March 2012 Making Progress and Net Worth Update

If you've been following the blog you know that I recently got a significant windfall last month.  It certainly helped the old net worth go in the right direction.  It also allowed us to pay off one student loan and sock away a lot into the old emergency/moving fund.  We are definitely making progress on our journey to the "crossover point."  The point at which our projected passive income exceeds our projected expenses for the month.  

Our income came in at a whopping $13,072.80; with $3072.80 being salary and $10,000 coming as a windfall.

Our expenses topped out at $7,035.18.  Why did we spend so much?  Well, as mentioned above we used some of the money to pay off a student loan.  $1939.27 for a Perkins loan I've been chipping away at since 2003.  We paid a total of $2069.93 in student loans in March.  Going forward that number will be $130.66 until another student loan is paid off (or forgiven, come on Congress, do it for the economy...).  We also sent about $1,000 of the windfall to my wife's mom and sister in Thailand to help with some medical expenses.  We also got some much overdue car repairs done and that came in at about $585.  Finally we bought some "jewelry" as a favor to a friend instead of letting her borrow the money. I feel good about the situation because we got something in return and I don't expect to be paid back because we already have been in the form of the jewelry (maybe not a fair trade, but at least I feel better about the situation because there will be no hard feelings because I know this isn't a "borrowing" money from a friend situation, which rarely turns out well).  All other expenses were about the same as in past months.

After it was all said and done, we were able to put almost $6,000 in our emergency/moving fund.  I'm happy about that.  I'm going to try to get April's expenses back to their more normal $2,500 range.  

Our investment income jumped from $57.84 in February to $79.57 in March (because we were able to put money into the our savings (I know I won't leave all that in there or invest all of it so should I count it? I don't know if I can answer that because I would like to invest all of it or even open up a Roth IRA with some of it, but for now I am going to sit tight and count it for now).  

I get that investment income of $79.57 by employing a calculation I learned after reading Your Money or Your Life, by Vicki Robin.  Robin says to really know when you are "free" or to know how much is "enough" for you to live independently (from a job) you should calculate what you might expect to get from your investments once you start drawing upon them.  Robin says to take the current long term government bond rate and use that as your % of income to draw off of, right now that is around 4% and that is also a good rule of thumb to use as an annual withdrawal rate for your investments in retirement. If you are confused, that is okay, I'll walk you through the calculation below.

First I take the total value of all my retirement and non-retirement investments.  As of March 31st they stood at  $23,871.53 multiply by 4% (0.04) and divide by 12 (giving me a monthly income).  

$23,871.53x0.04=954.86/12=$79.57 (for example, every $1,000 I can save gives me another $5 in monthly income.  I don't know if that would make you more or less motivated to save, but for me I want to see this number go up and up).

Net Worth Update

Assets		$ Diff	% Diff
Cash	$2,120	($728)	-25.56 %
Stocks	$10,929	$6,165	129.41 %
Bonds	$0	$0	-
Annuities	$0	$0	-
Retirement	$12,942	$352	2.80 %
Home	$0	$0	-
Other Real Estate	$0	$0	-
Cars	$4,772	$124	2.67 %
Personal Property	$0	$0	-
Other	$691	$691	-
Total Assets	$31,454	$6,604	26.58 %

Debts		$ Diff	% Diff
Home Mortgage(s)	$0	$0	-
Other Mortgage(s)	$0	$0	-
Student Loans	$45,730	($1,916)	-4.02 %
Credit Card	$0	($513)	-
Car Loans	$0	$0	-
Other	$0	$0	-
Total Debts	$45,730	($2,429)	-5.04 %
Net Worth	($14,276)	$9,033	38.75 %

As you can see my net worth went up 38.75% largely due to paying off the student loan and putting a large chunk of money into our investment account (which is sitting there as cash for the time being).

So there is March's "making progress" and net worth update.  

How are you doing with your progress this year?

What to Do with a Windfall: a Good Problem to Have

I have a problem.  Its a good problem though, I recently received a windfall, a sizable one.  The problem is that when I receive a windfall of a substantial amount of money I am paralyzed to make a decision.  

Knowing what to do with a sizable windfall is difficult because it requires you to look into the future (and guess what is likely to happen), weigh your priorities and goals and your values.

