Year End Milestones

Today I am reflecting on the past year, which has been a rough one, and trying to look at the positive things I have done. Some are financial and some are personal goals that I met. It is a good feeling to reach a goal and be able to move onto the next. Here is what I have to report for 2009:

• Paid off Prosper loan: I had a $1,500 personal loan that I paid off early
• Bought a house: Aside from the $6,000 tax credit I gained equity and a lot of knowledge from a major remodel. I also lowered my total expenses with a roommate.
• Emergency Fund: I finally have 2 months of take home pay in savings to lean on if I need it. This mostly came from the refund mentioned above.
  
• Overseas Travel: This year I visited Colombia and Thailand. Thanks Skymiles!
• IT Certification: CompTIA Network+. I recently passed this exam to make myself more marketable in the job market.
• I still have a job: This is saying a lot for some folks. A lot of my friends were laid off this year and I am happy to still have my job. It is a rough job market out there right now!

Even though 2009 was a rough year I am still keeping my chin up and pushing forward. I don't do New Year's resolutions but rather update my goals for the next year. They may or may not get completed within 1 year's time but I have to have a sense of direction. Here is what I wish to accomplish:

• IT Certification: MCITP, Microsoft Certified Information Technology Professional. This will greatly help my future job prospects.
• Debt Consolidation: Once the house remodel is complete (by Feb) I am going to consolidate everything in to lower, tax-deductible (interest) loan.
  
• Debt Pay Down: After the house work is complete I can focus on putting every extra dollar towards my debt. Any extra bonuses or side work will go to debt payments.
  
• Travel: I would like to see at least 2 more countries this year. Travel is my passion!
  
• Health: I am going to focus on eating less and eating better. I want to lose some weight and feel better. This is going to be a tougher goal as I love all kinds of food!
  
• Consulting: I am going to work on my network of people and side jobs to earn extra money and stay on the path to self employment / IT Consulting.

I am sure that my goals will change as the year goes by. I will have to make some difficult adjustments to parts of my life. Being stubborn about my goals and honest with myself is the only way I can get ahead. Hope everyone has a great New Year's holiday and weekend!

Medical Alternatives for those without health insurance

If you are like me and millions of other Americans you know that health insurance is expensive and out of reach (cost wise) for most of us. I personally do not have health insurance and haven't had it for years. My employer currently offers no plan so I just made do without it. At this point I simply cannot afford it on my own.

For those of us without insurance going to a typical doctor's office is not an option most of the time. I personally rarely get sick so this is normally not an issue for me. I have done some research for ways to get healthcare at a reasonable cost without having insurance. Here are a few options:

• Drug store / Grocery Store Clinics: These are usually set up during the fall/winter to give flu shots. What most people don't know is that they are staffed by a nurse practitioner and you pay set rates for getting other treatments. You pay $59 for flu treatment & prescription of any needed drugs, for example. For someone without insurance this is very reasonable!
• Generic Drugs: This is a big way to save on costs. Most prescription drugs have a generic version which is always cheaper. If the pharmacy does not offer it then ask for it!
• County Health Departments: A lot of counties across the US run a county sponsored health clinic. This is a great place to get shots for school or travel, treatment of minor illnesses, and advice on preventative care. They are also very reasonable cost wise since they are supported by taxes.
• Immediate Care Clinics: This is probably your most expensive option but is still cheaper than a hospital in a bind. These are run for non-emergency care and you can negotiate the price a little if you pay cash. They do accept most insurance providers if you have it. The advantage here is that you can walk in without an appointment and usually be seen right away.
  
• Free Clinics: You may have to wait a long time but you cannot complain for free! These are not everywhere but major cities tend to have at least one. You might wait all day and not get seen but if you need the care and cannot afford any of the above options this is your only choice!

Even if you have no health insurance at all we have some reasonable options out there. It is also good to call a doctor's office and tell them what you need and how much you can pay. Some are flexible and like getting cash today instead of waiting for weeks from an insurance company. It never hurts to bargain and the worst thing they can do is say no!

Reminder: Year end tax loss harvesting!

The end of the year (and the tax year) is fast coming and I want to remind everyone to have a look at your investments. If you are holding anything in a taxable account and have losses it would be a good time to harvest them.

You only want to sell if you truly do not wish to own the asset any longer and have a loss on the position. If you change your mind later be sure to wait 30 days to avoid the wash rule. Now is the time to be able to claim those tax write-offs for investment losses!

Remember: You can use your losses against any gains this year and still deduct up to $3,000 in additional losses after that. Any net losses beyond $3,000 can be carried over for next year and claimed then.

Don't pay too much tax! Claim your losses, have a smaller tax burden, and move on!

Don't forget your points!

These days their are rewards programs for just about anything you can imagine. Cash back, airline miles, hotel stays, coffee, gasoline, and the list goes on and on. The problem with having so many programs is that we get signed up and sometimes forget. They are very difficult to track!

I am writing this post to remind everyone to check on your points balances. A lot of them expire so we need to use them if we can to maximize what we get from them. A lot of programs offer great rewards such as American Express gift cards, restaurant gift cards, and even popular items such as iPods.

Make sure to check all of your balances and use them! Here is a quick list of what I got from points I had sitting around:

• $25 AMEX gift card (Chase Freedom)
  
• $25 paid toward my student loans (Citi ThankYou)
  
• $25 Home Depot gift card (Chase Freedom)
  
• A free flight home for a friend for Christmas (Delta Skymiles Amex)

As you can see this can really add up! Don't leave money on the table. Cash in your points!

Needs versus Wants versus Saving

Budgeting is a daunting task for some and other love it. One major roadblock for getting people to start using a budget is that they think they will be restricted and unhappy. This most certainly does not have to be the case!

I came across a good rule to use when deciding how you should use your money. It strikes a good balance and can cover all the bases for most people. This of course is not set in stone and is a general guideline that can be adjusted.

The formula says everyone's budget should be close to this:

50% for needs, 30% for wants, 20% for saving

The difficult part is to sit down and differentiate a need from a want. Some are obvious. You need food, shelter, and transportation. Wants are going out to dinner, concerts, gym memberships, vacations, etc. Saving can be either retirement/investments or debt repayment if you still have debt other than a mortgage.

The idea here is to make sure you budget for everything that comes up. Allocating 30% to your wants will make sure you include things that you enjoy and make you happy. 20% is a good rule for saving and can always be higher. The more you save now the less you need later. I like 50% as needs as it makes you really evaluate what truly is a need and leave room for the fun stuff.

Most of our budgets don't fit this formula. That is OK as long as you are happy with it. This general guideline gives us a target to aim for during the budgeting process. Most of the time people discover they are well over the wants category and little to nothing for savings. This is a great indicator that it may be time for some adjustments!

I hope you all have a great holiday. Enjoy the season!

Asset Allocation: The rule of 120

I get quite a few questions from friends and family of how much money should be invested in stocks versus bonds. Part of the answer lies in your own risk tolerance and preferences. I found a good rule of thumb that is based on your age and is a great starting point.

The rule of 120:

Basically you take 120 and subtract your age. If you are 25 years old the result is 95. This means that you should have 95% of your retirement assets invested in the stock market and 5% in bonds. This is not a concrete rule just some general guidance.

Using this rule is a good way to slowly make your portfolio less aggressive as you age. Once you hit at 65 you would be invested in 55% stocks and 45% bonds. This is a reasonable asset allocation for someone entering retirement. No matter your age you will have some money invested in stocks to outrun inflation.

This rule is good to use to get a basic idea of how to invest. Once you figure out your own mix you would need to invest in the correct mutual funds to cover all the bases. As long as you have a well diversified portfolio with low expenses you will be on the right track.

Ways to start, build, or rebuild your credit history

For those starting out for the first time or having to rebuild credit due to extreme circumstances it can be tough to get that first creditor to start (or restart) your credit history. Their are a couple of options out there that can help. I will go over the best ones that I have found:

1. Secured Credit Cards: These are generally easy to get. You must put money, such as $500, as collateral on the card. Your credit line equals the amount you put down. Use the card and pay it on time build credit history. Beware of fees as some have very high start up costs. Good secured cards only have a small annual fee around $30-$40. Avoid all others.
2. CD-backed Loans: Credit unions offer these as a way to build credit. It is a fixed installment loan that uses a Certificate of Deposit (CD) as collateral. The term of the loans equals the term of the CD. The interest rate you pay is usually around 3% more than what the CD earns. This is a small price to pay to establish credit!
3. Having a co-signer: While this involves risk on the part of the person signing with you it is a good way to gain history. The best road to take is to get a fixed payment installment loan for $1000. This will limit the risk to the co-signer to the amount of the loan. As long as you pay on time you both get good credit! I would only do this if the above 2 options are not available or feasible.
4. Student Loans: It can be a little difficult to obtain without any credit but student loans in college do establish credit history. A lot of the time parents may have to co-sign but this is still an option. You get the advantage of lower, tax-deductible interest and the ability to defer payments during financial hardship. If you must borrow for college this is the best way and you get credit history as a bonus!

The above methods are the safest and easiest way to start or rebuild a credit history. They are the lowest cost options I could find that actually work. I found that most other methods were some sort of scam and / or they come with high fees. Stick to the basics and you can't go wrong!

Tighter credit policies are good for us!

