Contribute or Screw it?

I can’t believe that I got so caught up on having a little bit of spending money that I completely neglected a time-sensitive goal. You see, when I revised my debt reduction plan so that I would pay off my car note by the end of February 2011, I figured I’d have $1245 for March and $350 for [the first half of] April 2011. My plan was to place this amount ($1595) into my Roth IRA. In a previous post, I listed maxing out my Roth IRA as a goal; by sticking to the “$1245/month” plan, I would be $2288.75 short of reaching this goal. (i.e. reaching $5,000; I've contributed $1,116.25, to date). Well, since I’ve updated my debt reduction plan (i.e. reduced my monthly car payments from $1245 to $1045) and paid off my credit card, now I won’t pay off my car until the beginning/middle of April 2011.

And the issue about my goal being time-sensitive? The IRS won’t allow me to make contributions to my Roth IRA for 2010 past April 15, 2011. Each year, I’m allowed to contribute a maximum of $5,000, and I would like very much to begin the trend of doing this sooner than later (I gotta have my money "in the game!"). Going forward, this will be a cinch, because I won’t have a car payment and credit card debt sabotaging my savings.

So, what should I do? Here are a few ideas that crossed my mind:

1) Contribute. Postpone my car payoff date and restore contributions to max out the Roth. If I did this from November 2010 through March 2011 (5 months), I would make my regular car payment ($269.11) and would contribute $776.75 to the Roth (5 months times $776.75 equals the $3,883.75 needed to reach $5K). Additionally, I’d be able to pay off the  car loan by  the end of October 2011 if, starting May 2011, I paid $729/month to the note (includes minimum payment).

P.S. I'd max my 2011 Roth by saving $316/month from May 2011 to October 2011 ($1896), $535/month from November 2011 to March 2012 ($2,675) and including the $430 overpayment for the car note from October 2011.

2) Screw it. Get $625 per month ready for every month starting May 2011 in order to max out the account for 2011 and pay no additional interest on the car loan.

Update: I had my garage sale! Okay, so I probably shouldn't put an exclamation point after that statement, considering that my operation got shut down with a quickness (who knew I couldn't have a sale on the storage company's property? I knew I should have read the contract!) Nevertheless, I earned $93 for my goods and spent less than $50 renting a pick up truck to transport the "leftover" goods to a nearby Salvation Army. Hooray for $97/month restored to my budget!!!

Don’t Get Punked by Retirement Calculators

I found myself toying around with a retirement calculator on money.cnn.com to see how long it would take for my nest egg to reach $1,000,000. It asks for current amounts in taxable and tax-deferred accounts (check out the May 12, 2010 podcast for more info about these types of accounts), what you anticipate saving for those accounts and your best guess at an annual rate of return. I typed in $5,000 for taxable and tax-deferred accounts each and annual contributions of $12,000 for taxable accounts and $16,500 for tax-deferred accounts [this is the 2010 maximum contribution for tax sheltered annuities such as the 401(k), 403(b), 457)]. I left the federal and state income tax rates unchanged (28% and 6%, respectively), as well as the annual rate of return (8%). 

Guess how long it would take before I attained millionaire status? 4 years and 9 months (5 years and 1 month, if adjusted for inflation). Now you might check out this tool and run the same numbers that I did, but I assure you that your answer will be different. Turns out I inadvertently typed an extra “0” in the yearly contributions for the taxable accounts (i.e. my $16,500 became $165,000!). Good thing I had the sense to double check my entry. I mean, I love compound interest, but dang! That calculation was simply astronomical! 

At any rate, these calculations got me to thinking about retirement. I was a bit disheartened to read Money magazine (one of my favorite personal finance publications) this month...they published an article on “7 ways to a richer retirement” (reading it spurred my visit to the website’s retirement calculators in the first place). In the accompanying magazine pull-out, the scenarios STARTED for people who are in their early to mid thirties. I recognize that Money is simply appealing to their target audience, but good golly! I think to my 26 year old self “[35] is a bit late to BEGIN seriously planning one’s retirement!”

What do you think? Am I overreacting or is their an "appropriate age" to begin planning one's retirement?

After all, I wouldn't want to be like Frank...

Update: In the previous post, I asked if I should take funds from my savings to stay on track for my debt reduction plan. I did not transfer any funds. Instead, I've made my regular payment ($269.11) and an additional principal only payment of $445.89 (total September payment = $695). The resulting loan balance is $8,483.81. If I remain "on track" (i.e. make no additional principal payments to compensate for this month's payment and go forward paying $1045/month), I will have a balance of $167.97 in April 2011...and I'll be a little late reaching my my anticipated pay off date. I'll keep you posted!

Stay on Track or Defer?