My biggest problem making a "smart" decision about a windfall is that I really value flexibility in my finances because I am at a point in my life where I may move soon.  I also wan't to eventually pay off my student loans (but may get them forgiven in about 7 years if I don't).  Those are a few dilemmas that guide my decisions with any money I get.  

So, what should I do with this money?

I could:

1. Pay off high interest debts.  Right now I have about $700 dollars in credit card debt after paying my car insurance for the year; getting my brake pads replaced; paying for some dental work; and renewing my skype for the year subscription this month.  I usually don't carry this much in credit card debt.  In fact I try not to use the credit card at all.  This definitely is a priority.
2. Add to my emergency/moving fund.  While in debt, some people, like Dave Ramsey suggest only keeping about $1,000 in an emergency fund and paying down debt.  However, as I mentioned above, I value flexibility with my money (at least at this point in my life) and I like the idea of having a sizable emergency/moving fund (because I may move soon and need $$ for plane tickets).    Obviously this is a priority for me.
3. Contribute to my retirement.  This is a very smart idea.  Open up or contribute to an existing IRA.  The windfall won't affect my tax sitution (because it is under the gift tax rule).  I could also open up a Roth IRA; I'll be able to use the money tax-free in retirement.  In 2011 I can contribute up to $5,000 ($6,000 if you are 50 or over).  
4. Pay off lower interest debt, like my student loans or a mortgage.  Currently I have about $48,000 in student loan debt (I have no mortgage).  The monthly payments aren't killing me, but they aren't really making a dent into my overall debt level either.  Also, I hate the idea of having such a large debt hanging over my families head.  Because this is an emotional issue for me, I could lower the amount I owe (even pay off the smallest of the loans and still have enough left over to do something else with the money).  I am reluctant to use all the money on paying down this debt because it: 1. has a low interest rate; 2. is tax-deductible; 3. it will be forgiven in 7 years anyway.  
5. Make a big purchase or blow the money on something useless.  I've done this before with windfalls.  In a past life, I got a windfall and bought a living room set that cost about $4000.  Long story short, my brother now owns the set...  Another time I used a windfall to buy a more reliable car (which was actually a good investment, even though a car isn't really a good investment).  This time around I don't really need anything.

After talking with my wife about our goals and what we value right now (flexibility) we decided to go with options 1, 2, 4, and 5.  

Why?  We want to pay off our credit card because, well, that is what we would do even without the windfall.  We want to add to our emergency/moving fund because we both agree that we need to keep the money flexible just in case we need it for a move or other emergency.  We decided to pay off the smallest of the student loans (a little under $2000) because it was close to being paid off anyway and its the one loan that we don't get a tax break on.  Finally, we decided to use some of the money on ourselves because, in the words of Jack Nicholson in the Shining, all work and no play make Jack Pennywise a dull boy.  

What would you do with a financial windfall?

February 2012 Making Progress and Net Worth Update

We had another good month in February.  We are making progress on our journey to the "Crossover Point."  The crossover point at which our investment income exceeds our projected expenses.  I got the idea from the book Your Money our Your Life by Vicki Robin.  Our "number" is $57.84* which is pretty good because when I started tracking this back in July of 2010 we started with only $26.12*.  

Take a look at the chart below to see how far we've come since then.  If you look very hard you can see some daylight down there below the green line, that's the total investment income (it helps if you enlarge your screen, hit command +).  Seeing some white underneath the line is exciting.  It means our investment income is starting to take off.  With the power of compound interest that line should climb higher and higher as time goes by.  

The Net Worth Update

Our net worth also increased this month (it helped that we were paid back a loan that we lent out 4 months ago; I had a terrible experience loaning money to a friend and I don't think I will ever do it again.  I may post something about this topic later this month, check back if you've ever had a bad experience loaning money to someone).  

Anyway our net worth increased nicely even though our direct student loans are going the opposite way they should (capitalized interest is a b*!&h).  We still increased our net worth by $1,998 or 7.86%.

The big jump was because we got paid back from a loan we made back in October.  We were able to put an extra $1000 in the bank towards our emergency/big move fund.  We also got our 2010 tax refund from the CNMI treasury (finally!) and were able to put another $500 in the bank (woo hoo!).  A great month when it was all said and done.  

Assets

Cash: + $1,284 (82%)

Stocks: + $739 (18%)

Retirement: + $502 (4%).  I am only counting my cash contributions at this point.  

