The Liz Weston Budget

Budgeting is always in question. I've written a post on budgeting earlier, please see Budgets. However, it's always great to see other opinions as well. Liz Weston is a supporter of the 50/30/20 budget.

This means that 50% of the budget should go to your needs such as shelter, food, transportation, minimums on debts, and utilities. I think 50% for needs is great because in case of a job loss, you can easily survive on half of your income by working part time.

30% of your income should go on wants like clothing, entertainment, and dining out. This is perfect, however, for those who are saddled in debt or are behind on retirement savings, this is a little too much. I would spend half of this on debt repayment or catch up contributions, if I had excessive debt or were behind on saving. If, for example, someone does not have an emergency fund, they should not go out and spend 30% of their money on things they want, but do not need.

20% of your money should go to savings and debt repayment. I think you should be saving a minimum of 15% for retirement per year, therefore, leaving you with 5% for debt repayment. 5% is unrealistic if you have a lot of debt.

Therefore, this is a great budget to follow when you have a fully funded emergency fund, you are on track for retirement, and you have a low debt ratio. I would consider a low debt ration to be below 10% of your take home pay or even lower.

Kiplinger - Archives

Yesterday, I was looking through the Kiplinger magazine archives on Google Books. They have full online issues of magazines starting from 1947. Personal advise has obviously changed since then, especially since now we have more complicated products such as IRAs and ARM mortgages.

Here are some things that I found interesting.

Mortgages:

• Feb 1957 - When you borrow for a mortgage, make sure that you borrow reasonable amounts. A safe amount for a monthly payment on a mortgage is no more than 25.6% of your take home pay. You are probably okay with 28.8% of your take home pay. If the mortgage is over 33.2% of your income, you are going into the risky territory. The higher your income, the less mortgage that you should take out as it will be harder to maintain in time of a job loss.
• Feb 1957 - If your rent is 15% of your take home pay, you are either economizing or getting a break. If your rent is 25% or more of your take home pay, you are stretching it. Mortgages can be a higher percentage of your income as you will keep the home after it is paid off.
• Sept 1961 - The government approved 40 year mortgages. The article strongly advises against them as it would take you 29 years on a $12,000 mortgage at 5.5% to reach the tipping point, which the article describes as your loan being worth as much as the house. This example does not include a down payment. Graphs that were used clearly demonstrated that 15 year mortgages were the way to go as it saves a ton in interest costs. In fact, the magazine was trying to show that, due to interest, your monthly payments would only be slightly lower in a 40 year mortgage than in a 15 year mortgage. I did the math and the payments were $98.05 for a 15 year mortgage and $61.89 was for a 40 year mortgage. Doesn't seem like a large difference to us now, but the 15 year mortgage payment is more than a 1/3 higher. However, the magazine showed the difference per dollar borrowed, emphasizing that the difference is not that great.
• Mar 1964 - The average down payment declined from 28.4% to 24.5% in a year. The average mortgage term went from 19.7 years to 24.5 years in the same year. Please note that the average down payment was more than 20% in either case.

Student loans:

• Jul 1958 - First student loans are discussed. The loans have a 36 months term at 4.5%. Students are borrowing a few hundred dollars a year.
• Apr 1964 - 72 month terms for school are discussed.

There is much more information in those magazines. It is also interesting to see how, through the history, the down payments became smaller, the loan terms became longer, more types of loans became available such as personal loans and credit cards, and those other types of loans became more popular.

Cut Your Bills - Insurance

Insurance is something unavoidable, if you own a car that is. However, many people overpay simply because they stick with the insurance agency that gave them their first quote or they never compared rates. A great company for comparing rates is Insurance.com. This site allows you to fill in the forms once and get quotes from several companies.

However, it does not hurt to get quotes from other companies that you do not see on the Insurance.com list, or even those that show up, just to make sure.

Upromise.com will offer $5 if you request a quote from Liberty Mutual, even if you do not sign up for their insurance.