Conventional wisdom in personal finance circles says one should pay off higher interest rate loans before tackling lower interest loans. I’ve shared that I’m on a mission to pay off my car note by the end of March 2011. In a separate post, I divulged my shortcoming of using a credit card and not paying the balance in full. Well, I decided to pay off the higher interest rate loan, my credit card. Although it use to carry a 6.99% interest rate, thanks to my credit card company’s ability to increase rates at their convenience, my interest rate is now 15.9%. Compared to my car loan interest rate of 7.88%, it’s easy to see that, over the long term, the credit card would be the more expensive loan. I went to bankrate.com, used their “credit card minimum payment calculator” and learned that it would take six years and eight months for me to pay off this balance of $775.69 (I’m happy that this information is also reflected on my credit card statement; we have the CARD Act to thank for these details :>). Keep in mind that this would NOT include any additional purchases (which, if past performance is any indication of my future actions- is completely NOT gonna happen). 

My credit card company calculates minimum payments at 2.45% of the balance at the end of of my billing cycle and in the 80 months that it would take for me to pay off my credit card bill (if I only paid the minimum amount due, which is $19), I would pay a total of $1,242.87. Where the heck did this amount come from? Well, it’s the money I used plus interest: $775.69 + $467.18 = $1,242.87. If I paid $27/month (and made no additional purchases) it would take approximately three years to pay off my balance, at the end of which I would pay a total of $982 ($775.69 balance + $213.31 interest).

Cartoon from www.mordantorange.com

Being a tad bit impulsive, I said to heck with the credit card debt and paid it off....with the funds I ordinarily use for my super-duper $1045/month car payment.  

Here’s my question to you: Should I make my super-duper car payment with funds from my savings account or should I make the regular payment only (and wait until next month to get back on track)?

A few notes: I would have at least $500 readily available in my savings account for an unexpected expense after moving $705 to my car payment to stay on track. Alternatively, if I make only the regular payment, I will postpone my payoff date to April 2011 (one month later). 


To be fair, the interest assessed on the credit card is for a smaller amount of money- $775.69- compared to the outstanding balance of $9,118.93 on the car note. Between now and the end of March, I will pay $251.34 in interest charges for the car loan. If I postpone the super-duper payment, between now and the end of my car loan I will pay $286.48 in interest charges (a difference of $35.14).

It's My Budget! Part 3 of 3

In the last two posts, I shared my budget and categories of spending that were non-negotiable and maybe negotiable. Today we will cover the part of my budget where I have the most flexibility/options. 


Every month, I will spend $293.81 for my most negotiable spending category: Miscellaneous!
The amount available for miscellaneous expenses has increased by $200 recently because of a change in my car payment ($1245 to $1045). What exactly qualifies as “miscellaneous”? Pet expenses (I have two furry friends** that require food and litter), storage rental (I’m hoping to lose this expense SOON; a little more about this later), entertainment, gifts, airfare to see my sweetheart and occasional car maintenance (think oil changes and car wash). **I wish my cats were as cool as these two...

 

Although I like to think that my budget in reality reflects exactly what’s on this spreadsheet, the sad truth is that I occasionally use my credit card to make purchases.....and I often don’t pay the balance in full every month (YIKES!) What’s not-so-sexy about this idea is that I know interest charges are lost opportunity costs. Having looked at my credit card statements for the past 8 billing cycles (starting since January 11, 2010), I’ve paid $59.11 in credit card interest. That’s enough money to fill up my gas tank and buy a decent lunch! Fortunately, the miscellaneous category of expenses also includes me taking a stab at whatever credit card balance exists, so it’s not an ever-growing ball of debt.


Now about that storage unit...
I’m working on getting a nice chunk of money from selling all of what I have (it’s mostly furniture), but I am more excited at the prospect of reclaiming $97 a month (bye-bye monthly storage payment; hello more money for saving, expenses, credit card balance elimination, etc.!). I’ve posted items for sale on Craigslist and received a few responses, but none that adhere to the requests of the post (Hey Craigslist customers! Please read the entire post before you start emailing sellers silly questions about what’s for sale. The information is already there! Okay, gripe over :>)


At any rate, you might be wondering what my plans are for the “miscellaneous” expense category? Well, here’s where I’ll solicit your help. There are a few items on my list that I need to do and others that I’d like to do. How I will (or will not) attain such will be up to you. In the near future (9 months), I’d like to (in decreasing order of expense amount):

1. Max out my Roth IRA ($3,883.75 remaining)
2. Pay for a trip to the Caribbean to celebrate my girlfriend’s birthday ($500)
3. Set aside money for my boyfriend’s birthday ($300)
4. Buy new clothes ($250)
5. Vehicle window tinting ($200-$250), and
6. Repair the crack in my windshield (I’m guessing $100-$200). 