Their has been a lot of talk about the fact that credit for most people is harder to get these days. Some say it is a bad thing and will hurt our economy and others disagree. I too disagree as having less access to credit keeps us that much more out of debt. The banks are getting hit hard with defaults and really pulling back. I am glad!

Rewind a few years and think about all the different credit card and personal loan offers we got. Also remember the housing prices skyrocketing and banks lending to practically anyone who had a paycheck. Fast forward to today and look at the mess they are in. Credit limits are dropping, interest rates on consumer debt skyrocketing upwards, and foreclosures are left and right. Both banks and people got in over their heads and this is the fallout.

Based on these events it is now more difficult to obtain credit. I like this because it forces us to save for what we want and not senselessly borrow for it. I cannot think of a better reason to accelerate our debt repayments (aside from saving on interest) than the very fact that it is now a lot harder to get more credit! I hope it stays this way for a long time.

America really needs to get their savings rate up. We cannot rely on government bailouts and social security to carry our weight forever. If we lose at least some access to credit we will be forced to save or go without which I think is a great thing. Get out of the paycheck to paycheck rat race and act like we have a future to save for!

December 2009 Prosper Lending Update

It is the middle of the month again and it is time for my update on prosper.com lending. Things went negative this month due to 3 loans going into collections. Once this happens I consider their remaining balance as lost and deduct it from my total principal.

Here are my stats as of today:

Outstanding Loans: 50

Late: 0 (< 30 days)
In Collections: 3 (written off)
Current: 47

Closed Loans: 7

Charged Off: 1
Paid Off: 6

Open Bids: 3

Total currently invested: $1523.80 (Principal Value)
Cash in Account: $ 142.96 (includes open bids)

Total Principal: $1666.76

Net Change from last month: $(45.19) (2.64%) decrease.

Personal Annual Financial Review Part 5: Estate Planning

Finally we will examine your estate documents. At a minimum everyone should have a will, living will, medical power of attorney, and financial power of attorney. These need to be kept up-to-date and an annual review of the documents makes sure your intentions are legally stated!

Will:

• Make sure all major assets are covered. This includes Home(s), car(s), investment accounts, bank accounts, etc.
• Make sure all listed assets are going to the people you want to have them in the event if your death.
• Make sure your will follows estate laws (attorney review is recommended for this!)
  

Living Will:

• Make sure the person you list as a decision maker to turn off life support in the case of extended coma or unconsciousness is still the person you want to have this power.

Medical Power of Attorney:

• Make sure the person listed on this document is correct.
• Make sure the powers given are explicit and clear.
  

Financial Power of Attorney:

• Make sure the person listed on this document is correct and is someone you trust with your money.

Investment and Bank Accounts:

• Check all beneficiaries on IRA accounts, trusts, employer retirement plans, pensions, and payable on death accounts. Make any changes you need to be sure your money is still going to the right people.

Estate Planning is the least fun part of managing finances. It is very important as you want to be sure your assets go to those that you actually want to have them. It makes things a lot easier for your loved ones in a very tough time.

Life Events that would cause you to change these documents:

• Marriage
• Divorce
• Death of a Spouse or Partner
• Death of other friends or family members
  
• Having/Adopting Children
• Changes in what your wishes are
  
• Buying or selling major assets such as real estate, collectibles, etc

Keeping your estate planning documents up to date does not take long. As always it is a good idea to seek professional help when making changes to be sure that everything is legally sound and will not give rise to a dispute in court. Reviewing them annually ensures your wishes are met!

December 2009 Net Worth Update

It is the 1st of the month again and it is time for my net worth report card. I did way better than I expected yet again! I am a little late due to my vacation in Thailand.

As of today my current net worth is (21,772.63). That is an increase of $7,465.54 over last month. The major factors contributing were a large tax refund, cutting spending, living cheaply in Thailand on vacation, and eating out less!

I expect next month to be a slow month since Christmas always puts a dent in net worth due to travel and gifts. I also have some unpaid time off this month that will set me back but not too badly.

Alternative Income:

- none for this month.

Personal Annual Financial Review Part 4: Taxes

Next it is time to have a look at your taxes. Understanding and taking proactive steps will make sure you achieve the smallest tax burden possible. This part will cover Income and Property taxes. You will analyze each thoroughly to be sure you don't miss anything!

Income Taxes:

• Was enough withheld from your pay? Was too much withheld? Make adjustments to your w-4 and other documents at work if needed. Do this for federal, state (if applicable) and local taxes (if applicable). The idea is to have little or no tax refund if possible.
  
• IRA/401(k) contributions: Do you need to adjust the amount you deposit based on any change in tax laws or employer matching? Increasing these is a great way to reduce your tax burden!
• IRA Conversion: Depending on your income this year and your tax bracket it may make sense to convert some or all of you traditional IRA assets to a Roth IRA. It is best to consult a tax adviser about this if you are unsure in any way. It does pay off in the long term!
  
• Tax Credits: Are you eligible for any credits? Examples: First Time Home Buyer, education credits, foreign tax credits, and so on. This list is long so be sure to do some research or consult a professional so you don't miss any!
• Tax Deductions: Should you take standard deduction or itemize? Run your numbers both ways to compare. Common (non-itemized) Deductions: student loan interest, 50% of self employment taxes, medical bills over 7.5% of income, etc. This list can also be long and you should consult a tax adviser if you are not sure!
  
• Accuracy: Make SURE all of the tax documents (W-2, 1099, etc) are completely accurate. The documents you get are what the IRS gets as well so they need to be 100% right!
• Social Security Statement: Be sure to review this each year and that it matches what you actually earned. Call the number on the statement with questions or concerns. Inaccurate information can cause to to get a lower benefit!

Property Taxes:

• Carefully review your property tax bill for any changes. Make sure it is accurate!
• Did your amount increase or decrease? Why? Be sure to call and ask them questions if you are unsure about any adjustment.
• Exemptions: Most counties have a homestead exemption for your primary residence. Has this been filed and reflected on your bill? Do you have to refile it each year or is it permanent?
• If your change in property tax is large it may be worth to file an appeal and have it re-evaluated. If you and the county disagree on the value of your home it is worth getting a appraisal to support your case. Property tax appeals can be tedious but well worth the time!

Spending a couple of extra hours on your taxes and studying them can pay off. Be sure you get all deductions, credits, and advantages you are due. Make sure you are investing in the right kind of IRA account to get the most out of your money in retirement. Roth IRA's are almost always the best choice for those who qualify. Paying a little now to consult a tax adviser can really pay off for years to come. Use it as a learning experience that will pay for itself many times over!

Tune in next week for the final step in the Personal Annual Financial Review process (Part 5): Estate Planning!

Personal Annual Financial Review Part 3: Investments

Next it is time to have a look at your investments and retirement savings. This part will determine that you have invested your money correctly and are on track to reach your goals. It will cover asset allocation, retirement accounts, and taxable investments.

Asset Allocation:

• The first step is to evaluate your current target asset allocation. Is it performing as you expected? Are you able to tolerate the ups and downs in your portfolio?
• Based on the above questions you can make adjustments to your target asset allocation if needed. Example: Current: 80% stocks, 20% bonds. New Target: 70% stocks, 30% bonds.
• Once you have determined the correct target allocation it is time to re-balance your portfolio. If you have new or idle cash to invest use it first. Once that runs out do a Sell/Buy to bring it back to the target allocation if needed. Using cash first reduces transaction costs!
  

Retirement Accounts:

• Fees: Have a look at any fees you were charged over the past year. Is their any way to reduce or eliminate them? This includes changing brokers to a discount one such as Firstrade.
• Contributions: Are the amounts you deposit each month / quarter / year correct? Do you need to contribute more? Are you getting your full employer's match, if any?
• Tax Status: Does it make sense to switch to a Roth IRA from a Traditional or vice-versa? ( See Part 4 next week for more in depth tax information)
• Progress: Are you in line to meet your retirement target?
  

Taxable Investments:

• Fees: Have a look at any fees you were charged over the past year. Is their any way to reduce or eliminate them? This includes changing brokers to a discount one such as Firstrade.
• Shifting Assets: Are you maxing out your IRA contributions each year? If not, use assets from this account to fill the gap so you can get the tax benefits.
• Check your 1099 tax statements versus your actual activity to be sure it is accurate!

A yearly (minimum) review of your investments makes sure that you stay in line to meet your goals by maintaining your target asset allocation. Re-balancing forces you to sell high and buy low. Keeping an eye on account fees and knowing your options prevents wasting money and time. Tune in next week for Part 4: Taxes!

Happy Thanksgiving!

I am writing to wish everyone a Happy Thanksgiving back home in the USA. I am currently on Koh Phangan, a wonderful island, in the Gulf of Thailand. I plan to spend the day on the beach and eating some fried rice for my Thanksgiving dinner.

Hope everyone has a great holiday and weekend!

Personal Annual Financial Review: Part 2: Savings & Debt Analysis

Next it is time to have a look at your savings and debt. This is also known as your net worth. We will examine each separately starting with debt. This part of the review is to make sure that we are on track to get out of debt and reach our longer term goals. We grade ourselves on how we are doing and make adjustments to get there!