Make sure to compare insurance rates every time your insurance expires as you might be able to get a better deal elsewhere. Also, make sure to pay your premium in full for the 6 months. Usually, it will lead to great savings.

When to Start Saving for Retirement

So, you've heard people say that the sooner you start saving for retirement, the better. If you are till not saving for retirement or are not saving enough, you probably were not shown the numbers. Use this CALCXML - Savings Calculator to see how much you would loose for every year that you delay savings.

Money in your 20's

Money management skills should be learned as early as possible and the 20's is a great place to start. Here are 10 financial projects you should take on in your 20's:

1. Learn to live on less than you make. Many people who find their first job, go all out with a new wardrobe, a new car, decorations for the new apartment, etc. Control your spending and only spend what you can afford with the money you have. See the Cash Flow blog post to see how you can see your cash flow with ease.
2. Start saving. Use the budget worksheet to see where you are overspending if you are unable to spend 15% of your take home pay. If you have large student loan payments, try to cut down in all areas to free up some space for savings, even if it's $5/month.
3. If your company offers a 401(k) match, start putting in the minimum amount you have to put in to get the full match.
4. Build an emergency fund in a high interest savings account.
5. Maintain a good credit score. Make sure you are never late. Automating your bills is an easy way to make sure of this.
6. Pay down on your student loan or any other debt with any extra funds that you have. If you receive a gift, a tax refund, or a bonus, try to apply it directly to your debt. See the Debt Pay Off Methods to see how you want to tackle your debt. See how even $5 per month extra will make a difference in your debt by using the Bankrate Amortization Calculator.
7. Save for retirement. Starting early is one of the best things you can do. Use a retirement calculator to see how much you should save. Start small if you can't contribute the full amount you are advised and increase your contributions yearly.
8. Designate separate savings accounts for various goals. Retirement should be saved in a 401(k) and an IRA. You should also have separate savings accounts for an emergency fund, grad school, vacation, car, down payment, etc. You can save in each account simultaneously or take it one step at a time and once your emergency fund is full, save for a vacation, once you have enough in that account, you can save for grad school and a car, etc.
9. Get health insurance. One accident can ruin all of your plans. 
10. Earn more money. Ask for a raise at the annual review or find a job that will pay you 15%-20% more and present the offer to the current employer. Be ready to leave for the new job if the offer isn't matched.

Kelley Blue Book

Just like you need to know the value of your house to calculate your net worth (See Blogpost Zillow), you need to know the value of your car.

To estimate the value of your car, you can go to Kelley Blue Book (KBB) and enter your car's information. KBB is also useful if you would like to sell your car. Once you are ready to sell, enter your car's information and use the private party value as the basis of your listing. The buyer will probably want to bargain with you and bring the value of the car down, but at least you have a place to start.

Ebates - $5 for Signing Up

Like Upromise, Ebates pays you to shop online. Upromise can be directly linked to your Sallie Mae account and you can involve your relatives to participate and gift all their money to your loan account. For Ebates, you receive cash, yet you usually receive a larger percentage.

Just for signing up, you'll earn $5 in cash. If you keep shopping, you could earn a percentage of all your purchases on your Ebates account. Your money is automatically transferred from Ebates to Paypal in $5 increments.

Some examples of merchants and their cash back offers:

1. Groupon - 3%
2. Mint.com - $1.50
3. Entertainment.com (Entertainmnet Book) - 17.5%
4. Snapfish - 6.5%
5. ATT - $50
6. Netflix - $10
7. AMEX Gift Cards - 1%
8. Walmart - 2%
9. eBay - 1%-4%

Pretty much anything you buy online can be bought through Ebates and, therefore, you could earn cash back. It ads up quickly.

Your Money Personality

Want to know how you spend/save your money compared to others? Take the Money Personality Test to see.

