Declare the pennies on your eyes

I finished our taxes last night, and what a relief that was. It was the culmination of our plans in 2010. Here’s why:

1) I adjusted our withholdings earlier in the year so they would be as near to perfect as possible.
2) We wanted to maintain our student lifestyle even with our significantly better jobs/income.
3) We wanted to reduce our taxes through the use of Section 125 plans and pre-tax retirement savings (401k and 457b).

So, did we succeed? I’d say so.

1) Our federal refund is $201, and our state is $161. The only reason we got a federal refund was that neat little $800 Making Work Pay Credit. I have no idea what that is, but I trusted TurboTax that we qualified for it. We also got a $66 credit from our state because we had Long Term Care insurance.
2) By rough estimates, we put a bit more than 20% of our 2010 adjusted gross income toward debt and a fully funded emergency fund. In other words, we lived just fine on 80% of our income.
3) A rather large portion of our gross income went into our 401k, 457b, and a cashed-out mutual fund toward the end of the year went directly into an IRA.

I already adjusted our withholding for 2011 to get it even closer this year–woo, slightly more take-home pay! I’ll check throughout the year to make sure we’re still on track, because I’m nerdy like that, and it makes me happy to see that “your refund or tax payment will be $25 or less.” Aww, yeah.

Real retirement calculator?

There are a lot of retirement and savings calculators online that will let you plug in your monthly (or yearly) savings and investments, and your expected rate of return. There are some that will tell you how long it will take you to become a millionaire. There are others that will ask you when you want to retire and calculate how much you need to save monthly to make that happen. What I haven’t been able to find is a real retirement calculator.

What do I mean by that? Well, assume you’re 25 and you put $2,500 in a Roth IRA, but then you kind of forget about it and it sits for five years. Then you’re 30 and married and realize you need to put more into that IRA! So you start making random deposits, sometimes you get on a monthly routine of adding $100, but other months you don’t add anything, and then right before tax season, you add $1,000. Maybe this goes on for a few years, and then you start to get serious about it at age 35. You invest as much as possible each month–let’s say $500. But the next year, at 36, you get a raise, and up your savings to $600 each month. And you continue to get both small and large raises and increase your savings until retirement. Also, after your mortgage is paid off at age 45, you start investing your former house payment as well, so now it’s up to $2800/month into savings and investments.

Where’s the calculator for that? I’d like to see a calculator that allows for exponential savings amounts, lets me project 15 or so years and plug in the amount that I could potentially be saving per month at age 45. I want a calculator that allows me to add in other retirement benefits I may have, like a pension that grows as my annual income rises.

I can guess at these numbers, but none of the calculators I’ve found–including Excel sheets people have made–allow for this type of input. Most people don’t invest $500/month for the rest of their lives, though maybe some do. People who want to accumulate wealth put away everything they can.

Why interest sucks

If Dave Ramsey’s proposed concept of paying off debt (any and all debt–no debt is ‘good,’ even student loans, even mortgages!) isn’t a familiar one, I’ll use some of my own real world examples to demonstrate why I am waging an all out war on debt (my student loan). These are actual real life numbers, so if you’re afraid of what this means, then you know my fear!

Now, I’ve already admitted I borrowed a bit more than I should have in order to get through graduate school, but I’ve also got a better job than I thought I would have at this point, so I’m going to be kicking this loan–hard–very soon.

My loan information:

Principal balance: $31,784.72
Interest rate: 6.625%
Monthly payment: $241.45
Repayment term (months): 235
Interest paid: $24,997.22
Total amount repaid: $56,738.02

Okay, maybe that doesn’t look scary, or maybe you aren’t used to looking at straight numbers, so let me put that into regular English. I borrowed $31,000+ to pay for school. My interest rate is 6.625% (keep in mind, some mortgages are going for around 5% or less these days) and the repayment term they’ve given me is 235 months. In real terms, this is nearly 20 years to repay this loan–20 YEARS! You’d think that’s great, right? I can take my time, only pay $241 a month, and that it’s… but wait. What’s this ‘interest paid’ category? Take a closer look. That’s right, if I take 20 years to pay off this $31,000 debt, I’ll pay AN ADDITIONAL $24,997 in interest. That means I’ll pay $56,738 for my $31,784 education. Yikes!

Seeing those numbers makes me angry. This is good, because this anger and frustration is what propels me to do something about it. This debt happens to be Debt #3 in our ‘snowball,’ so it’s going to be last in our series of debts.