Debts:

• Credit Card: This is the top priority to pay off. It is generally the most expensive form of debt and can really hinder our financial progress. Now is the time to examine balances, minimum payments, and amount of credit card debt. Check your budget to see how much you have allotted to payments and attack the lowest balance first until they are all paid off!
• Auto Loans: These are loans in depreciating assets. If your credit cards are paid off this is the next one to accelerate payments on. It can be worse if you have an accident and the car is totaled and you are left with no car and a loan to pay. Pay as aggressively as you can to clear this debt off!
• Student Loans: A lot of us have had to borrow to cover the rising costs of a college education. Luckily for us the interest is tax deductible and usually pretty reasonable. These loans are an investment in yourself but would be good to pay off early. I would only pay more than the minimums here if you have adequate (6 month+) emergency funds saved already.
• Mortgages & Home Equity: These are loans against (usually) appreciating assets and are considered good debt. The main thing to examine here are your interest rates to see if it is worth it to refinance (more than 0.75% drop in rates). Only accelerate payments if you are nearing retirement age as you want this paid before you hang up your work gloves!

Savings:

• Emergency Fund: This is the most important savings you can have. I recommend having a minimum of 3 months of expenses saved. Others say 6 or even 9 months. This should be funded before any acceleration of debt payments including credit card debt. Paying more on your credit cards with no savings can get you right back into credit card debt again if an unexpected expense or job loss occurs.
• Bill Escrows: Make sure your irregular bills are covered using a savings account to accumulate money for when the bill is due. Examples: Property taxes, annual dues, car registration, or insurance premiums.
  
• Goals: If you are saving for a big ticket item such as a car, house, or dream vacation make sure you are putting enough into this account each month. This should also be covered in your budget review!
• Retirement savings and investments will be covered in Part 3.

One final note about savings: For your cash savings you need to shop around for interest rates. Compare your current rate with other banks to be sure you are maximizing your earnings. Bankrate.com is a great place to comparison shop. Open accounts and move your money if needed. Also make sure you are using the correct vehicle to reach your goal by using savings, money market, or CD's. CD's are great for longer term goals to earn more interest! Try to match the CD term to your goal time line.

Now that we have looked at everything it is time to see how we are doing! Calculate your net worth by adding up all your assets: Cash, Savings, Investments, House(s), car(s), and anything else of value that you have. Now subtract all outstanding debts from that amount. The result is your net worth. Those of us with a lot of debt may have a negative number. It is good to record this to compare in next year's review. It is a good gauge of how we are doing!

Next week I while show you how to review all of your investments. This is the most important step to stay on track for retirement and financial freedom!

Focusing on achieving goals (wins) keeps us going!

Greetings from Bangkok, Thailand!

I wrote this in response to an article over at Get Rich Slowly. It had some lively comments which I added the majority of this post to. Writing my comment on the article sparked the idea for this post. Enjoy!

You win when you achieve a goal. It is a great feeling of accomplishment. Some are large goals such as paying of all debts and some small such as cutting your entertainment spending by $100 per month. Small wins add up to big ones. A "small" or "big" win does not have to be a dollar amount!

A win for me, no matter the size, is something that relieves stress, pushes me closer to my goals, and generally makes me happier. If we focus on working towards things that will make us truly happy then you will be constantly improving.

Examples:

1. I paid off the remaining $900 on a small loan early. I gained $50 a month in cash flow but more importantly the great feeling of paying off one of my debts completely. I am motivated to attack the next!

2. I worked really hard the past 2 quarters and as a result get 5 weeks off to go to Thailand. I leave next week! This doesn't involve money as much as quality of life and experiences/memories I will have forever!

3. I bought a foreclosed home and did the remodel myself (with family help). While this turned out to be a great financial investment I got a lot more from doing all the work myself and learning about home repairs and remodel. It gives you an entirely different perspective!

Achieving goals and feeling better about yourself and your life are the biggest wins you can have. It doesn't have to always involve money. In my book money is a means to get experiences we love, such as travel. Money is important but we cannot forget the non-financial aspects too!

What other big wins can you think of that don't necessarily involve money?

Personal Annual Financial Review: Part 1: Budget

The yearly budget review is a great starting point for you annual financial review. You look at all of your real expenses over the past year and decide if you need to make any adjustments. This is where we usually find out if we eat out too much or were allocating too much money to our water bill. This step is critical!

Items examined in this section:

• Income: What are your sources of income and how much are they? Has their been any change in the past year that needs to be noted?
  
• Expenses: Look at the budget for your monthly expenses and also look at your actual payments for each. Also note any unexpected expenses and new ones not included in your budget.

Now that you have gathered all of the data for your budget it is time to make adjustments. Here are the key action items:

• Income: Total up your income and come up with a monthly figure. Insert it into your new budget. If you have side business or income note is separately for ease of accuracy and adjustment
• Expenses: Did you drop any expenses this year? Do you have any new ones to add? Adjust all numbers to reflect what you really need to cover them.
• Savings: Do you need to adjust the amount you move into savings up or down? Make this adjustment in your monthly budget as well.

Now you have adjusted your budget to reflect your current situation. The numbers do not have to be 100% accurate as they never will be! Rounding up is OK and is a best practice when creating your budget. Make any adjustments to automatic transfers as needed to cover the new amounts.

Tune in next week for Part 2: Savings & Debt Analysis!

Off to Thailand and Laos tomorrow!

For the next 5 weeks I will be on extended vacation in Thailand and Laos! I leave tomorrow morning to fly out and return on December 20. I am looking forward to some much needed beach time and possibly some jungle trekking and waterfalls. I plan to take tons of pictures!

While I am gone I have scheduled a 5-part guide to doing your own personal annual financial review. It goes over all aspects of your finances. It is designed to make sure that you have everything in order and stay on track to reach your goals.

Here are the 5 parts:

1. Budget
2. Debt & Savings (Net Worth)
3. Investments & Retirement
4. Taxes
5. Estate Planning
   

I hope you enjoy the guide! If I have time I will make some sporadic posts from Thailand in my travel blog.

November 2009 Prosper Lending Update

It is the middle of the month again and it is time for my update on prosper.com lending. I am doing this a bit early due to my upcoming vacation. Prosper has once again been good to me this month with (mostly) timely payments and another payoff. Even though I report late loans each month they have all come current within the month each month (so far).

Here are my stats as of today:

Outstanding Loans: 50
Late: 2
Current: 47
Payoff in Progress: 1

Closed Loans: 6

Charged Off: 1
Paid Off: 5

Open Bids: 1

Total currently invested: $1671.33 (Principal Value)
Cash in Account: $40.62

Total Principal: $1711.95

Net Change from last month: $19.18 (1.13%) increase

Benefits of Mortgage Prepayment

Paying off a mortgage early can give us a feeling of accomplishment and relief. Dropping a large monthly payment can put us in a great position to save more and do more of the things we enjoy. It is a step to financial freedom!

Warning: Do not prepay a mortgage if you have other debts outstanding. This is the last step in the debt elimination process. I have had people as me how much they can really save so I put together this post!

Example:

30 Year Mortgage, $100,000 @ 6.00%

Normal payment: $599.56

Prepayment Examples (assuming you pay extra from day 1):

• Add $100 in principal each month: Paid off in 258 months (21.5 years) and save $39,896.57 in interest
• Add $200 in principal each month: Paid off in 197 months (16.42 years) and save $58,446.42 in interest
• Add $300 in principal each month: Paid off in 163 months (13.6 years) and save $69,460.99 in interest

As you can see adding as little as $100 per month can save you a lot of money. You also knock off 8.5 years of payments to boot. Prepaying a mortgage can help us get to our goals faster. If you have the free cash flow and no other debts or obligations I highly suggest you do this.

To calculate the above scenarios I used this free tool here. It is a little quirky but once you get the hang of it you will be able to play with the numbers and decide what is best for you!

Using Online Banking saves time and money!

These days most people take online banking for granted. It is so widely used and available it has become and integral part of our financial lives. However, their are some people, such as my dad, who still are getting used to it. He was skeptical and now he loves it and wonders how he ever did without it!

Ways online banking saves us money:

• Online Bill Pay: No checks (cost money), stamps (cost money), or late fees (money!) using this system. For those lazy folks it can also be automated.
• Online Statements: Reduced risk of identity theft via mail and any time access.
  
• Online Transfers: We can move money between accounts without checks, stamps, or a trip to the bank or ATM machine. Saves gas too!
• Real time balances: most banks allow you to see your available balance including uncleared transactions (such as a debit card purchase). This can help you not overdraw your account and rack up fees. Be careful as checks you have written do not reflect until they clear!
• Higher Interest: The online-only banks historically pay higher interest rates on savings. We lose the paper (and the clutter) and get a higher return. That is a win-win in my book. ING Direct is my favorite so far!

I look back at the time when I did not have online banking and now wonder how I was ever able to keep up with my money! The paper checkbook register worked if you were a good record keeper but even I have to occasional lost debit card receipt or neglect to write down an amount of a check I wrote. Online Banking mixed with Quicken saves me a lot of time and headache in the long run.

If you have not signed up for online banking yet I would strongly recommend it!

Credit Card Balance Transfer Pitfalls

Credit card companies are currently slowing down on the balance transfer offers due to the high rate of default and the current economy. I have used them in the past to save me a lot of money in interest over the years. I was a fan of the 0% offers but they have now all but dried up.