Money Max Coach - Money Personality Test

Just make sure to answer honestly. Throwing $10 in your IRA when you have an extra $10 (once every couple of months) is not really regularly saving for retirement. My result as a Hoarder is spot on besides the fact that I would like to create wealth and the fact that I do not mind risky investments as long as it is a limited amount of my assets.

Restaurant.com

If you ever go out to eat, one great way to do so is by buying gift certificates on Restaurant.com. Restaurant.com offers gift certificates to restaurants usually at a 50% discount. Although there is usually a clause about how much food you have to buy, it usually ends up the amount that you would spend anyway. Buying a $10 gift certificate for $5 to a burger joint is still a good deal if I have to spend a minimum of $20. Two burgers and two drinks is usually $20.

Many restaurants will automatically add tip on the pre-discounted amount. Usually the tip is 15-18%. However, there are many restaurants that do not have the tip included, just read the fine print. I don't like going to places where the tip will be automatically included, I feel I don't get as great of a service as the waiter already knows that I am forced to pay 15-18%. I'd rather pick my own tip amount and it will only be 15-18% on an exceptional service. I used to be a waitress too at one point in my life and I think the society has moved to accept tips as mandatory, but I think if the customer had to wait a long time, didn't get what he ordered or the waitress showed the customer attitude, minimal tip, if any, should be left. Therefore, I always seek the restaurants that do not automatically add tip to your bill.

Now, Restaurant.com seems to offer more than restaurants in some places as well. For example, in Miami, Restaurant.com is offering a sunset cruise at a 50% discount.

You can buy Restaurant.com gift certificated at the website itself. However, there are ways to get the gift certificates at deep discounts or free:

1. Most likely you have some miles that are expiring with an airliner that you do not fly often. Usually, you can trade in your expiring miles for Restaurant.com gift certificates in their miles mall. I received my first ones through United.
2. You could buy Restaurant.com gift certificates at a deep discount on eBay.
3. American Express usually has free 30-day trials of services that will give you Dining Dough certificates for free as an incentive. Just make sure to cancel the service that you are trying.
4. Some retailers will have special promotions for Restaurant.com. For example, I recently received $50 in Restaurant.com gift certificates for purchasing $50 worth of goods at Drugstore.com.
5. You could use coupon codes on Restaurant.com to get certificates for pennies. Google "Restaurant.com coupon codes."

Zillow.com

If you own a home, you need to know the current value of your home to calculate your net worth. The best site for that is Zillow. Zillow will not only give you the current value of your home, but will also give you fun statistics like your locations Walkability score which looks to see how close you are to closest school, grocery stores, bars, etc. If you are looking for a house, this is a great way to see how much houses in your area are going for.

I look at the website for fun. It's fun to see that I can buy an apartment in downtown Miami for 25K, it might be in a run down area, but the luxury apartments are less than a mile away.

Estimate Your Tax Refund

If you haven't done your taxes yet and are expecting a return, then maybe an estimate of your return would be a motivator. TurboTax is great for doing your taxes or at least filling everything out and seeing what the refund will be and then trying to do get the same number yourself on paper copies.

Another great feature of TurboTax is their TaxCaster  - Free Tax Calculator. In less than a minute, you can receive a rough estimate of your return. I think mine is roughly $100 off.

Save the link for next year and play with your numbers in December so you know what to expect before 2012 rolls around and while you are still able to make some changes in 2011.

Pay Yourself First First, No Really

Every personal finance adviser out there says to pay yourself first. There are websites dedicated to the concept. However, many of us still don't do this simplest thing. For the longest time, I figured I was disciplined enough not to have to do this. However, since I've started a couple of month ago, it has done wonders.

Paying yourself first is as simple as setting up a new savings account (if you don't have one yet) and setting up automatic transfers of at least 15% of your take home pay. It sounds so simple, but paying yourself first lets you see the money that you have left over.

Since I am saving for a couple of things right now, I have one slush fund for the 15% savings and then I distribute from there to other savings accounts based on what I feel I want to accomplish first.