Debt #1 in our snowball is already paid off, and right now, we are focused on paying off Debt #2. Right now, Debt #2 is getting paid each month, plus the amount we were paying toward Debt #1, and whatever other money we can throw at it. We are putting a very minimal amount into savings each month, because our debt interest is much higher than the interest we’d earn on money in a savings account. We are putting a substantial amount to our student loans each month. And then what? Then I’ll have an additional $24,000 in my pocket 20 years from now…

Book review (so far): The Millionaire Next Door

I started reading “The Millionaire Next Door” yesterday, and am about half-way through. It’s written in a very conversational style by two wealth experts, so it’s a fairly quick read. The whole point is that millionaires aren’t what we think they are (high consumers), and that really anyone could be a millionaire with the right attitude and willpower to save money (income does not equal wealth).

I really liked a few anecdotes so far, so I wanted to note them here.

One is about prodigious accumulators of wealth (what they call PAWs–people who have saved a significant amount of money relative to their income) being excellent defensive players when it comes to money. They liken someone who is a good defender of their money to someone who is physically in shape but still exercises every day. I get this, because I am what most would consider relatively fit, and I still exercise regularly. I don’t do it to lose excess weight, I do it to maintain weight and generally help my well-being (mentally as well as physically).

The other anecdote is about the millionaire who shies away from the expensive champagne and caviar spread that has been set out for him to enjoy as he is interviewed about his millionaire status. He admits that he only drinks scotch and two kinds of beer, “free and Budweiser.” The point is that millionaires actually have rather blue-collar tastes and backgrounds, and that is how they sock away so much of their incomes and work so hard to maintain financial freedom. They don’t wear expensive clothes or lease expensive vehicles.

I really like the idea that there literally could be a millionaire next door, and you’d never know it. It may be the plumber with his own business, or the auctioneer who spends a lot of time around farm equipment, but it’s probably not the doctor with the $500,000 house or the middle manager with the new Maserati every year.

Can money buy happiness?

I’ve been reading Gretchen Rubin’s The Happiness Project, and she puts forth that money can buy happiness, to a degree. I really do agree with this (I would!), because there are some things that I’ve been able to do or enjoy, and without some expendable income, this wouldn’t be possible. Lack of money generally makes people worried and, therefore, less happy. Having a bit of fun money allows us to enjoy those happy benefits.

The first happy benefit of money is the same as Gretchen’s first investment early in her project, and that’s a gym membership. I don’t know why it took me so long to get off the couch and into the YMCA, but when my husband and I finally joined, I discovered just how stress-relieving exercise can be, among other things. I’ve also vastly improved my posture, which means less achy neck/shoulders after a long day, which has definitely increased my happiness.

The second is visiting my sister or having my sister visit home while she’s going to graduate school in Pittsburgh. I spent Thanksgiving with her there, and she came home at Christmas and during her mini-pre-summer-term break in early May, and will be back in August for a month. Without my own ‘fun money,’ and my parents’ generous attitude about flying her home for visits, I wouldn’t get to see her for the length of her 2-year program. I’m very thankful for these visits.

The third is something little that doesn’t take a lot of money, but definitely makes me feel more connected to friends, and that’s going out. Whether it’s to a coffee shop, movie, or restaurant, spending time with friends makes me happy. Now, fun can be had without spending money, but since I currently live in a 1-bedroom apartment (which saves money), it’s hard to entertain a group of friends. Also, since I live in a moderate-sized city, if we go ‘out,’ odds are we’ll run into other friends and that will add to the enjoyment.

What do you think? Can money buy happiness? Why or why not?

Marriage and money

The National Marriage Project at the University of Virginia took a look into marriage and money with their report on “The State of Our Unions, Marriage in America 2009: Money & Marriage.”

Things I found most interesting are in Jeffrey Dew’s piece, “Bank On It: Thrifty Couples are the Happiest” (pg. 23 of the full report):

When individuals feel that their spouse does not handle
money well, they report lower levels of marital happiness.

Couples who reported disagreeing about finances once a week were over 30 percent more likely to divorce over time than couples who reported disagreeing about finances a few times per month.

In particular, couples who are wise enough to steer clear of materialism and consumer debt are much more likely to enjoy connubial bliss.

Seems that financial disagreements are the major predictor of marriage success or failure, so agreeing on finances and also having more assets than debt is actually critical to marital happiness. Probably something many people knew intuitively, but nice to have research to back up that hunch.