I find that a lot people see a great rate advertised in balance transfer offers but fail to read the fine print. They then become victim of the change in terms and get hit with high rates, fees, and possibly end up worse off than they started. I personally believe this deceptive practice by the credit card companies is at least partially part of why they are in this mess to begin with!

What to look out for in a balance transfer offer:

• Teaser rates: This was big with the 0% offers. It would be 0% for 12 months and then jump to a much higher rate. As high as 25%! Make sure you don't do the transfer if you cannot pay it off within the allotted time. I call this the "bait and switch" method.
  
• Balance transfer fees: Most of the companies charge for doing the transfer. I have seen as high as 5% of the balance. I personally will not pay more than 3% (for a 0% rate). You are best doing a transfer that has no transfer fee attached but these are rare these days.
• Convenience Checks: A lot of the direct mail offers give you checks (if you already have an account open). SOME of them are for the rate offer. Others are for cash advances which charge the highest interest rates. Be sure you use the correct checks!
• Protection Plans: If you are not careful you will get signed up for the "protection plans" which cover your payments if you lose your job or some other financial disaster occurs. They charge a lot of money and are best avoided. This is typically offered over the phone by customer service reps at the company. "No" is your best word of choice!

Balance transfers can be useful, money-saving tools if utilized properly. As long as you do your homework and avoid the above pitfalls you will be on the road to becoming debt free. As with any other credit card offer you have to be sure to read the terms and understand them. If in doubt go without.

Dealing with foreign currency while traveling abroad

As an avid traveler of 35 countries (and counting!) I have dealt with a lot of foreign currency. If you are not careful you can pay hefty exchange commissions and fees when you try to get local money. I have a system that combats this as much as possible.

The absolute best way to get local money in any country is to use an ATM. Most of our debit cards have either a Visa or Mastercard logo on them and will work worldwide. Just look for the same logo on the ATM itself and you are usually good to go. Getting money from the ATM almost always gets you the best exchange rate.

I also carry about $100 - $200 in small US Dollar bills (no larger than $20). They are the easiest to exchange overseas and are the most widely accepted. I do not use this money unless their is no ATM within a reasonable distance or if your card is not working for some reason. You usually have to exchange the dollars for local money (at usually a not-so-good rate) at a bank or change house. NEVER exchange in an airport as you will always get the worst rates there. Banks are best! Only exchange the amount you need to limit the damage.

Traveler's checks are almost useless these days. With ATM's in nearly every country and our handy debit cards there is really no need for them. I also feel it is silly to pay someone to hold my money as they usually charge a fee for them. I have never used them and don't plan too. They also get worse exchange rates than cash most of the time. These are best avoided!

Dealing with local money while traveling is not a complicated process and if you following my system you will never be stuck. Just go to the ATM like you would at home and get the money for a couple of day's worth of activities. Check with your bank to see if they charge foreign transaction or ATM fees. It is best to change banks if they do as it is silly to pay these fees. ING Direct only charges a small commission (less than changing money!) on the foreign ATM transaction, for example.

If you follow this guide you will have a great time and not have to worry about getting local money!

Where do I bank and why?

I have done some writing about finding the best rates and what I think the best banks are and so on. I decided to share who I use to do my own banking and why. It will give you insight into how to choose a bank based on fees and features that best fits you. Here are my accounts and why I have them:

• Bank of America: Free checking. I use this to deposit checks and cash to transfer over to ING Direct.
• ING Direct: This is my primary checking account. I get direct deposit from work. I love the ability to electronically deposit to anyone's account and any bank. They do not allow a checkbook at all which is wonderful. Checks are paper and cost money anyway! I also have a "Bills Escrow" savings account and some 4% CD's from a while back.
  
• HSBC Direct: I have my emergency fund here. They currently offer a better rate than ING on savings.
• Assoicated Credit Union (local): I just joined and will use them for my home equity loan to fund my remodel. They also offer a special savings account that pays 6% (!) on the first $500. That is like having a perpetual CD that I can tap any time and has a great rate!

Some may argue that this is a little complicated. It can be but it works for me. If I were to cut anything out it would be HSBC direct if/when ING got their rates in line. Some people like doing business all with one bank and that is fine. I tend to go for the best rates for savings no matter what bank and also the lowest fees. ING charges me nothing for my accounts and I even have a $1000 overdraft just in case (I have never used it).

I like having 2 checking accounts as added security. I travel abroad as often as I can and it is very handy to have ATM/Debit cards from the two major issuers. Bank of America gives Visa debit cards and ING gives Mastercard. As long as I have cash in both accounts one or the other will work at an ATM somewhere. Also if one card is damaged or stolen you have a backup ready to go. This makes life on (and off) the road a lot easier!

No matter which bank or credit union you decide to use I believe everyone should have online savings accounts and/or CD's. It puts an extra step between you and your savings so if you want to spend it on something you have to think about it and go through a deliberate process. This will eliminate 90% of your impulse buys which can kill your savings!

Frugality: Have "No Spend" and "Veggie" days

Their are hundreds of ways one can be frugal. Whether you hand your clothes to dry (saves energy and extends life of clothing), make your own soap or candles, or eat beans every day. I have two in particular that are easy for everyone to do and really work: Have a couples special days each week geared toward spending less.

No Spend Day: This is a day where you do not spend any money at all (unless you absolutely have too). Take your lunch to work. Eat leftovers. The goal is to have no financial transactions on this day if at all possible. Making this habit allows you to see how you can not spend! It forces you to think about your spending and try to slow down on other days too!

Veggie Day: We spend a lot of money on food no matter how we try not too. One way to combat this a bit is to have 1 day a week where you don't eat meat. Meat is the most expensive type of food. My Veggie day is usually leftovers such as pasta or salad and bread. Beans are a great replacement for meat. Soups are also a good choice.

There are numerous ways to be frugal. These two are a great start on the path to living a frugal but enjoyable life. You get to see the money you save, you like what you see, and you continue to look for more ways to do it. Give it a try!

Tip: Slowing down on eating out

A lot of us have the problem of eating out too much. I admit that I eat out too much myself. I justify part of it by my need to get out of the office for a break during the day. Even then I usually limit myself to $5 for lunch. I work in IT support and I find the stress reduction is worth the investment to me.

The real money spent on eating out is on dinners. They always cost more and we like to do it because it is convenient and fun to go out. I have a way to combat this. I made two rules for myself that I find fairly easy to stick too:

1. Only eat out for dinner once a week (at most).
2. If at all possible have a coupon or gift certificate (that you didn't buy) to use.

A side effect of these rules is that I eat at home which is cheaper and also healthier as I can control portions and salt content among other things. I do enjoy cooking to an extent as well so I try to do it fairly often. I like to try to make things I have eaten before as a fun experiment. Sometimes I just settle for a lean cuisine or pot pie if I had a long day.

Eating out also tends to eat away at our budgets (pun intended). If we take the above easy steps to combat our temptations we will be more able to attain our goals and possibly live a healthier life at the same time. All that money spent on eating out can be put towards retirement so we can get out of the rat race sooner and enjoy life!

November 2009 Net Worth Update

It is the 1st of the month again and it is time for my net worth report card. I did better than I expected yet again!

As of today my current net worth is (29,238.17). That is an increase of $1,491.95 over last month. The major factors contributing were getting a bonus at work, cutting spending, paying of my small prosper loan, and staying on track financially.

I expect next month to be a slower month since I am going on a 5 week vacation in Thailand where 2 of those weeks will be unpaid time off. We also have the holidays coming up so that will have an affect on my finances as well.

Alternative Income:

Youdata.com: $0.73
eBay Sales: $38.15 (commissions)

What I plan to do once I stop working (full time)

This is a comment I posted on this post at Get Rich Slowly. I thought you may be interested in what my "light at the end of the tunnel" is for me. This is what keeps my going!

My retirement plans are already set. I absolutely LOVE travel and plan to travel the world–and see every country at least once. I would live only on what I carry with me. I would shed most of my possessions and hit the open road. I would arrive in a country and make it a point to stay the length of my visa. I want to see, smell, taste, and enjoy all the cultures I can. Some would say I am obsessed with travel. They are probably right!

I also think I would need some extended time of rest so I am considering the idea of eventually buying a place in another (cheaper) country on the beach. If I ever wanted a break from the road I could go there for a while with my own place and relax on the beach with a margarita. I could also come back stateside and stay with family and friends for a while too. Being a traveler makes things very flexible!

I would also have side projects that I could do over the internet and/or while traveling. My travel blog would certainly be one of them and I also like photography so I would spend time working on that hobby. I also see myself possibly doing some volunteer work as I go as my way of giving back once I retire. Maybe even write a book about my travels if I got the ambition and time to do it. I find with travel that you can certainly over-plan everything and then it becomes work. Just go where the road takes you! It’s about the journey not the destination.

If travel was not an option for some reason or another I would take my idea of owning a place on a foreign beach and open a bar/cafe too. It would occupy my time and in my mind be fun. Maybe I could even make more money!

I am sure as I go along in life circumstances and priorities may change and will alter this plan accordingly. I do know if I retired today I would be on the next plane out and take it from there. I am passionate about travel and do it every chance I get!

Don't count on Social Security benefits for retirement!