This 15% is the starting point for my savings. I also contribute 4% of gross pay to a 401K and I always end up transferring more out of my checking and into my savings. However, keeping the funds separate and having the automatic savings plan of at least 15% going into my slush fund, helps keep me on track.

Annual Credit Report Three Times a Year

If you haven't checked your credit report in 2011 yet, make sure to do so at the free site provided by the credit scoring agencies at Annual Credit Report. There are 3 credit scoring agencies: Equifax, Experian, and TransUnion. Therefore, you can check your report thrice a year for free.

Most people who know they should check their credit reports and don't, forget to do it. Therefore, you should create a system that reminds you. Putting it on the calendar does not work for me. If the calendar does not work for you either, you could mark the days that you have to check your report by, for example, day light saving days and your birthday. Therefore, you check your credit report every time the time changes and around your birthday or other memorable day like the 4th of July. I do better at associations for remembering things and, therefore, this method works for me.

I also struggle with remembering which agency I checked last. Therefore, it might be easier if you do them in an alphabetical order. Check Equifax, then Experian, then TranUnion. Or, maybe you can check the agencies starting with an E on day light savings days and TransUnion on your birthday or whatever memorable day you chose.

Whatever system you use, make sure to check the credit reports to make sure you did not experience identity theft, there are no errors, and you have been on track with paying down your debts.

E-Miles - Free Miles

Most airlines give away free miles through email subscriptions, a dining program, magazine subscriptions, etc. Another way to get miles is through looking at advertisements and possibly answering a few questions. e-Miles Miles for Minutes is a website that gives away miles or points for companies such as AirTran Airways, Alaska Airlines, Continental Airlines, Delta Air Lines, Frontier Airlines, Hilton HHonors, etc. Check to see if your airline is there and fly sooner.

Dave Ramsey's Baby Steps

Dave Ramsey is a hugely popular financial adviser. I like listening to his radio show just to see what his opinions are, even though a lot of the times, I do not agree with what he says. Here is the just of what he advises through his 7 baby steps:

1. Save $1,000
2. Pay off all debt, but the mortgage (this includes student loans)
3. Save 3-6 months in an emergency fund
4. Invest 15% of your income in retirement
5. Fund college education for children
6. Pay off your home
7. Build wealth and donate

 I think having a step process works for most people. However, not every household has the same factors in their financial life. I do have to credit him with saying that cheating baby steps in some circumstances might be okay, however, he does not seem to endorse it. I've heard his say, for example, that if you have an unstable job, you should increase the savings that you do in baby step one. However, he is never clear with how much.

I still believe in Suze Orman's idea of saving an 8 month emergency fund and then paying down the debt like student loans. Of course, if you have credit card debt at high interests and you feel pretty safe at your job, you could get by on a smaller emergency fund until your credit card debt is paid off.

I also think that Liz Weston has a point when she says that you can never catch up on your contributions for retirement. Therefore, I think that getting the employer's match in a 401(k) is a priority over paying for debt.

See my blog post on Prioritizing Savings to see what my personal 8 steps are.

Value of Your Car

Many people spend crazy amounts on their car payments. Usually those car payment are for 3-5 years. So, if you drove an old car for the first 3-5 years of your life and paid car payments to yourself, at the end of the 3-5 years, you should be able to pay for your car outright. While you drive your new car you have no payments, therefore, once again you can make payments to yourself and at the end of another 3-5 years you can buy another car outright, if you want. You have to be disciplined and treat those car payments to your separate savings account as a bill. Paying interest on the car payments to a loan company is like paying someone to make sure you put that money away. Do you really need to spend 5%, 10%, 20% of the value of your car on having someone look over your shoulder?

Also many people buy cars that they are unable to afford. A car's value together with all other motorized things in the house (i.e. boat, plane, motorcycle, ATV) should never total more than half of your salary. If it does, you have poured too much money into something that you cannot afford, especially if you are making payment on it. Therefore, if you just started working and are making $30K, and have signed a car loan for a brand new $25K car, you have overspend by $10K.