Car: - $148 (-3%)

Total Assets: + $2,377 (10%)

Liabilities

Student Loans: + $19 (0.04%).  Capitalized interest sucks!

Credit Card: + $513 (258%).  Had to pay for car insurance for the year and some dental work.  We will have this paid off by the end of March.

 Total Liabilities: + $389 (0.81%)

Total Net Worth Change: + $1,988 (7.86%). 

Total Net Worth for February 2012: (-$23,309)

* I get this number by taking my total investment amount multiplying by 4% and dividing by 12.  This gives me a fairly standard withdrawal rate (4%) and a monthly income (12 months).  

Thanks for reading.  If you want to track my progress and get some good ideas on how to increase your own net worth consider signing up to receive email updates from this blog.  Sign up using the email sign up at the top of this page.  

Why Student Loan Debt Will Never Be Forgiven

I just came across this article written in the Wall Street Journal way back in August of 2011 by Detlev Shlichter, called Forty Years of Paper Money.  It struck me as a very adroit explanation of our current monetary situation, since we wen't off the gold standard completely (albeit, incomplete..for a more complete history of the U.S. and its fiat currency read this).

Basically by relying on paper money with no commodities or hard money backing it, the Federal Reserve is able to "create" money supply from thin air and it doesn't take a rocket scientist to see what comes next...Inflation.  To control this inflation the Fed manipulates interest rates; making it either easier or harder to borrow money.  

Since 1982 the federal funds rate hasn't gone above 10% and hasn't been above 6% since 2001 (to see the historical rates click here).  All this means that its easier to borrow money and more and more money is in the economy; which is good for an economy that is in crisis, but it all has to come to a horrible, nasty, and terrible end. With so much money currently in the economy and interest rates at historic lows (0-0.25%) and the economy still in doldrums, there is really now where to go but up as far as interest rates go, leading to a credit crunch (and hopefully a subsequent correction) and a more stagnant economy.   

So that won't happen.

Instead Schlicter goes on to say that

"Forty years of persistent monetary interventionism have left the economy addicted to cheap credit and continuous asset inflation. Forty years of monetary expansionism have led to distorted prices, misdirected economic activity and unsustainable debt levels. Since Lehman Brothers we know that the accumulated imbalances have become so momentous that a market-driven liquidation of them is deemed politically unacceptable. Credit correction, debt deflation and liquidation—as much as the market is craving them to cleanse the economy of its dislocations—will not be allowed under any circumstances."

There's a movement out there to forgive student loan debt to stimulate the economy.  This makes sense on the surface.  Especially since the federal government holds so much of the debt.  Freeing money for students to spend in the economy instead of on their loans would help the economy.

That should happen, but it won't.  As Schlicter states, it wont be allowed under any circumstances.  Liquidating those debts probably wouldn't stimulate the economy in any appreciable way in the short term, which is the timeframe that politicians usually base their decisions on.  For example someone with $50,000 in debt wouldn't go spend $50,000 in the first year they are bailed out, maybe they would spend $1,000 to $1,500 in that first year and so on.  It makes more immediate sense for any stimulus to go to people who will get a smaller amount and then spend all of it immediately.  (For other reasons student loans won't be forgiven check out this article at freakonomics.com)

The stimulative effect of forgiving student loans doesn't make sense and shouldn't be the major argument for getting that to happen.  Perhaps there are other ways to ease the pain on student loans (maybe allowing them to be discharged in bankruptcy again would help those in most dire straits) or making the interest rate match the federal funds rate (hey that would increase the amount of people seeking education and loans, a stimulative effect in the economy).

What do you think, should student loans be forgiven?  If not, what should be done to help borrowers who are struggling to get out from under their loans?

Presidents and the Stock Market

Which presidents have presided over the best and worst years of the stock market?  Does the stock market react to who is in the White House?  Does it matter if the president is a democrat or republican?

To answer this incredibly unimportant and largely inconsequential question I turned to my U.S. history textbook and moneychimp.com's historic market returns since 1871.

The results are mixed.  The presidents with the top five stock market "terms" were all republicans.