I believe that anyone under age 40 should not be counting on Social Security benefits as part of their retirement income plan. I am sure the politicians on capital hill will either revamp or replace it with a new system but I want to side with safety. The law can be changed at any time and I believe they will do just that to greatly reduce benefits.

I look at Social Security as a bonus during retirement assuming it even exists for me. I plan on covering all of my income needs using my own assets and businesses that I will have amassed by then. If I get extra money from the government each month then I guess I will be able to do more fun stuff than I had originally planned!

This of course means that those of us who were counting on that income have to re-evaluate our plans. You most likely will have to save more and/or make cuts in your retirement plans. It is also possible to retire later or find ways to reduce your retirement expenses. You are much better off planning for $0 Social Security now as opposed to falling short when retirement rolls around. We would much rather have saved too much rather than not enough!

Portfolio Rebalancing: Save on transaction costs

Everyone should be re-balancing their retirement portfolios once per year. This normally involves the sale of part of one asset and the purchase of another. One little trick to save on transaction costs is to have your re-balance scheduled for when you expect to receive a tax refund you intend to invest.

Example:

Your portfolio is overweight in stocks. They did well this year and you need to move some money to your bonds portion to get things back in order. Lets say the amount you need to move is $2,000. Lets also say you are also expecting an income tax refund totaling $2,000. It is best to wait!

If you re-balance now and sell off $2,000 worth of stocks and reinvest it into bonds you could be paying transaction costs for the two trades. If your mutual funds are no transaction fee then this does not apply. Either way it is easier to wait on your tax refund and the invest the new monies appropriately to get you back into the proper asset mix. Less transactions means less record keeping and hassle on your part.

This strategy particularly works well if you are invest in ETF's or in mutual funds that cost you for each trade. Keeping our portfolios in balance is very important but we also need to minimize our transaction costs and possible tax consequences (if trading in a taxable account) whenever we can. Taxes would not apply to IRA or 401(k) accounts but transaction costs are levied on all types of accounts.

The less we spend in transaction costs the more money we can keep invested and growing for us for the years to come. Try to select investments that meet your needs with the least transaction costs associated with them. Lots of brokerage houses have long lists of no transaction fee mutual funds and free dividend reinvestment. A little research can save a lot of money!

Get your first time homebuyer tax credit NOW!

I did some digging around and found out that you can refile your 2008 federal tax return using form 1040X (amended) to get the money back early. The form is a little complicated so I suggest consulting a tax adviser if you are not comfortable with it. Here is the article on the IRS site that says you can refile.

The IRS claims it will take 8 to 12 weeks to process but my past experience has seen it more like 4 weeks. With something as simple as a tax credit it should not take too long or much scrutiny. I would suggest that everyone who is eligible file now to get the money. It would be a great debt payment or savings addition and their is no reason to wait!

Suggested uses for home buyer credit (in priority order):

• Pay down credit card debt (best)
  
• Pay down auto loans
• Pay down other debts (non-mortgage!)
• Emergency Fund Savings
• Roth IRA contribution (up to max--preferred)
  
• Other Retirement Savings

I specifically left out the mortgage pay down as I believe a mortgage is good debt and only needs to be paid off early if you are near retirement. Interest rates are generally low on mortgages and you can get better returns on your money in investments. I especially am against paying it down if you plan to sell the property anyway. Houses are very illiquid and your money is better off in an asset that is easier to liquidate and earns more return.

My story for my tax credit:

I just completed my form 1040X to mail off tomorrow. Unfortunately you cannot have direct deposit using this form so I have to wait on a paper check. This may make me wait as I will be in Thailand for 5 weeks on extended vacation. Either way I am happy to get the money!

I will end up with a large sum once my amended return is processed. I plan to send this money directly to my debts to knock off a nice chunk. This will significantly help my net worth and reduce my monthly payments so I can accelerate the others. It will be a big relief to drop a monthly payment!

How to start saving for the future

I read an interesting post over at Get Rich Slowly and it inspired me to write this article. It lightly touched on the idea of how you can start saving so I decided to explore the topic in more detail. This is a step anyone can take no matter how high your expenses are or how much debt you have. This is also how I got started!

Start of by saving 1% of your income. This can be via an employer 401(k) program or a savings account done via direct deposit. You could also set up automatic transfer at your bank so each time you get paid 1% of your income gets moved. This is only 1 cent on every dollar you earn so chances are you won't even notice it.

Over time you will see your balance increase. If you are like me then you will be motivated to try to save more. This can be done a variety of ways. You can put gifts, rebate checks, side work pay, and others into your savings. Pretend like you never had the money. You can then increase from 1% of your pay to 2% or 5%. Your savings will begin to snowball.

As you pay down your debts and have all of this "extra money" each month make the move to taking the same monthly payment amount in spread it among your savings. 401(k)s, Roth IRA, emergency savings, and other goals. You will soon turn from being the person "who could never save a dime" to "wow look at all the money I have put away!" No one saves a ton of money at once. It is built over time. Along with savings comes freedom. Freedom is priceless!

15 year versus 30 year mortgage

Since I was recently house shopping I have decided to share my thoughts on mortgages. I am not a fan of adjustable rate or interest-only mortgages as they tend to only cause financial trouble or even crisis later on. I only support fixed rate, fixed term mortgages and that is what I have on my foreclosure that I just bought.

When I was looking at houses I decided that a 30 year mortgage was best for me. I am over 30 years away from retirement, have a lower payment, and can always add principal payments if I desire. I like the flexibility. Having the lower payment allows me to tackle higher interest bad debts and get them gone faster. I end up saving in the long term.

If you are house shopping and no longer have bad debts (credit card, auto loans, etc.) I would suggest a 15 year mortgage if you can afford it. You will save a small fortune in interest in the long term and the monthly payment goes away a lot faster. You should absolutely get a 15 year mortgage if you are 20 years or less away from your target retirement age. The ideal situation is to have the house paid for by the day you retire at the latest.

That said, their are exceptions to the above rules. If I knew that I would be selling the house in a few years after I bought it or going to use it as a rental property after I moved out then I would do a 30-year mortgage. The tax breaks and more positive cash flow from a rental make sense in this case. If your cash flow becomes exceptionally good you can always accelerate the payments on principal.

The best way to pick the term of your mortgage is to take a close look at your personal financial situation. Ask yourself these questions:

• Would I save more in interest by taking a 30 year term and paying down other debts?
• How much of a monthly mortgage payment can I afford?
• When is my target retirement date and how close am I to that date?
• When do I plan to sell the house (if at all!)?
• Am I going to need to borrow money to do remodel or repairs on the house as well?
• What are the tax, insurance, and maintenance costs each month?

You should also consider your tax bracket and tax breaks from the interest. This is only a secondary concern but does changes the numbers a bit. It is best to avoid paying interest when you can but sometimes it can make sense to pay more interest and refinance later if rates are expected to drop. If you fall into a 20% marginal tax rate, for example, you can reduce the total interest on the loan by 20% as you would save that money on your income taxes assuming you itemize deductions.

One final item to consider and should really not affect your decision at all is future borrowing potential. Having a higher payment from a 15 year mortgage could theoretically drop your ability to borrow for other needs as you have less disposable income. This should be a non-issue for most as we should save for things and not borrow.

Buying a house is a big investment and it is important to make the right mortgage choice for your situation. If you have covered all of the above items then you have "done your homework" and are on the right path. Now that you have figured out your mortgage details and how much you can afford go out and find your new home!

Never go grocery shopping hungry!

This is a lesson that I learned early on in life. It was not completely obvious to me at first but when I began to think about it I soon realized what was happening. I ended up spending a lot more that I had originally intended too and bought things I did not need. Some of that eventually was wasted. I devised a system to correct this!

Going grocery shopping hungry will make everything look extra-good to you. Suddenly things that you sort of like or even don't like look delicious. I also tend to buy more junk foods when I shop hungry. My solution to this is to go shopping an hour or two after a meal. I can then stick to my list and only deviate if something is at a bargain and I can stock up without waste.

The inverse can also be a hindrance here. If you go shopping too full then you will not get everything you need and end up having to go back later to pick up those items. This wastes time, gas, and money because you are not exactly in the mood to think about food or eating. Give yourself time to feel less stuffed and then go.

If time is an issue and you are hungry you are much better off stopping for at least a snack before hitting the supermarket. It can be a $1 cheeseburger, bag of chips, candy bar, or anything! Spending that $1 can save you 10 or 20 fold in the supermarket since you won't be hungry and looking at all the great foods around you. Before you walk in the door just make sure you don't feel really hungry or stuffed and you will be able to stick to your list and move on!

AT&T Wireless Users: New A-list!

AT&T has finally caught up with the competition. You can add 5 phone numbers to the list for free unlimited calls. You can add 10 numbers if you are on a family plan. Individual plans must be $59.99 or more and family plans $89.99 or more. As an iPhone owner I am very happy to see this. It can be any number with any carrier.

It is very easy to set up and use. You log into your wireless account on AT&T's website and add the A-list feature (free). You can then add numbers to the list which will take 24 hours to activate. It can be changed at any time. Keep in mind that current AT&T wireless numbers are usually covered under the unlimited mobile-to-mobile feature. I personally added my Google Voice number so I can start giving it out and get calls for free!