And, since new cars loose much of their value within the first few years, it is always a smart idea to buy a used car, even if it's just a couple years old.

The Math of Retirement

There are all sorts of numbers that you can calculate to see how much you will have in retirement. The truth is no one can predict how long you will live or what your medical costs will be, for example. However, there are some numbers that you could use as estimates without having to use complicated calculators.

• Always save at least 10% of your salary for retirement
• Have at least 10 years of your final pay in retirement before you do retire
• Never withdraw more than 4% of the principle of your total holdings in retirement to make sure you don't deplete your retirement fund (this means that you should be okay with living on 4% of the total amount you have as well)

Just remember 10, 10, 4 and you should be set. 

Student (or any other) Loans

You have a large student (or any other loan) looming over your head and you want to know how to pay that off. Look at the Bank Rate Amortization Schedule to determine what you need to add every month to pay the loan off sooner.

As an example, let's take the left overs of my private loan of $11,676 at 164 months, 6.25% interest. Select the mortgage start date to be the due date of your loan and the last month you paid it on. I am selecting Feb 24th. The calculated monthly payment is $106.05 (which is a few cents off my actual minimum payment). My pay off date is Oct. 24th 2024. If I double my payment to $212.10, my pay off date changes to Aug 24th 2016. That is in 5 years instead of 13.

You can play around with the numbers to see how much extra money you have left in the budget to see how much extra you can pay towards your loan and what is the difference that it will make on the life of your loan. I am planning to add $200 to my monthly payments, which allows my loan to be paid off in 3 years instead of 13. I am going to pay $1,374.99 in interest vs. $5,716.64 if I kept paying the regular payment amounts. This is a saving of $4,341.65.

Many people say that you should not pay off your student loans any sooner than you have to due to the tax deductible interest. If those experts can prove that I will gain a tax break of $4,341.65, then I will change my strategy and stop paying extra on my loan. However, I don't think they can. I paid $1,427.37 on this loan in interest last year, which, at 15% tax rate, means I saved $214.11 in taxes. If I save this much every year, which I won't, as the interest you pay decreases every year, then I will save $2,783.37 in taxes over the next 13 years. This number is lower than what I can save in interest if I make the extra payments and I will have a tax break for the next 3 years as I pay this loan down.

The only factor that might change this number is when I move to the 25% tax bracket. If I moved to the 25% tax bracket starting next year, I would save $4,638.95 in taxes, which is more than the savings in interest, however, remember that the interest you pay will significantly lower as the years go on, and, therefore, you would still be saving less in taxes than in the interest. Also, this assumes that I will be moving to that tax bracket this year.  Also, this calculation does not account for what interest I could be earning on the extra $306.05/month that I would have freed up starting in year 4.

Bottom line - you save more by paying down your debt earlier than you do in tax breaks from paying the interest.

Daily Deal Websites

Daily deal websites such as Groupon are a great way to save money if you do it right. If you currently do the things that are sold on the daily deal websites, then it's better to save by buying the vouchers. I regularly purchase the discounts for bars, restaurants, or other activities.

Another reason why Groupons are an excellent idea is that sometimes you will see activities that you would not normally do, but they are for the same price as a common activity. For example, I recently purchased a 4 hour fishing boat tour for the price of a movie. Therefore, I can explore new activities such as fishing for the same price as a movie ticket and I get to keep the fish I catch!

One thing to remember about Groupons is that you have to remember to use them before their expiry date. I heard that 1 out of 5 Groupons are never used.

There are hundreds, if not thousands, deal-a-day websites. There are so many sites that what is needed is a site where you choose your cities and you can see all the deals at once. If someone knows of a site like that and it works well, let us know in the comments. It'd be great if you could also see the deals from other cities that you could use. For example, New York recently had a cheap subscription to Newsweek. People in Los Angeles could have used that deal too if they saw the NY Groupon.