1. Calvin Coolidge, 1923-1929, tops the list with 20.73% returns.  Presided over the bubble leading up to the Great Depression.
2. William McKinley, 1897-1901, 18.73%
3. Rutherford B. Hayes, 1877-1881, 18.30%
4. Dwight D. Eisenhower, 1953-1961, 18.14%.  Eisenhower warned us about, but also benefitted from, the "military-industrial complex," which consolidated power between American business and the military by giving lucrative military contracts to arms and military developers.  A coalition that still dominates U.S. politics, despite the fact that the Cold War has been over over 20 years.  
5. Ronald Reagan (R), 1981-1989, 16.73%.  Military spending and massive deregulation of business, and high corporate profits helped Reagan reap the rewards of growth in the stock market during his presidency.  

However the worst four terms for the stock market all occurred during republican presidencies (and the only two presidencies that showed losses during their terms were republican presidents).

Don't tell her that FDR's
first two years in office
saw the largest gains
in stock market history. 

1. Herbert Hoover, 1929-1933, rounds out the bottom of the list at -(5.08%).  No surprise here as he was the president during the "Great Crash" of 1929 which set off the start of the Great Depression.
2. Richard Nixon, 1969-1974, -(2.22%).  Paranoia and Watergate weren't the only things dragging down Nixon's presidency.  Inflation and an energy crisis hurt Nixon's market record.  
3. Benjamin Harrison, 1889-1893, 1.43%, was hit by a depression at the end of his term, which dragged down the next president too, Grover Cleveland (1893-1897), a democrat.  Cleveland had the fifth worst market at only 2.69% growth.
4. George W. Bush, 2001-2009, 2.35%.  Presided over the "no-growth" decade and was hit by the "Great Recession" at the end of this term as the housing market crashed all around us.  We are only now starting to recover.  

As for the democrats the top Dem is...

1. Franklin D. Roosevelt, 1933-1945.  Fortunately for FDR the stock market really only had one way to go after the Great Crash in 1929,  and that was up.  Even though the economy during the Great Depression was slow to grow the stock market did remarkably well, gaining 16.23% from 1933-1945.
2. Bill Clinton, 1993-2001, 14.98%. President during the "tech boom" and the final stages of "free trade" schemes opening up borders and sending jobs over seas.  
3. Barack Obama, 2009-?, 14.68%.  Like FDR the stock market really had only one way to go, up.
4. Harry Truman, 1945-1953, 14.47%.  Like Eisenhower, Truman benefitted from the consolidation of power at the start of the Cold War between industry and the military.
5. John F. Kennedy, 1961-1963, 14.12%

After looking at the results I have come to the conclusion that presidents have some control over the economy as a whole, but there is no telling what the market will do once presidents are in office.  Outside forces have much more to do with how the market will perform.  

What is really interesting is that in 1933 to 1935, four years into the Great Depression and the first two years of FDR's presidency the stock market had its biggest gain, growing at a clip of 34.57%.

If anything the democratic presidents are a bit "safer" with an average of 11.125% growth during their presidencies vs. 9.17% for republicans because republicans have a deviation of 25.81% between Calvin Coolidge (1) and Herbert Hoover (28).  Whereas the democrats deviation from #7 to #23 is only 13.54%.  As this graphic (to the right) from The New York Times shows it pays to be safe.

Perhaps Congress has more "sway" over the economy.  But that will have to wait for another post.  

What do you think?  Does the market "react" to who sits in the oval office?  Please comment below. 

Gas Prices Still Going Up

This post is on of editor's picks on the Carnival of Personal Finance #135 hosted by sustainable personal finance.  For other great posts check out the links above.

Gas prices are skyrocketing where I live.  Currently they are at $5.05 a gallon for regular gas.  Up $0.15 cents from its previous high.  

I live in Saipan.  What makes matters worse, at least for a majority of workers on the island is that minimum wage here is also $5.05 an hour.   So it takes one hour just to pay for a gallon of gas.  Sad.

Why are gas prices so high right now?

The price of a barrel of oil is but just one of the many factors that go into the cost of a gallon of gas.  So just what goes into the price of gas?  And more importantly, how can we save on gas today?

Demand drives prices.  Basic economics states that as demand increases, prices do too.  Worldwide demand has been increasing steadily in recent decades and prices have been going up as a result.  But new supplies have always been discovered and I suspect new supplies will continue to be discovered, even if those supplies become harder and harder to get.  Seasonal demand also effects prices.  Summertime, when Americans typically go on more vacations and travel more increases the amount demanded and every year around summertime gas prices go up.  

