The mighty tax refund

Well, I'm getting a big tax refund. And I mean big, or at least it seems to me. I've never had to figure out what to do with this much money at one single time in my life (at least when I didn't have several bills screaming for my attention).

And yes, I know, it's an interest-free loan to Uncle Sam. I realize that, and will be taking steps to fix the problem in the future. (The nice thing is, I can up my 401(k) contributions, and not even notice the difference.) It's just hard to believe (still) the huge tax benefits of paying my mortgage company huge amounts of interest with every monthly payment.

Here's the problem. I know, if I was being totally financially responsible, I'd take the money, put a nice chunk (1/3) into savings (since they are now depleted), and put the rest toward my HELOC. I thought about this a lot.

Then, I decided, I would balance between being completely responsible, and split the remaining 2/3 (after the savings part) equally between the HELOC and some smart financial purchases. (By this I mean that I wouldn't just spend it frivolously on junk, but, rather, well-thought-out and planned purchases).

Unfortunately, in the course of deciding just what those well-thought-out purchases would be, I visited a furniture store to do some research. I spent the drive home adding up the total cost of everything I would like to buy, and trying to justify spending it.

So, now I'm in a quandry. I know what I should do, I know what I want to do, and I'm even considering a middle-of-the-road compromise.

The problem with the only non-mortgage debt being a very large sum is that it is very difficult to see any progress. This is why lots of popular financial gurus recommend paying debt off starting with the smallest balance.

It will be a while before the refund will clear my bank. In the meantime, I'm off to check out some financial sites for a calculator, to calculate the impact of paying a large lump sum. I'm hoping that will get me motivated to make a more responsible decision.

Furnace, part 3

Well, the problem with the furnace didn't exactly take $300 to fix.

The replacement gas valve cost $320, plus $157 for a year's maintenance contract, which included a deal that saved me $140 on the replacement cost. And this is on top of the $50 I paid for the first technician's diagnostic visit. And, I could have paid more, if I was willing to pay the charges to overnight the part here (I'm not).

I guess it was about time I started to experience some of the disadvantages of home ownership.

Hello, Murphy!

Dave Ramsey (and the devoted followers on his message boards) often claim that the first step to getting control of your finances is to save for a "baby" emergency fund ($1000). Their reasoning is that, just when you commit to stop using credit cards, Murphy will come visiting, and there will be lots of financial emergencies that pop up - your car breaks down, your furnace goes out, unexpected medical expenses, etc.

Well, I have to say - this is certainly the case with my life right now.

Yesterday I thought I had finally licked the problem with my heat - and paid a relatively small price for a technician to come fix the problem. Total cost: $49.50, and it came straight out of my freedom account for Home Repairs.

Last night I discovered that in fact, the problem was not fixed (something the technician had no way of knowing). Or, to be more accurate, there was a deeper level to the problem than we previously thought.

So, I need to call them again, and quite possibly have a part repaired. Even if they waive the diagnostic fee, I've been told that there isn't a single part in my furnace that wouldn't cost at least $200 to repair.

On top of that, on my way to work this morning, I heard a horrible scraping noise. Apparently, the mud flap on my front passenger side tire has been knocked loose, and now scrapes my brand-new tire (literally - installed a little over a week ago) whenever I'm driving.

I left the car in the parking lot, and will call a mechanic cousin to see if he can come fix the problem, or at least keep the loose flap back so I can drive to a body shop to get it repaired.

I was frustrated - thinking of how this would involve some creative financing to pay for these costs. Then I realized - I've started an emergency fund! Come Friday, it will have $300, which should pay for these repairs or at least make a large dent. It just means I'll have to keep saving.

All of this has got me thinking - it's interesting how financial peace comes about. I thought I would feel more comfortable with just the process of planning for these expenses (via emergency funds and freedom accounts), and there is some peace in that. But I think really, the real peace comes from the first time you have an unexpected expense, and have the funds to pay for it. Not because there's just extra sitting around, but because you planned, as much as possible, for the unexpected. Now that's real peace.

Freedom Accounts

I've decided freedom accounts are a wonderful thing.

I first read about the concept in Mary Hunt's The Complete Cheapskate (a great online explanation here), and though I've tried to use them before, this is the first time it's actually working. (Before, I wasn't committed to funding them, or I tried to create too many separate accounts and got quickly overwhelmed).