The Breakdown of Your Credit Score

If you've already checked your credit score on Credit Karma and Quizzle, two companies I wrote about in an earlier post, then you might be wondering how that number is determined.

Fico.com determines it by the following factors:

Therefore, if your credit score is lower than you want it to be, make sure you do the following:

1. Always pay on time, if you accidentally missed a due date, call the debt holder and ask for them to not post any negative information because you have been a 'good client'
2. Pay down your debt, all of your debt and don't close down your cards as they represent the total available credit to you
•  Debt (balances on your cards) to available credit (total combined credit limit available to you on all cards) should be under 10% every month
• Please remember that even if you pay your credit card in full every month, the balance that is due every month is the balance that gets reported, therefore if you have $5K as the credit limit, but every month you charge and pay $4K on the due date, your debt to available credit is 80%
• To lower your debt to available credit ratio, pay down your credit card before the card calculates your balance for the month
3. Don't close oldest cards or any cards at all in my opinion (unless they have outrageous annual fees that just would not make sense to keep)
4. Don't open any new cards or apply for any new loans so no new inquiries are posted on your credit report
5. Make sure you don't have any store cards (if you close any that you already have, you will probably be affected negatively though)
• This one is a little bit tricky as with 'types of credit,' FICO means you need to have credit cards, installment loans such as student loans, mortgages, etc. - I recommend staying away from all debt besides an affordable mortgage and reasonable student loans. You should have a couple credit cards just so your available credit is high.

Rule of 100 - Portfolio Diversification

To know how much of your portfolio should be invested in stocks vs. bonds/CD/other safer investments, you can use the simple rule of 100. What you need to do is subtract your age from 100. For example, if you are 25: 100-25=75. You should have 75% of your portfolio invested in stocks and 25% in bonds, etc.

Of course, if you want to be more aggressive, you can invest more money in stocks or the other way around. If you want to be safer, you can invest more money in bonds and CDs. However, the rule of 100 can provide a basic guideline.

Reverse Mortgages Explained - the Good and the Bad

Retirement has many options such as annuities, IRA income, social security, etc. Reverse mortgage is one of them. A reverse mortgage is a loan that you can take against the equity that you have in your house and the loan can be taken out in a lump sum or in monthly payments. You do not have to repay the loan until you die or move. You must be 62 to qualify for this retirement program.

The Good:

• Money is quickly available in a lump sum to use to pay off debt in retirement
• Monthly payments that could support your social security and retirement distributions
• You can stay in your house
• Credit history is irrelevant to obtain this loan as your home is the collateral
• You can use the loan to pay off the remaining balance of the mortgage and never pay your mortgage again

The Bad:
 

• Fees to obtain a reverse mortgage can be high
• You are still liable for the insurance and taxes
• If you move (i.e. nursing home), you must start paying back the loan
• Once you die, the estate repays the loan and the fees if they want to inherit the house
• If you receive some payments and pass away, and your estate does not have the money to repay the payments and the accumulated interest, than your estate will loose the house

It is a great program for those who do not need/want to leave anything to their heirs and for those struggling in retirement. However, do keep in mind that you must live in the house to not have to pay back the loan. As soon as you sell the house or move, you must start repaying the loan back to the bank.

ChexSystems Annual Free Report

Everyone knows to check their credit report annually to see if there are any errors that need to be cleaned up. Also important, is the 'bank credit report' or the ChexSystems Annual Free Report. Click on the link to take you directly to the website where, every year, you may get your report for free. Check that report to see if there is anything negative and if there is, if the negative information is accurate.

If it is not accurate or, for example, that overdraft fee listed on there has long been paid, then contact the report banking institution to have that information removed. If you have negative information reported on ChexSystems, you may be denied a bank account in the future.

And, remember that just because your banking activity does not get reported to your credit report that computes your FICO score, it is still being reported and can negatively impact you in the future.