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)