This will be a good way to save most of my minutes and utilize Google Voice better. I plan to eventually change my official number over to Google Voice so I will always have the same number no matter what city, state, or country I am in since I can forward to anywhere. Just load my account with credit as needed and keep going!

Understanding opportunity costs of time and money

Opportunity cost is an economic term in it's common form. You can also apply it to daily life, spending, and many other areas. It is good to think in terms of opportunity costs if you have trouble with buying too much stuff. It is also good to use it for managing your time.

Example:

You want to spend $100 on some new electronic gadget you have been eying for a while. You see it at a store and you are tempted to buy it. Now is the time to consider opportunity costs. Think to yourself: What else could I do with this $100? You could put it into savings for other goals such as a vacation, a replacement car, down payment for a new home. Would you rather have this gadget now or attain these other goals sooner? If you spend the $100 now you give up the opportunity to use that money on other things that may be more important.

I use the above example myself all the time. I work in the IT Industry and I like computers and all the toys that I can get to go with them. I used to buy new stuff all the time but have cut way back by going through this thought process. I have a strong passion for travel and tell myself I can either have this now or save the money and cover 3 days expenses in Thailand, etc.

You can also use this to help manage your time. Here is an example:

You have free time this weekend and a friend offers to sell you his extra ticket to a ball game. You are considering it as you would like to go to the game. You also have to weigh other things in your life to decide if it is worth your time. Maybe you have a household project you need to get to. Or you would like to spend more time with your family. You may want to finish that book that has been collecting dust for a month. You have to decide what is the best way to use this free time. There is no right or wrong answer here only you can decide how to best spend your time.

It is important to remember that your time is just as (if not more) important than money. How we spend our time affects our happiness and what we get out of life. Money helps us to do the things that we enjoy in our lives. For me this is travel and living without a job (eventually). Always remember that we work to live. We do not live to work.

Credit Card Tip: Get your interest rate lowered

Today I decided to call about my oldest credit card account, a student card, to see if I could change to a type of card that would give me a better rewards program. I was unable to get better rewards but by changing to a different type of card they lowered my interest rate 5%! This is great!

I have always called and asked them to lower my rate when I had to carry a balance for a while. I did not realize that you can also get a lower rate by changing the type of card you have. It is worth your while to call and ask if you are carrying a balance. This can save you a lot of money in interest!

I usually do my research online first to see what types of cards are offered. Keep in mind that if you have a Visa you can only change to a different Visa card. You cannot change from a Visa to a Mastercard (or any other brand of card) as they all have different agreements and require a whole new application. Once you find one you like you may see that they are advertising a lower rate than yours. Chances are you could get your rate lowered and a better rewards program.

In my special case today I have a card that was owned by a company that was bought up by Citibank a few years back. For a long time I was stuck with the type of card I had. Today I was finally able to change over and at least get my rate lowered and gain a few other perks. Credit cards can be useful tools and it is important to get the most out of them.

10 Frugal habits that save us money every day

I have compiled a small list of stuff we can do each day to be more frugal and cut expenses. Someone once said if you "take care of the pennies the dollars will follow." I find this to be true and am always looking for small things I can do to save a little here and there.

Here is my list:

• Shut of the faucet while brushing your teeth, shaving, and during other hygienic activities. Even the most efficient faucets dispense 2 gallons per minute!
• Get into the habit of turning lights on and off as you go. Power is expensive. Save it by not leaving a lot of lights on all the time!
• Use coupons! This one can be big. I follow coupon cravings, mail, and the local paper for coupons. I keep all of the ones I use in an envelope in my car. Any time I shop I dig through and take them in to use. This mostly applies to food.
• Find the cheapest gas station near you. Here in Atlanta gas prices can vary quite a bit. I did a survey of my neighborhood every weekend for a few weeks and found that certain gas station is always the lowest. I save an average of $1 per tank in my Honda Civic this way.
• Grocery sale shopping can be a big saver. I always grab the weekly flier at the door and see what is on sale and stock up on the items I need. Combine sale items with coupons too. I also go to farmers markets and Aldi to save even more!
• Unplug what you don't use. Simply having stuff plugged in draws power. Even if it is turned off. Only leave the items that you use all the time plugged in and unplug the rest.
  
• Going out of town: Turn off all you can. Unplug everything except the bare essentials. Turn the water heater down and the air conditioning / heater to very low levels. No need to run up utilities when you are not home.
• Check your air in your car tires weekly. I do this when I get gas. Having them at the optimal level saves gas and uneven wear on your tires.
• Run the dishwasher and clothes washer when you have full loads. You waste energy and water if you run them when they are not full. Of course you will have exceptions but most of the time this can be done.
• Use your leftovers religiously. Leftover food gets wasted a lot these days. Make it a point to go for those first before making anything new. It saves time and money!
  

All of these are very easy to do and will most certainly save you money. Forming frugal habits is a good way to start your path to good spending. If you think about the cost of the above you realize how this can easily add up over time. Frugal habits become hard to break and this is a good thing!

October 2009 Prosper Lending Update

It is the middle of the month again and it is time for my update on prosper.com lending. I reinvest all payments into new loans when I find one I like. I had 3 new bids that become loans last month. I also have 2 notes that are paying off this month.

Here are my stats as of today:

Outstanding Loans: 49
Late: 2 (< 30 days)
Late: 0 (> 30 days)
Current: 45 (2 are processing payoff)

Closed Loans:

Charged Off: 1
Paid Off: 3

Open Bids: 1

Total currently invested: $1627.04 (Principal Value)
Cash in Account: $65.73

Total Principal: $1692.77

Net Change from last month: $24.59 (+1.47%) increase

Enviromentally friendly credits and rebates

The federal government seems to be making a big push on "going green" with home improvements. They are providing money as incentive for folks reduce energy consumption. They offer tax credits and grants to states. I personally have taken part in some of these programs for my house remodel.

Examples:

• Sales tax-free weekend (GA) for energy saving appliances and light bulbs. I saved 7% on my new washing machine and some fluorescent light bulbs.
• Federal Income tax credit for water heaters, air conditioners, and other energy saving appliances.
• 2x $100 rebates for installing 1.28 gallons per flush toilets. I got this from my county government.

I encourage you to look into credits and rebates to see if any of your needed home repairs and improvements will qualify. Most of these have time limits so it is worth your while to evaluate your options now. On top of all this the energy efficient improvements will cut your monthly utility bills while helping the environment too!

Sources for credits and rebates:

• EPA
• Tax credit for first time home buyers
• Energy Star tax credits
  

These rebates and credits have added up over $1,000 that I will get back. It seems I picked a good time to buy a "fixer upper" house. I will also get the large tax credit just for buying the home as well. I plan to use the tax refund that I will receive to pay down my debts.

Setting up "Escrow" savings for irregular bills

One of the challenges of budgeting your monthly income is bills that are not due monthly. Examples include taxes, insurance, homeowners dues, and many more. My solution is to break the amount of the bill up as if it were due each month and have automatic transfer so a dedicated "bills escrow" savings account. I will use my own example:

I have two "irregular bills" that I must pay:

1. Homeowners Association dues: $150 due every 6 months
2. Water/Sewage: $60 average, billed every 2 months

If you do the math #1 is $300 a year. That works out to be $25 per month. For #2 it works out to be $30 per month on average. I have set up an automatic transfer of $55 per month to go to my "bills escrow" savings account. When they come due I will have the money waiting for it (and earning some interest!).

When the time comes I will transfer the appropriate amount back to my checking and pay it on the due due. At the end of the year I will re-evaluate the escrow system and make any adjustments up or down as needed. Using this system prevents you from having to dip into savings or have hardship when the "irregular bill" comes. It makes balancing your finances much easier!

Which goals do we save for first?

The other day I wrote a post on what debts we should pay off first. I then started to think about what to start saving for once debts are paid? I have come up with a priority list as a general guideline of how we should earmark our monthly savings. This list makes sure we are on the right track to reaching our financial independence.

Savings Priority List:

1. Emergency Fund - Their are many schools of thought on how much this should be. It varies based on your situation but the best general guideline I found is 6 months worth of your average take-home pay saved. This is the most important. This trumps even retirement savings!
2. "Escrow" Expenses: These are irregular expenses such as bills that come once or twice a year. They include insurance, taxes, association dues, and many others. Work out a monthly amount to set aside for when the bill(s) comes due as part of your monthly budget. Use a savings or money market account to earn a little interest while the money sits there.
3. Retirement: The amount you save depends on how much you will need during retirement years. See my priority list of what type of retirement accounts to use here. This one comes after the above two are completely satisfied!
4. Future Big Purchases: I reserve this part for necessary purchases only. Examples: A replacement car, down payment for a home, new appliances, home improvements (mandatory only), and other big ticket items that you must have.
   
5. Fun Stuff: This is where we can use savings to work towards things we want. In this part I include vacations, weddings, holiday and birthday gifts, collectibles, etc. Once you get out of debt and start saving it is important to include fun things too!
   
6. Other Goals: These are goals that don't fit into the above categories and are of lowest priority. Examples: Charitable gifts, gifts for friends or family, Religious donations, etc. These are goals that would not affect your livelihood if not obtained. All of these goals would start with "It would be nice if..." and are completely optional.
   

