Double Check Everyone's Math

If you owe anyone money: student loans, a mortgage, etc., then make sure that their math is correct. I've calculated my government student loan payment recently and found that it is incorrectly calculated. I am paying more in interest every month then I should be according to all the amortization calculators that I was able to run.

After writing them an email, they responded by lowering my payment by $1.50 per month, we will see how they will calculate interest this month. However, it is hard to argue what they are charging because, unlike Sallie Mae, the DLS Website does not calculate daily interest and the outstanding interest is always the same throughout the month and is around $10, while it should be around $70.

My Sallie Mae payment is also incorrect due to pre-payments, but at least they are calculating the daily interest correctly, therefore, I don't mind paying a few dollars extra a month. However, if you are having trouble repaying your loans, every dollar counts, therefore, do the math.

How much house can you afford?

MSN money has a useful tool to see how much house you can afford. Before, going to get pre-approved, have an idea of how much you really want to and can take out in a mortgage. Use this tool to find out:

How much house can I afford?

Monthly, Bi-Weekly, vs. Weekly Payment

Ever wondered how much difference a bi-weekly payment will make vs. a a monthly payment on a loan? How much difference is there between a weekly loan payment and a monthly loan payment?

Now you can see using this calculator:

RBC Mortgage Payment Calculator

Financial Clean-Up

If you haven't done so already, now is a great time to get your finances in order. Taxes are done; it's a fresh financial year. Now is a good time to start making folders for 2011 taxes: one for receipts, one for paycheck stubs, one for interest payments you make on your mortgage or student loans, etc.

If you start organizing now, taxes will be a breeze in April, or maybe you will be so organized that you can do your taxes in January and get it over with.

Now is also a good time to make some long and short term financial goals.

Here are mine:

1. Continue to contribute 15% towards retirement through 401(k) and IRA
2. Pay extra on my student loans, but just enough extra that I only pay $2,500 in interest in 2011
3. Have an emergency fund of 6 months that I don't have to touch because I have enough in checking as well (recently I pulled some money out because I had a family medical emergency, a car accident, and I want to prepay some rent to negotiate the rent down)
4. Start saving money on the side to pay off my private student loan in 2013 (as discussed in a previous post, my whole payment is currently interest because I am only paying capitalized interest and after doing some math, it works out better if I only pay $2,500/per year in interest for the tax deduction and then pay off my loan in full in 2013, when I won't be able to rack up the $2,500 in student interest payments for the tax deduction) - I would like to see $3,000 in this account by Dec 31st, 2011
5. Get a raise of around 13% from my current salary by April 2012 - currently supposed to get a raise at the end of May and then again in April
6. And of course, be able to take all my vacation days by going somewhere, buy Christmas presents for the family, and spoil my nephew-to-be

Excel Templates

I just discovered a great way to have your own financial calculators that you can modify. For example, recently I have been struggling with the fact that I am paying off capitalized interest on my private student loan, which means that the whole payment is currently tax deductible. I had two options: pay off an extra $300/month on that loan or save that $300/month in a savings account.

Mathematically, it turns out that I should save $300/month in a savings account for the first 2 years and then pay off my student loan with those savings in the third year after I have paid off my capitalized interest. There is no way to run an amortization schedule where you can change the payment amount after 24 months and add a lump sump payment in the beginning of the third year. However, that and more can be done with Excel Templates.

I also like the fact that in an Excel template, you can save the worksheet and return to it when you feel like it. If you were to use the BankRate amortization schedule, for example, then you would have to reenter your data each time you wanted to change up your payment.

Excel templates offer amortization of payments, monthly and yearly budgets, expense trackers, net worth analyzers, gas and mileage logs, etc. New templates are added by users, so new ones can sprout up any time. Modify any of the templates to meet your specific needs.

Suze Orman Expense Sheet - Budget and Emergency Fund Planner

Another great budgeting tool is on the Suze Orman's website, Suze Orman's Expense Sheet. You enter your emergency fund amount and break down how much you spend each month by category. Then, Suze lets you know what your essential expenses are and based on that how large your 8 months emergency fund should be.

If a budgeting category is off from the national average, the cell will highlight yellow and by hovering over the cell, you can see what the national average is. If you are spending less, that's great. However, if you are spending more than the national average on a category, you should reconsider that expense even if you have an above average income.

At the end of the process that takes 2 minutes, Suze will tell you to beef up your emergency fund if you do not have 8 months of essential expenses. If your emergency fund fits the bill, she'll say that you should aggressively pay down any debt.

NetWorth IQ

There are several ways to track your net worth. The most convenient for me, has thus far been Mint.com because it does everything automatically. However, another way to track your net worth is through NetWorth IQ. Here are it's advantages and disadvantages.

Disadvantages:

1. You must manually enter all your data
2. All other people's data is manually entered as well and might not be accurate for comparison
3. You must enter your data every month to see the progress

Advantages:

1. You can track your net worth with a graph
2. You can see the percentage change in each category
3. You can make your net worth public so other people can comment on your progress
4. Making your net worth public might motivate you to get that number up
5. You do not need to give out personal login information
6. You can compare your net worth to others your age, or in your occupation, for example
7. You can also compare each category such as student loan debt, credit card debt, or retirement assets to others in your demographic groups

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.

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.

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.

Financial Goals

The whole point of learning and keeping up with your finances is to attain our financial goals. What are your financial goals.

Here are some examples of goals:

1. Save X amount in an emergency fund
2. Save X amount of months of expenses/salary in an emergency fund
3. Save X amount for retirement this year
4. Save X% of each paycheck for retirement this year
5. Max out your IRA
6. Pay down my student loan in X amount of years
7. Pay double the minimum on my debt
8. Save for a vacation
9. Save for graduate school
10. Save for a down payment
11. Buy a car with cash

What are you saving/hoping for?  Whatever it is, my favorite tool to keep an easy track of your savings and goals is to open up a high yielding savings account (see my earlier post where to find one), and set up a goal in Mint (see an earlier post about this website as well). You can set up multiple goals as long as you have a different account for each goal and keep track of your progress. Mint will tell you if you are on track, behind, or ahead on your goals and the amount of time it will take you to reach them.

Renting vs. Buying

Before even considering if you should be a home owner, you should have a 20% down payment to minimize the risk of foreclosure and to avoid paying the mortgage insurance. You also should have a full funded (whatever that means for you) emergency fund since home emergencies can come up regularly. Some even advise that you should build a separate home emergency fund valued at 1-3% of the purchase price.

Once you have both of those criteria, it is smart to see if you should purchase a piece of property for yourself. The NY Times "Is It Better to Buy or Rent?" Calculator is great for determining just that. Have you considered association fees, insurance, taxes, maintenance, and closing costs? The property costs more than just the price tag. Do you know how long you are going to stay in that property? The break even point can come 10 years after the purchase. If that is the case for your situation, are you prepared to wait that long before your investment pays off?

Having lived several years in CA, I always thought that buying is better than renting, however, now that I live in Miami (a renter's market), I can see that there is no way I could afford a house in the area that I am renting and break even, even after 30 years. Therefore, landlords seem unavoidable in my foreseeable future.