I've been using them for this last month, though, and the concept really, really works! Each paycheck I withdraw even a small amount of money and set it aside (I'm using both Excel and savings goals in Quicken to track contributions and withdrawals). I started with just six accounts (which is actually a large number - I'd recommend starting smaller), for both irregular expenses (Medical, Pet, Auto Service and Repair, Home Repair) and specific upcoming expenses (Christmas, Savings). By the way, the Savings account is just a way of setting aside money until I have the minimum balance I need to open a savings account without paying account fees - I'll be there by the beginning of next week.

I've already seen these to be useful. I jump started the Auto Service and Repair account with $300, because I knew I needed to replace the tires on my car. When I did replace them last week, the money was there, ready and waiting. My savings for Christmas expenses is steadily growing. And today, when I needed to call a H/AC technician to deal with my heating problem, the money was there to pay for the call (I had to jumpstart this one, as well).

A good financial tool, and once in the habit, not really so difficult to manage. I like that!

401(k) Investing, Part 2

So, I was wrong about my employer's contributions to my 401(k).

The company actually contributes 5% of my salary, regardless of my contributions. Which means that I am currently maxing out their contributions, at least - so that's good.

Still, I can still make better use of the pre-tax benefits of my own contributions.

401(k) Investing

I confess, I know almost nothing about investing.

At some point, I really need to start actively managing my 401(k). I just dumped 5% of my salary in it, and signed up for a 100% agressive portfolio - because as someone in their mid-20s who can handle the fluctuations, that's what I'm supposed to do.

I've done some reading online today, though, and here's one thing I realized: at least up to the 5% I'm currently contributing, my employer matches dollar for dollar. And that seems rare - most other numbers I'm seeing are closer to 50 cents on the dollar.

So, I've decided I need to take better advantage of this. First, I need to figure out exactly how much I can contribute, and up to what percent my employer will match. Then, max that out.

I'd like to find a calculator online that will help me figure out the real impact of increasing my contribution. If I contribute $100 more into my 401(k), I know that my actual take-home pay will not decrease by $100, since 401(k) contributions are pre-tax. But what's the ratio? Is it $65 for that $100? I need to figure this out before I change my contributions.

Financial goals and status

I've been doing a lot of thinking about my financial goals lately.

Originally, the goal was to be debt-free, except for a mortgage, by the time I was 30. I came to the realization recently that probably wasn't going to happen. Now, I'm thinking, do I really want that to happen?

Dave Ramsey outlines 3 baby steps to achieving financial peace. (Please note: these are from the reading that I've done on his website's forums, not from the book, The Total Money Makeover. I am hoping to get to the library soon to read this book, though.)

  1. Save $1000 in a emergency fund.
  2. Pay off all non-mortgage debt.
  3. Save 3-6 months expenses for a full emergency fund.
  4. Contribute 15% of paycheck to retirement savings.
  5. Save for kids college fund.
  6. Pay off house early.
  7. Give and build wealth.

Here's where I stand with each of these.

Baby Step 1 - $1000 Emergency Fund: I have very little in savings at this point. I opened an ING account, and got $25 to do so. And I started a Freedom Account for Savings, and have been transferring money this month, until I have the $300 I need to open a free savings account at my bank. I'll have this by mid-February. After I have the first $500 there, I'll save the rest at ING. That should keep enough easy to get to. My yearly bonus, when it comes, should be a nice boost, as well as any tax refund.

Baby Step 2 - Debt Repayment: I have two personal loans to repay, and these will be repaid in the next couple months. Other than that, I have a home equity line of credit, and given that I can't possible repay that in the next couple years, Dave recommends moving it to Step 6 (mortgage repayment).

Baby Step 3 - 3-6 Months Expenses in Emergency Fund: I'm not even sure what 3-6 months expenses would total right now, and would rather live on my budget for at least another month before determing that amount. Given that I'm single with no kids, I can probably focus on a smaller amount.

Baby Step 4 - 15% to Retirement: I'm currently deducting 5% to my 401(k). And I think there really is enough wiggle room in my budget to increase this to 15%, especially after I change my W-4 to withhold less taxes (waiting until I finish my taxes to do this).

Baby Step 5 - College Fund: No kids (yet).

Baby Step 6 - Pay Off Mortgage Early: And in my case, the HELOC first, then the mortgage.

Baby Step 7 - Give and build wealth: Not even close right now.