Following this list should provide you with a good plan for the future and cover any financial emergencies that come up. Once we have an adequate emergency cushion and our normal expenses covered we can continue onto saving for retirement and other goals. Every dollar we save is another step towards our financial freedom. Let's make sure we put those dollars in the right place!

Personal Record Retention Guideline

I must admit that I hate having piles of paper around. I am a big fan of scanning everything and shredding it if possible. One of my pet projects for the past year is to thin out how much paper I have around. I have come up with a general guideline for personal record keeping:

Keep Forever:

• Income Tax Returns (filed copies)
  
• Investment Trade Confirmations
• Retirement plan and pension plan records
• Estate Documents (will, living will, trusts, powers of attorney)
• Social Security Card
• Social Security Statements
• Divorce Documents
• Child Support Documents
  
• Marriage License
• Inheritance-related Documents
• Credit Report Dispute Documents
  

Keep for 6 years:

• Supporting Documents for Tax Returns (W2, 1099, etc)
• Car Accident Police Reports and Claims
• Copies of annual credit reports
  
• Receipts and Bills with Tax Effects

Keep for 3 years:

• Expired or Canceled Insurance Policies
• Credit Card Statements
• Bank Statements
• Brokerage / Investment Account Statements
• Medical Bills (in case of an insurance dispute)
• Utility Bills

Others (time varies):

• Car Maintenance and Loan Records (until sold, includes motorcycles, RV's, etc.)
• Current Insurance Policies (Keep for life of policy + 3 years)
• Mortgages, Deeds, Leases, Closing Documents (keep 6 years past end of retention or sale of property)
• Sales Receipts (For the life of warranty on the product)
• Warranties and manuals (keep for life of product)

Record retention is a necessary step in staying organized as well as attaining financial independence. The majority of the above documents can be kept in digital format so you can save time and space when you need to dig something up. I would retain a digital and paper copy of at least everything in the "Keep Forever" section.

Organizing and shredding your personal records can seem daunting at first but goes pretty fast once you get going. It will save you hours upon hours later when you need to find something. It also allows you to reduce clutter and storage needs. See my PDF Filing System post for more information.

Which debts should you pay off first?

I had this question myself and the answer is not always so simple. Some will tell you it is the one with the highest rate. Others will say it is the one with the lowest balance. Both of these methods are good but you also have to consider the type of debt that you have. It can affect your credit score and ability to get future credit (such as a mortgage) if you need it.

Barring some insanely high interest rate or high payment I have come up with a priority order of what debts should be attacked first. I will give me reasons for each as well. The order in which you pay them off can have big effects on your finances as well as credit report. Here is my list:

1. Credit Cards - Generally the highest interest rates plus rates and payment amounts can be adjusted at any time. Choosing the highest rate or lowest balance doesn't matter as much. These must be paid first in almost all cases!
   
2. Unsecured personal loans - These are installment, fixed payment loans. Example: You borrowed $2,000 paid over 2 years from a bank for a laptop. Interest rates are usually higher on these.
   
3. Auto and motorcycle loans - These loans are for depreciating assets and should be paid off next. Accelerating payment of these reduces the risk of having an accident where the car is rendered useless and you still have to pay the loan back.
   
4. Student loans - Interest is generally lower on student loans than the above debts and the interest you pay is tax deductible. In a real emergency you can defer payments if needed.
   
5. Mortgage and equity loans - These are usually the largest of all loans we carry and will take the longest to pay off. You have assets to back up this loan so it should be paid last. The interest on these loans is also tax deductible. Interest rates as usually lower than the above types as well.

Following the order above will ensure that you pay your debts off faster and in the correct order so that your credit rating will improve over time. Lenders like to see installment loans more so than revolving (credit cards) with balances when they decide to lend to you. You pay off your most expensive debts first using this method as well. You will be on the road to success!

I am currently working on steps 1 and 2 simultaneously. I am slowly digging out of my hole and soon will be able to accelerate my payments in the other areas. I recently paid off my smallest personal loan and can move to the next. It feels great to have one paid off!

Travel for work? Save more!

I travel a fair bit for work and when I do I get a set per diem each day for food. I get this money whether I spend it or not. This creates an opportunity to make money tax free. Saving per diems can add up really fast and boost your savings or debt payments.

Most companies give traveling employees a set per diem for food. It makes accounting a lot simpler by not having to process a ton of receipts. My company does this and I make it a point to never spend all of my per diem. I eat cheaply and bank the rest. I must also note that I do try to eat healthy with sandwiches, salads, soups, and the like. I don't eat McDonald's all the time to save money.

In my example I get $40 per day while on the road. Most hotels include breakfast so that is covered. I usually do $5 to $7 for lunch and try to keep dinner around $10. After tax and tip I should be able to bank about $20 per day. Traveling an average of 5 days per month means $1200 per year in tax free income!

I should also point out the indirect savings of traveling for work:

• You are not putting milage on your own car so you are saving in gas and maintenance costs.
  
• You are not eating the food at home (obviously) and they are paying for meals.
  
• While not home your utilities will be lower as you can turn most things off when you are gone. (savings on electricity, natural gas, and water/sewage costs)
• You can earn airline miles or points which can be accumulated and used for vacation flights
• You can earn hotel reward points to use for free hotel stays
• You can ear rewards points on your credit card for work related expenses that get reimbursed
  

Traveling for work definitely has it's down sides but the upsides financially are pretty good. If you like travel (like I do!) then this is just added bonus. All of the above things add up over time. If you are looking for more small ways to get ahead then this is something to consider. If you remain frugal while traveling for work as well as at home you will always come out ahead!

Tip: Amazon.com free shipping threshold

I do a good bit of my book shopping on amazon.com as they tend to be the cheapest and offer free shipping on orders of $25 or more. I do run into the problem where my order may not total $25. I found a site that allows you to bridge this gap!

Slickfillers!

This site is part of slickdeals.net where people submit good deals on all sorts of things to the forums. The best deals make it to the front page. I have saved quite a bit of money on electronics from this site so I am a fan. You just have to be careful not to buy things you don't need since it is "a good deal."

Slickfillers allows you to search for items that qualify for free shipping by price or type of item. I find that best fillers are batteries, school supplies or consumable items I use around the house and will need anyway. I figure why pay shipping when I can use that same money to get something that I will get some utility from? If you are just a few dollars short this site will prove very useful.

Just make sure you don't buy junk you really don't need. Clutter costs us money in the long run anyway. The idea is to have less stuff and more money that we can invest and have working for us. If you use slickfillers correctly you will save money overall.

Making my goals public!

Today I have decided to make my goals public. The title and description of this blog give you some idea but not the complete picture. I am going to list my goals in this post and create a page to track them as part of this blog. I am forcing myself to be even more accountable!

Goals (in priority order):

1. Consolidate and accelerate debt payments (consumer debts, student loans)
   
2. Build adequate emergency fund (3 months for now but possibly up to 6 or 8)
   
3. Build side business and retirement savings (and hopefully be self employed)
   
4. Have enough residual income to work part time from anywhere in the world
5. Travel perpetually on the residual income

So far I have taken some steps towards all of the above as they are related to each other. I have now decided to tackle them in order so I can reach them faster. Item #1 is in the works and once I am finished with my house remodel I will have consolidated and paid a good chunk of my debts. I must first get my total monthly payments lowered so I can get to item #2.

Now that I have listed my goals I will give you the story behind them. Back in 2004 I took a 3-week study abroad course in Europe as an elective for my business degree in Finance. I immediately felt a passion for travel and wanted more. I finished college and did another 2-week backpacking trip in Europe in 2005 as a reward to myself.

This second trip only added to my "travel bug" and all I could think about was getting back on the road. I was working full time at a local financial advisory (independent) firm and saving heavily. I was laid off just before the holidays in 2006. I was very upset about it and started looking for work. I soon decided that now was a great opportunity to go travel more. I left in December 2005 for the open road.

I ended up traveling around the world (literally) for a total of 18 months and covered 25 countries. I had some savings but also credit cards. I was on the road living it up and ended up running high balances on my cards. As they started to dry up I decided I better get back to the USA and figure out what to do. Bankruptcy did cross my mind and I seriously considered it.

I got back home in May of 2007 and did a full personal review of my financial mess. My minimum payments were quite high and I was 2 or 3 months late on some of them. My family stepped in and bailed me out. It was hard asking for money but they paid off all of my cards and I am to this day paying them back each month. They really saved me a lot of stress and interest. I also negotiated with the credit card companies to take off the late payments on my credit report if I paid them off today. It worked.

I found a job about 2 months later and that is the job I am still currently working as an IT project manager. It allows me to travel domestically for work and I am able to travel abroad using my skymiles for my vacations. I of course want to travel a lot more but I have to take care of finances first then the fun stuff. My financial situation has drastically improved since May of 2007.

Today I am working hard to pay down my debts. I have generated some side income which for now I have been putting in my emergency fund. Given the current state of the economy I feel it is worth it to have at least some money for emergencies. I also just bought a house in July 2009 that needed a lot of remodeling (it was a foreclosure). Between my Dad and I we can do most of the work ourselves. As of today it is about 80% complete.

I will also get the large tax credit from the government next year and will have a lot of equity once the remodel is finished. I should be done by mid-October. I have again borrowed money from family to do this remodel (they offered!) and will get an equity loan to immediately pay them back and to refinance some other debts to a lower interest rate. I can then work on the emergency fund to an adequate level and then accelerate the payments on this new loan.

