time teaching jobs at the community colleges.

Although it would be very difficult, it appears possible that I could get by for a year or two without having to sell my home. After that, I can raid savings to return the amount I’ve drawn from Social Security to the government, which will reset my SS payments to the full retirement figure. That should keep me going until the market improves enough to revive my savings. The benefit of this exercise is that I now feel fairly confident that I will survive the recession, come what may.

My Worst 2008 Financial Strategies

Leaving savings in the stock market as it became increasingly evident that the Bush “recession” is no ordinary recession but indeed will probably devolve into a depression. My savings are conservatively invested, about a third in stocks, a third in bonds, and a third in the money market. Bonds, as it developed, provided little or no protection in the crash, and although Vanguard’s Prime Money Market fund has not broken the buck, we’ve seen that losses in the money market can happen.

If I’d had a crystal ball, I would have yanked every penny out of the market and stuck it all in laddered CDs. Lacking any such tool, though, I followed conventional wisdom and stayed the course. This, we can now see, was probably a mistake.

Jumping the gun on refinancing the Investment House. M’hijito and I got a much improved interest rate on the mortgage refinance we took out earlier this year for the house the two of us are copurchasing. However, had we waited a few months, we might have landed a 4.5% rate.

Maybe not, too: at this point we’re upside down on that house, and it’s questionable whether the credit union would give us a loan against what the property is now worth.

The problem with the refinance is that to get the 5.3% rate we obtained, we had to take a 30/15 loan. At the time, we figured the market would turn around before 15 years passed; in the event that we had not sold the house by then, we would have no trouble refinancing the remaining principal.

I no longer think that’s true. IMHO, the real estate market will not recover for another eight to ten years. By that, I mean we will not break even on the sale of that house anytime in the next decade. If I’m right about this, we may not be able to sell the house for a profit after 15 years. This will force us to refinance or to take a bath on the sale. And if by then mortgage rates are in the double digits, as they have been historically, we may not be able to negotiate a monthly payment that would be covered by rental income. Thus the 30/15 mortgage terms could lock my son into the house at a time of his life when he’s likely to marry or find better job opportunities in other parts of the country.

I failed to contest the county’s property tax valuation. This resulted in a breathtaking tax increase on a house whose value is less than the county claims. The reasons for my lapse were a) the county’s statement is well-nigh incomprehensible and I had no way of assessing whether it was anything like accurate, nor could I tell what its effect on my taxes were going to be (tax statements arrive several months after the property revaluation statements); and b) the window for protesting lasts only a couple of weeks after the valuation statements are mailed, so that by the time you realize what those statements mean, it’s too late for you to do anything about them. Clearly, I should have protested as a knee-jerk reaction, even though I had no idea what the statement implied.

All in all…

I’m way worse off financially than I was at this time last year, that’s for sure. So, I expect, are most Americans.

On the other hand, so far I still have a job. I’ve managed to salvage some of my savings—enough to pay off the small loan against my house, if push comes to shove. Our little editorial business has a couple of regular clients, and we’re working on landing some more. At this point, every week that passes without a layoff puts me in a better position to survive without a salary.

My plan… 

• …starts with continuing to stash as much as possible into savings.
• That dovetails with cutting back on spending so that I’ll be accustomed to living on less, should I find myself unemployed. As long as I’m still working, savings from the spending cutbacks will go straight to the emergency fund.
• Instead of trading in my 10-year-old vehicle this year, as I would normally do, I’ll drive that car until it falls apart like the minister’s one-hoss shay.
• This spring and summer I’ll continue to try to build Copyeditor’s Desk income; if that doesn’t pan out, in the fall I’ll sign up to teach composition at the community colleges. 
• And finally: Funny about Money is doing surprisingly well, considering that I don’t work very hard at it. The site’s page rank is 4, and its most trafficked post has a page rank of 2. I will try to focus Funny more sharply and develop its readership more broadly, and if it continues to draw readers, I’ll consider monetizing it.

Financial Advisor to Investor: Don’t panic!

by

Below, an exchange that started with an update from my financial advisor.

Beloved youngish partner of Financial Dudes, LLC, to Funny about Money:

To enhance our ability to remain patient with respect to our long-term investment strategy, we raised the cash level in your portfolio again, by trimming allocations to specific securities.

In addition, we initiated the process to upgrade the quality of our client’s money market holdings to a U.S. Treasury based money market to avoid the turmoil swirling around some money market funds. If you were not in a U.S. Treasury money fund, you will see some activity in your affected accounts in the next day or so.