So, depsite that fact that I was disappointed that I couldn't pay off the HELOC before I was 30, I really am in a good financial position. That was an impractical goal; now I just need to make realistic ones.

Here's a start:

By January 2006, I will have an emergency fund with 3-6 months of expenses, and be contributing 15% to my retirement.

Fair and Accurate Credit Transactions Act (FACTA)

The new Fair and Accurate Credit Transactions Act (FACTA) has, among other things, now made it possible for people to get free copies of each of their three credit reports every year.

Living in Maryland, I've always been able to get one per year, but the hassle of ordering it has always been a fantastic deterent. (And, I rarely had large purchases to worry about. It's funny how getting a mortgage makes you care that much more about your credit reports.)

This site, should make it much easier:

Credit reports will be available there for my state in September. I've already placed a note in my tickler file.

Here's a great article about credit reports, things to avoid, etc: How To Impress Lenders (an interview with Evan Hendricks)

I will say this - once you go through the trouble of getting things sorting through the first report, it's much easier to deal with on an ongoing basis. There were tons of things to dispute the first time around, mostly old credit cards that have since been closed. It's more of a precaution now, than anything.

A bit of financial disappointment

I ran some numbers mentally this morning, in the shower, that are a little depressing. I'll explain, but first, here's the background.

Sometime when I was in college, probably as I was signing papers for yet another student loan, I asked my father if he thought I could be debt-free by 30. I distinctly remember his response: he said it would be difficult, but if anyone could do it, I could. And, in the spirit of all idealistic college students longing to show the world what they can do, I vowed then and there to do it. Not including a mortgage, of course.

Of course, if I was really serious about it, I wouldn't have made some of the financial decisions I have over the last couple years. I realize now, in retrospect, that I was asking that question of someone who doesn't manage money, especially credit, particularly well. And who might set forth goals, but doesn't put a lot of thought, effort, planning, and carry-through in accomplishing them.

Anyway, it's still a nice goal, and one I would love to achieve. BUT (here's where the shower part comes in) I'm just not sure it's possible.

As of this moment, my only non-mortgage debt is the home equity line of credit I just financed, to consolidate my student and car loans, to the tune of $36,000. Actually, that's not true - I have a couple personal loans, but they will be paid off by the end of next month. And since I'm really starting these calculations in May (my 27th birthday), I'm not counting them.

Here's the problem - I turn 30 in May 2008, just a little over 3 years away. At $36,000, that's $12,000 a year, or $1,000 a month. (Ignoring interest, of course). With my current budget, raises not withstanding, I just don't see how I can apply $1000 a month to this debt. There will be extra money (besides the regular monthly budgeted amount) - income from my second job, bonuses, raises at work. Still, I can't imagine it averaging out to $1000 per month.

Sigh. This is going to be a tough one, folks.

My own personal financial debate

I've been wavering back and forth on making a financial decision for a while now, and I still haven't come to a concrete decision.

In November/December, I refinanced my house, and used additional equity to pay off two student loans and my car loan. I have no credit card debt, so that leaves two personal loans totally about $1,300.

With the refinance, I've cleared up a lot more money in my monthly budget. I know that the most important things I need to be doing with that money is saving for emergencies, as well as funding some irregular accounts. I also want to knock out those existing personal loans.

What I really want to do is buy new dining room furniture. Here's where I waver. The set I want is on sale now (and granted, has been for the last few months, even with supposed sale deadlines imposed in there). It's inexpensive, good quality, and a good fit for me. And my father keeps reminding me that it might not be there if I wait.

But, I don't have the cash right now. I need to take care of some other financial goals first. And I'd really like to get rid of the HELOC, though that's a bit daunting due to its size.

One minute I am certain I'm not buying anything else on credit, at all. The next - I'm ready to get the credit card and order the set.

I know what I should do, and I know what I want to do. Unfortunately, those two things are opposite.

Okay, decision time. (It helps that I've spent the last 20 minutes reading the forums at Dave Ramsey's web site).

I will not go into any more debt, for anything. Short of a complete catastrophic problem, I'm not doing it. No matter what. I've worked hard to get here, and I am not going backwards!

And, to appease my other half (the side that really wants that furniture), I'm going to add a Furniture freedom fund to my budget. That way, I'm saving towards that set. If I'm to have it, it will still be on sale when I have the cash. If not, I'll find something else.