Sometimes we can get everything we want, but rarely is that the case when you try to stick to the idea of “living within your means.” So, to get [all or some of] these things, I need your help to make some decisions and compromises. I will not use credit to purchase these items (clearly, this is one way to have it all, but I assure you that it’s quite costly) and I'm working within a fixed income (no overtime or part-time job here). Instead, I'll have to make some sacrifices. 


Let’s get started....
What need and want should I start saving for? Please select one of each and post your recommendation in the comment section. Thanks =)

It's My Budget! Part 2 of 3

Earlier this week, I shared my budget and categories of spending that were non-negotiable.

Today we will cover the part of my budget where I have a little flexibility: meet my “maybe negotiable” expenses.

I spend $565 in “maybe negotiable” categories each month. Here they are:

Food, $200: While I’ve never been one to order out “every day of the week”, I do enjoy an occasional indulgence such as happy hour or a $7 slice of cake (Hey, don’t judge me! We both know that Cheesecake Factory has it going on!). I recently discovered that I could shave about $40 off of my food expenses if I remained diligent about packing my lunch and not eating out “so much” (ex. twice a week). When it comes to grocery shopping, I make a list based on what’s in the sale circular. I haven’t been a super-duper-coupon-clipping-lady when it comes to food shopping, so there might be an opportunity here. By the way, I can get down like Cookie Monster...

Gas, $200: Currently, carpooling and public transit are not feasible options for my day-to-day travel because: a) my job requires that I have my own transportation (luckily, I don’t have to travel out of the office everyday; but when I do, I am reimbursed for it), and b) although I live 40 miles away from the J-O-B, there is no direct route (via mass transit) from where I am to where I need to be. I’d have to drive at least three-quarters of the way or take fifty million transfers to get to work (okay, so 50,000,000 transfers is a bit of an exaggeration).



Car Insurance: $140: I could pay the entire premium out of my savings (and eliminate the inconvenient “convenience fee” tacked on for monthly payments), break my premium into larger chunks (ex. pay it over the course of 2 or 3 months vs. monthly), or do what I’m doing (pay in monthly installments and spend $25 over the course of 5 months to pay the entire amount. I should mention that 1/6 of my car insurance premium is less than $140 I currently pay; at the rate I’m going, I’ll pay the entire premium in less than 6 months.



Savings Account, $25: Not too long ago, I was familiar with overdraft fees in a way that’s embarrassing to admit to. In order to mitigate this issue, I signed up for overdraft protection with my primary bank. To avoid monthly maintenance fees on the savings account where the overdraft service pulls from, I have to maintain a monthly deposit of at least $25. Staying on top of my account balances and outstanding transactions has resulted in ZERO overdraft fees for me (YAY!). In fact, the last time I incurred such a fee was April 2009 ($245 of overdraft fees in that month alone; you better believe that I signed up for overdraft protection the following month. I was absolutely disgusted by my waste and irresponsibility!)

It's My Budget! Part 1 of 3

Now that I’ve settled the car note stress, on to letting you folks now what’s going on with my budget. I earn $2778.02 a month and here’s the breakdown:

As I stated in the previous blog, I will ask for your recommendations for making financial decisions. I’ve divvied my budget into three categories: non-negotiable, maybe negotiable and negotiable expenses. Let’s start with the non-negotiable categories.

I spend $1919.21 each month for these non-negotiable expenses:

Car Payment**, $1045: Down from $1245/month to $1045/month, I am working on eliminating my car note in a “microwave minute”. Why am I committed to paying so much for an obligation that only requires $269.11/month? Because I ran the numbers for a few payoff scenarios and learned that I would be able to put more money away for savings and investment accounts by eliminating the car note sooner than later. Besides, life is better without a car payment :) Just think about all of the money NOT tied up to a note that can go to more fun stuff, like brokerage accounts, weekend trips, savings accounts, treating friends to dinner, etc. I just might have as much fun as the pup in this video...

Rent, $475: Having a roommate significantly cuts down on my housing expenses. Luckily, this amount includes utility payments, parking and Internet.

Student Loan, $229.21: Barring disability, bankruptcy or death - three very unfortunate circumstances- the federal government wants its money back, and, at a minimum, this is what I have to pay them.

Travel, $100: My close friend is getting married in April 2011 (congrats buddy!). In preparation for his destination wedding, I’ve been setting aside $100/month to pay for travel, accommodations and spending money (you know, for a wedding gift, jet skiing, over-priced adult beverages, group tours, etc.) I intend to save this amount up to April and commit to only spending cash will I’m enjoying the festivities (I think the theme song for the wedding party should be this). We’ll see where the $100/month will go afterward (Morocco anyone?).