My long term vision is to build wealth and work until I have enough fixed income to live life on the road. I want to travel and see everything the world has to offer. I plan to live out of my backpack and experience the food, people, culture, history, architecture, and simple life that traveling the world provides. I will stay in cheap hotels or hostels, eat street food, and live like a local. My income requirement will be hopefully lower or at least equal to what I earn today. I have the travel bug and it never goes away!

In order to reach this vision I will build my savings to the appropriate level and sell everything except for what I intend to take with me. This makes my situation different as I will not own any real estate at "retirement." I will have no need for it as a traveler. The only exception is if I decide to have rental property as part of my income. Based on these facts I calculate my net worth accordingly. I still have to decide exactly how I plan to generate this income. This will be more concrete after my debts are eliminated.

October Net Worth Update

It is the 1st of the month again and it is time for my net worth report card. I did better than I expected!

As of today my current net worth is (30,730.12). That is an increase of $196.47 over last month. The major factors contributing were me moving into my new house and extra related expenses, remodel expenses that I have not gotten a loan for yet, and my investments performed quite well.

I expect next month to be a better month since I am finishing my remodel which will significantly increase my net worth. I will also get an equity loan to offset some but should still be well ahead of my current state.

Alternative Income:

Youdata.com: 0.00
eBay Sales: $43

Want to curb spending? STOP watching TV!!

I have heard lots of people (who are in debt or "can't" save money) tell me they are not being affected by advertising. These same people watch TV regularly and have little to no savings. I firmly believe there is a connection. They are bombarded with commercials on a constant basis. It has been proven that if you tell someone the same thing repeatedly they start to believe it. Guess what commercials do?

Cable and satellite companies make most of their money from advertisers and home viewers. You pay every month to watch shows and you pay to watch advertisements. These commercials are what convince you to buy something the next time you are out shopping. Most people don't realize it at all!

My theory is that if you drop cable or satellite television completely then you will save money. For sure, you will save the money you spend on the monthly service right away. Secondly, you will not be subject to nearly as much advertising and will slow your spending. If you do not watch the commercials that get you excited over the latest and greatest product you don't really need then you won't buy it.

The biggest argument against canceling your TV service is that you will miss their favorite show or the news or sports. My response is to read the news on Google or a newspaper, Netflix DVDs of your show with no commercials, and watch the sports games on line, with friends, or go without. You also have sites like hulu to watch TV shows for free with minimal advertising.

I have been without any sort of subscriber TV for over 6 years. I do not miss it at all and now actually refuse to even own a TV. I despise the advertising and what it does to people's finances so much that I won't even have the device in my house. In my opinion it is a waste of time, money, and brains to watch TV. I obviously have a strong opinion on the subject!

The bottom line is that dropping TV will 100% without a doubt save you money. I dare you to try and and I am sure after a month or two you won't even miss it at all. You will suddenly have time to do all the things you "didn't have time to do before." You can spend time with family and friends, finish projects around the house, read more, etc. Cut the cord today!

Making your PC faster (again) and last longer

I work in the IT business and I am constantly asked by people how to make their computers faster (and therefore lasting longer). This question is more complex than it sounds but not so bad that it would take all day to explain. I won't get into specific instructions here but give the basics of what you can do. Most of these things are free if you do it yourself.

• Remove spyware. I use Ad Aware or Spybot to remove spyware. This is the number 1 cause of slowness in Windows. You can prevent most spyware from being installed by using another browse such as Firefox. Internet Explorer is very prone to spyware. Do this once per month.
  
• Virus Scan. Viruses can really slow up or even prevent your computer from working correctly. If you run virus scan (I recommend avast (free)) and it finds something it will try to remove it. My rule is that if a virus is found you should reformat your computer. Do this once per month
  
• Defragment your hard drive. This will add a lot of speed back if you haven't done this in a while or at all. This will reorganize the files on your hard drive so it can find and read them faster. Do this once per month.
  
• Remove programs you don't use. If you still have old programs and/or games installed that you do not use then go to Control Panel and uninstall them. This frees up hard drive space and will increase Windows' response time. Do this yearly (at least) or on an ongoing basis.
  
• Add some RAM. This has to be bought and physically installed. If you are not comfortable opening the case of your computer you can have it done professionally. I suggest maxing out the RAM in your PC if money permits. Find memory for you PC here.
• Reformat your hard drive and start fresh. After you have backed up everything you can clear out the hard drive and install Windows fresh. This removes a lot of junk and gives you a clean start. It almost always makes your PC faster again. I like to do this once per year as a spring cleaning list item.
  
• Replace your hard drive. If your computer is going on 3 years old and is still slower than when you bought after all of the above has been done you may want to replace the hard drive. It has physical parts that wear out and physically slows down. They are inexpensive these days. I recommend Seagate hard drives for reliability and good warranty.

If none of the above makes your PC as fast as you think it should be then either you have a really old computer (more than 3 years) or it has some other sort of hardware problem. In this case it makes more sense to buy a new one as you can get them inexpensively these days. For those in the market for a new PC I suggest Dell. They might be slightly higher in price but the hardware quality and support is well worth it. Go for the minimum warranty as it is not worth the extra money.

90% of the time the above tips should get you back to "normal" again. You don't have to buy a new computer in most cases!

7 Things you can do today to cut expenses

I find that I am constantly evaluating my expenses to see where I can cut back. Cutting expenses is a lot easier than trying to increase your income. I am a firm believer in the saying "It is not how much you make but what you keep." Someone earning $30,000 per year and saves $3,000 is a lot better off than someone earning $100,000 and saving $0. Living under your means will allow you to save money.

I have compiled a list of things people can do to cut expenses now. This is handy for those starting to budget or having to reduce a budget due to a job loss or income reduction. Examine your expenses and see if you can do any of the following:

• Take your lunch to work: I am guilty here. I go to lunch very often but can justify based on sanity terms. I work in IT and am on the phone all day. I need to get out for a bit to remain sane! I do plan to start bringing lunch and still leave for a break, though.
  
• Cancel the land line phone: If you have a cell phone you can do this. I have heard the argument that you may have a home security system. Most of these now work with a cell phone antenna that can be added onto your system. This can save you, on average, $40 per month which is $480 per year! If you really need the land line switch to Magic Jack.
  
• Make your own coffee! Even though we are currently in bad economic times I still see some fairly long lines at Starbucks each morning on my way to work. $3 for coffee 5 days a week saves $780 per year!
• Maintain your car: This can (potentially) be a big one. I asked my dad, a mechanic, what could be done to save money. He recommends keeping your tires inflated properly, changing the oil on the correct schedule, and put the minimum gas octane that your manual states. This will ensure smooth running and better gas mileage!
• Shop around for insurance: I wrote an entire post on saving money on insurance here. Premiums vary from company to company so it definitely pays to shop around! Even if you save $10 per month it is worth your time.
• Use Coupons! I highly recommend reading Coupon Cravings daily as they have some really good deals and save on food and health items in particular. It takes almost not time and they have done the coupon searching for you!
• Check your bank and credit card fees: Be sure to close and change your accounts so that you don't pay needless annual fees or monthly service charges. Change banks or to a credit card (with the same company) that does not carry an annual fee to save today!

All of the above items will cut any budget fast! You have to focus on the expenses that you can control easily and get them as low as possible without sacrificing quality of life or health. I am sure we all can do at least one of these today and begin reducing expenses. Including me!

The IRS 30-day wash sale rule explained

The IRS has a rule that if you sell a stock for a loss and buy it back in less than thirty days they consider it a "wash sale" and you cannot take the loss on your tax return until you sell it again (and of course not buy it back within 30 days). This prevents portfolio churning and creation of a fake "loss". The rule is a bit confusing so I have decided to try to explain it here.

I will start with an example:

You buy 100 shares of XYC stock for $500. You sell the stock today (September 28, 2009) for $300 (net). You have a loss of $200.

If you do not buy XYC stock again for the next 30 days you can take the loss on your tax return next year. This is the simple part. If you do buy it back in less than 30 days then you cannot take the loss on your tax return. It gets "rolled over" until the next time you sell. I will continue with my example:

You sold the stock as listed above. You decide that this was not a good idea and buy it back for $350 the next day. Now your basis in the stock is $550 (adding in the "washed" loss. Your "buy date" for tax reporting purposes is the original date in which you first bought the stock.

This is where it can get tricky. You actually did lose $200 of your original $500. It is a real loss. The IRS says you have to wait to claim that loss on your taxes until you sell your XYZ stock again without triggering another wash sale.

I should also mention that option contracts on the same stock are considered a wash as well. If you sell stock at a loss and then buy a call option on that stock the IRS rules state that it is still a wash sale since it is a "substantially" similar security. You have to carry forward your loss in this case as well.

Short sales are also included in the wash sale rule. If you sell short, cover the short, and sell short again without 31 days going past then you have the same wash sale as above. Your loss will carry over until you are no longer "washing."

This rule is complicated but of high importance to traders. People can find themselves having the IRS change their tax return if it is violated. I have written my own interpretation of the rule here but for more information check out IRS Publication 550. Please note that I am not a tax advisor and this post does not constitute advice.