There certainly has been a tremendous amount of news to digest lately, and we are navigating these markets with your long-term goals in mind. We have seen, and likely will continue to see, short-term volatility in the value of many investments that we hold.

If you have any questions or concerns, simply give us a call.

Funny to BYPoFD:

Thanks, John–

I have about ten or twelve grand in Vanguard’s Prime Money Market fund. VG is claiming it’s not invested in Lehman or related unhappy sites, & so I’m guessing it’s OK to leave the money there… Would you advise moving that money to a different fund? Or into a credit union money market, which just now earns a grand 1.88 percent?

best, –vh

BYPoFDto Funny:

We just moved it to be on the safe side and don’t think there will be any issues with the money market. We will move it back at some point. I wouldn’t really fret the Vanguard money market as they are normally on the conservative side and I don’t think there will be any issues.

Funny toBYPoFD:

Good. I’d pretty much reached the same conclusion.

Doesn’t appear to be much safety anywhere in the current storm, eh?

BYPoFD to Funny:

Not really. Even putting it under your mattress you run the risk of someone stealing it. Eventually we will work through all the problem companies and the ones that survive will be the big winners like in the early 90’s. This seems to be happening with BofA.

The long and the short of it:

Don’t dive out of your money market fund. Especially if it’s with Vanguard. Stay the course.

Money market drops below a dollar a share

by

Here’s a little gem in today’s International Herald-Tribune: the Primary Fund, part of one of the largest and oldest money market funds around, has dropped its share value to 97 cents.

Now a loss of three cents a share isn’t going to break any of us up in business. But…well, heck. Dunno about you, my friends, but being the cheapskate that I am, I don’t want to see even three pennies go away. I have a fair amount sitting in Vanguard’s Prime Money Market, cash saved to pay off the Renovation Loan and to double as an emergency fund. Since it’s not invested in stocks or bonds, it could just as easily lay fallow in the credit union as at Vanguard. At the credit union, it’s insured.

So I called Vanguard this afternoon, where I learned I was far from the first to harry the call center employees with fussy questions about their money market funds. The young woman I reached assured me that “Vanguard is very confident” (uhm…is this a statement with meaning?) and that its money market funds are not invested in any instruments presently known to be at risk.

O.K.

I guess.

Path of least resistance is to leave the money at Vanguard. Path of medium resistance is to write a check on the fund and pay down the Renovation Loan by ten or eleven grand (and maybe plant some vegetables in the backyard to cover for the proposed emergency). Path of most resistance is to move everything over to the credit union, whose arcane rules assign a different return to each of the half-dozen different accounts it offers and so will require some figuring out.

Hmmm… Bogle, can your successors be trusted? Probably. It’s at least a strong maybe.

Do I want to pay off that loan right this minute? Nope. With the economy melting down around us, I want cash.

Am I making a larger pittance on cash savings at Vanguard than at the credit union? Yes. But only if Vanguard’s Prime Money Market Fund never breaks the dollar.

Looks to me like the path of most resistance could be the best way to go: identify the best-paying CU account (money market: 1.88%; CD: 2.23% for 3 months to 3.92% for 5 years; savings: 5% up to $1,000 and .75% over $1,000) and move the money over there.

Good grief. Just look at the complexity of those options. Makes me not want to think about it! Gut instinct, though, suggests I’d make a little less at the CU but sleep better with savings insured up to $100,000. The wee dividends don’t matter, but that deposit insurance sure does.

Scary times

by

Well, we all had quite the adventure yesterday. I woke up an hour ago—12:30 in the morning local time—wondering if I should move all my investments into the money market. Nothing like the dead of night to ramp up the panic factor.

In fact, though, I see that Vanguard lost all of $738.13 against many tens of thousands of dollars, and so I’m feeling a little saner.

Don’t have up-to-the-minute data on how the big IRA (a different fund) that Stern and Reimer manage is doing, but in past slumps Stern has worked the occasional small miracle. Checking the current holdings, I see he dumped Morgan Stanley and AIG a while back…and interestingly, we own Bank of America. How does that man know? He’s bought my son’s employer, so I guess he doesn’t expect that outfit to crash in flames soon. A fair amount of oil: Occidental, Exxon, and Conoco Phillips. And…hmmm…he’s moved a ton of money into cash reserves. Yipe!

At any rate, I guess I won’t be going broke soon. Later, maybe, but not today.