Phone, $70: I have a no-frills plan with an equally non-frilly phone. I selected my service provider mostly because the people closest to me are customers of the same company. Translation: free mobile to mobile without worry of how many people I can put on a special list AND I don’t have to feeling guilty about them using THEIR minutes to talk during peak hours. I should mention that a friend recently put me on to another company...essentially, I could pay the same amount for my plan, but get more features. Since I’m smack dab in the middle of a contract, I think I’ll sleep on the idea of switching cell phone companies. Those cell phone termination fees are kinda nasty!

**Correction to 09.09.2010 Post: Previously, I stated that due to the change in my debt reduction plan "What’s more likely to happen is that I will finish off the debt in April 2011." After reviewing my 'debt reduction' spreadsheet, I am on track to complete this feat by the end of March 2011. I apologize for the oversight.

Thursday, 09.09.2010

Have you ever been frustrated about your finances? Have you ever fretted about your budget, your investments, your credit cards or any financial plans intended to make you better off? I guess we have something in common, then!

A few nights ago, I stared at spreadsheets for my ongoing expenses and debt elimination plans in utter vexation. After setting aside money for food, gas, my student loan payment, obligatory savings for overdraft protection, health expenses, and an upcoming oil change, I had $19.34 remaining to be spent as discretionary funds.  There’s more to it…I also set aside a portion of my paycheck for my car note.  Exactly 2.362937088922745 times the amount of my actual car payment. Why in the heck would I set aside 65% a paycheck to go towards my car payment? Well…. to pay it off early (duh)!!!

Here’s the background: my credit union loaned me $13,500 (at 7.88%) in July 2009 for a vehicle purchase. If they had their way, I’d pay $269.11 for a cool 60 months (all the way through July 28, 2014, to be precise). In this time, I’d pay $15,505.26 (do the math, that’s just over $2,000 in their pockets). I’m not knocking them for it, either. I understand that’s how the business works: when you use other people’s money (i.e. credit), you pay for it (i.e. interest)! However, I recognized an opportunity to save some money. So I set out to pay off my car early, and with a new job (i.e. higher income) in the works, I finagled my budget so that I would pay my car note off in May 2012. My boyfriend shared the idea of me bumping up that amount EVEN MORE! If I suspended my savings and [after-tax] investment contributions, I could put $1245 towards my car payment every month and be done with the whole thing in February 2011! Naturally, I freaked out because I’ve been taught to save money….ALWAYS! But when I ran the numbers (more spreadsheets of course), I discovered that I’d be able to save more by eliminating the debt earlier. Simply put, I could start saving more money sooner than later:

$1245/month payments = Debt retired in February 2011*	$500/month payments = Debt retired in April 2012
Amount Saved/Invested by December 31, 2012
Save $0 from April 2010 through February 2011 ($0/mo x 11 months= $0) $1245/month in March 2011… ($1245/mo x 22months= $27,390) $0 + $27,390 = $27,390	Save $745/month from April 2010 through April 2012 ($745/mo x 12 months= $8940) $1245/month in May 2012… ($1245/mo x 9 months = $11,205) $8940 + $11,205= $20,145
*Includes two additional payments made possible by an “extra” paycheck in October 2010 and estimated tax refunds.

Sounds pretty cool, right? Not exactly… my frustration came to a head when I was faced with the reality that I wouldn’t be able to do anything fun for the next six months (after all, $19.34 for discretionary funds isn’t much). Between airfare to see my beau, his birthday in January and my girlfriend’s super-duper birthday festivities (she’s acknowledging the big “3-0” with Caribbean beaches; also in January), I’d be a real miser and say "no" to everything (like David Spade). But would it be worth it?

After a mini-breakdown, I decided that the answer was “no”. So I revised my budget and debt elimination plan. Now, I’m paying $1045/month for the car note. I could probably still eliminate the car note by the end of February 2011 if I significantly increased portions of my “extra” paycheck in October and anticipated federal and state tax refunds to the note. What’s more likely to happen is that I will finish off the debt in April 2011. In the meantime, I’ll have $200/month to put towards airfare, January birthday celebrations and who knows what else until the note is dead and done with. Instead of saving $27,390 by the end of December 2012, I’ll have $24,900 (still ahead of the initial $500/month plan and WAY ahead of the credit union’s plan).

So what do YOU have to do with this? Why should YOU care? I'm sure glad you asked! I’d like your help. You might be familiar with the concept of crowdsourcing, and I’m willing to give it a shot…with my financial decisions… for a year. The way I imagine “Spend for Sandy” to exist is that I will ask for your recommendations about the way I should spend my money and will select the most popular ideas. You have nothing to lose (it’s my money after all) and I look forward to sharing how these various financial experiences work out. So that’s it.

I commit to posting twice a week (Tuesday & Thursday). I will aim to keep posts less than 750 words (already violated this; please forgive me =>). And I agree to let YOU be the decision makers and to share my reactions and experiences. Thanks!