The cost of extraction.  As new oil is discovered there is a cost for extraction.  New discoveries of oil are of the type of oil (experts call heavy or sour) that is much harder to extract than previous discoveries (which experts call light or sweet).  To get at the oil costs more so prices go up as well.  

What else goes into the price at the pump? (%=percent of each dollar spent on gasoline, source: Energy Information Administration.  eia.gov   )

• Taxes (12%)
• Distribution and marketing (10%)
• Refining/Suppliers (78%)

Also, gas prices are on the rise because the economy is starting to turn around and the price at the pump reflects that good news.  For more on this check out a great article by Aaron Belkin on huffingtonpost.com called, GOP Deceptions about Gas Prices.

So, how can we save on gasoline?

1. Drive more efficiently.  Driving aggressively can cut your mileage down by as much as 30% (more on the highway than in the city, but still it pays to drive sensibly).  So slow down.  Part of driving sensibly is obeying the speed limit.  You may end up saving more than just gas by following this rule too.
2. Get rid of excess weight.  The more junk in your trunk the less mileage you'll get (literally, but it might be a good idea to lose a few pounds too).
3. Take care of your car.  Keep it tuned.  Keep your tires sufficiently inflated. 
4. Use the right motor oil and look for oil that says it conserves energy and reduces friction in the engine.
5. Plan your trips.  The less you drive the more gas you save, of course.  So before going out make a plan and stick to it, combine errands, check the p.o. box once or twice a week instead of everyday or pay your bills online instead of getting in the car and waiting in line like schmuck.  

For more tips on saving at the pump check out fueleconomy.gov the official U.S. government site for fuel economy information.  

You can also consider using public transportation or carpooling.

Ideally, we would all be "off" our dependence on oil, but that is still years into the future.  The more you can do now to "ween" yourself off oil the better, get an alternative car, use alternative fuels like electricity, biofuels, or ethanol or if its feasible ride your bike more often to do the things you need to do (hey that would also fix our "junk in the trunk" problem).  

How are you coping with high gas prices?  At what price will you start looking at alternatives to gasoline and traditional ways of getting around?

Ways to Save

Are you saving enough?

photo from http://blogs.reuters.com/

There are a million excuses not to save, from earning too little to having too many bills.  But what are the best ways to save?  Saving is simple enough, but it's often difficult because, financially, it really isn't sexy.  It's not investing or buying that mcmansion or Audi.  But it is necessary for any other financial goal anyone may have for yourself.  

If you aren't currently saving enough, here are my top 5 ways to save.

1.  Pay yourself first.  This tip right here is what 99.9% (made up stat) of all millionaires do.  It's common sense, but very uncommon in our consumer culture.
2. Automate your savings.  The easiest way to save money and pay yourself first is to automate your savings plan.  If you have direct deposit available, use it; if not, your bank may have bill pay or automatic transfer services and you can set that up in a matter of minutes.
3. Make a budget.  Knowing what comes in and what goes out every month can be a big boon to your savings strategy.  If you don't know how much money you have to spend, how will you save it?
4. Reduce your lifestyle.  If you are budgeting and you still cannot find enough money to save it's time to take a good, long, hard at your lifestyle.  Are you paying too much for your apartment or home? Is that car payment dragging you down.  Take a look at the "big" expenses in your life and ask yourself if you can do with less so you are able to save.  If you can't do that look at the small stuff, i.e. the daily coffee or cable t.v.  You won't get as much savings, but even a little bit helps.  
5.  Save any windfalls you get.  Anytime you get money for the holidays, your birthday or your tax refund save it.  You got by without the money before you received it, why not "pretend" nothing changed for you financially and put it directly in your savings account. 

As for me I find the #1 way to save money is to combine all these strategies.  I have figured out that I need only about $300 dollars in my checking account to get through two weeks.  I really don't need that amount, but that is the amount that emotionally and psychologically I feel the most comfortable with.  I usually don't spend that much if I can help it.  So anything above $300 that I have on any given payday (after paying bills of course) I put directly in my savings account.  I also have a portion of my paycheck directly deposited into my savings so that if I don't have anything above the $300 threshold I still have something saved. 

Doing this allows me to save about $500 a month give or take.  Of course your results will vary.   

How do you find ways to save?