Happy Birthday to Me!

Normally about this time of the month I post a mortgage update giving all the details of how much progress we’ve made, how much longer we’ve got, etc.

Since it’s my birthday month, I decided to take a slightly different approach. We recently celebrated my birthday, and as a gift to our entire family, we decided to pay off the house early!

We were able to take some money from savings, rearrange some things with my first paycheck of the month that we would normally budget, and come up with a enough to knock the rest of it out!

What’s next?

I’ve posted before about FIRE (Financial Independence Retire Early). Remarkably enough, the initial plan was to go full speed ahead on saving and investing for 10 years from this birthday. I thought originally that we might start a couple of months behind, but as it turns out we’ll be starting right on time.

The plan is to switch from mortgage updates to FIRE updates. I’ll share progress as we go and the strategies that we use. The progress will likely be slow going to start and may be hampered at times by the stock market, but we’ll keep the plan in mind to not get discouraged.

We have a specific number in mind that we’d like to hit. That number doesn’t include the value of our house, car, or college savings accounts. It’s mainly composed of what we have in savings and investments. For obvious reasons, I don’t plan on sharing that final number at this time.

One common rule that I’ve seen to find your number is to take your annual spending and multiple it by 25 (up to 50). That gives you a pretty good starting point. Our final number is about 37.5 times our annual spending to give us some extra room.  Given what we have invested so far through our 15+ years of working, we’re about 20% of the way to our final number. That means we’ll save the other 80% in about two-thirds the time it took us to do the original 20%. Pretty crazy, but entirely possible.

Final notes

What do you do to celebrate your birthday? What crazy gift could you give to yourself this coming year to change you and your families future forever?

Early Retirement – What does it mean to you?

I think many people fall into two groups when they think of an “early retirement lifestyle”.

One group thinks that since you’re not going to save for the same amount of time as everyone else (30-40+ years), you’re likely going to retire with very little. If you retire with very little, you’re going to live a very meager existence so you don’t burn through all of your savings quickly.

The other group may think it’s possible to save enough to have a nice retirement in a shorter time period, but that means you’re going to have to live an incredibly frugal life now. Personally, I think living frugally is what allows you to have margin in your life for the things you want, even if that thing you may want is early retirement.

I don’t believe that saving for early retirement needs to be either of the extremes above. Life is short, and anything can happen between now and early retirement, so you need to be able to enjoy life now as well as in the future. An important balance needs to be struck so chaos doesn’t rule.

Many of the topics I’ve written about up to this point have been about how to save money on a variety of things such as internet, cell phones, and even a trip to Disney World. If you’ve followed any of the advice, you’ve hopefully got some extra financial margin in your life. If you haven’t decided what to do with it yet maybe now is the time to go on this journey with me.

Perhaps you’re in a place where you really can’t imagine working for the next 20, 30, or 40 years and you question whether you’ll have enough to actually retire in the end. If that’s the case, than exploring this topic may help you realize you can make plan and live it out for a better future.

There may be some of you who aren’t in either of those two categories, and if that’s the case, that’s okay too. Let me know in the comments below what kinds of questions or skepticism you have. I’ve read stories in the past of people “retiring” by the age of 30 and figured that their situation was different from mine and that’s why they were able to pull it off. I’m 33 now, so I’ve already passed the age that some of these people were able to retire by. It’s never too late to step on the gas pedal and accelerate full speed into the future that we want. No one is going to do it for us!

Photo by Tax Credits

Early Retirement? Why Not!

Over the past several months, I’ve been fascinated by the idea of early retirement. Just the term early retirement can bring up a few different questions.

What is early?

I consider early to be anytime before when most people would retire. A quick search on the internet brought up a US News article where they surveyed 5100 employees and only 2 percent expected to retire before the age of 55. So we could consider anything before the age of 55 to be “early”.

What is retirement?

Well, that’s a different thing to different people. I view it as no longer having to do the 8-5 anymore. Essentially, financial freedom to do what I want when I want. It’s the point where investments and assets are making enough money to cover our everyday living expenses. At that point, we could do what we want, when we want without living like paupers.

What’s next?

I’ve learned a bit and plan on reading more on the topic from different sources. One authority on the topic is Mr. Money Mustache. Another that my wife found recently is The Money Habit.

Do you know of any authorities in early retirement? Is it a dream of yours to one day quit your 8-5? Let me know in the comments below. I plan on writing more about this topic as I learn more and develop a plan of my own.

It’s also the time of year to start planning what you want to do next year. Let me know what you’ve got planned in the comments concerning your financial future.

What are you going to do with your tax refund?

Taxes

According to the IRS, the average tax refund last year was about $2800. That’s a lot of money. Let’s look at that a couple different ways.

$2800 is the same as:

  • $233 a month
  • $116 if you’re paid twice a month
  • $107 if you’re paid bi-weekly
  • $53 if you’re paid weekly

That would be a pretty nice raise if you got that money in each of your paychecks. We’ll talk more about that in a future post. For now, let’s look at some ideas on how to use this year’s tax refund.

It’s always nice to get a big pile of money unexpectedly. It’s sad to find out after a while that it disappeared and you’ve got nothing to show for it. Below are some ideas on how you might use your tax refund this year.

  • Pay off some debt. Since you’re probably paying interest on any debt that you have, paying it off makes your tax refund that much more valuable by saving you interest every month.
  • Start or build an emergency fund. Emergency funds are far from exciting, but on the bright side, once you’ve got one, unexpected events aren’t such a crisis.
  • Put it in an IRA for retirement. You can start the year by cutting your tax bill for the next year by putting your refund right into an IRA. Whatever you contribute to a traditional IRA can be a deduction if you itemize your taxes.
  • Start a 529 college fund for your kids. Depending on where you live and in which state you start a 529 college savings plan, you can get a lot of great benefits that a savings account won’t provide.
  • Buy something big you’ve been looking at. If you’ve been planning to buy something like a new computer, furniture, or something else that isn’t exactly “cheap”, using your tax refund can get you that item that much faster. Plus, if you’ve saved money for that special item you can use it for something else now!
  • Plan a vacation. It may not sound like the most responsible thing to do, but paying cash for a vacation is better than putting it on a credit card.
  • Start a business. I’m sure you didn’t expect to see that on the list. If you’ve ever thought about starting a business but have always used not having the money as an excuse, now’s your chance. It may be the catalyst to make a dream come true.

Don’t let your tax refund (or any unexpected dollars) slip away. Make a plan for it, even if the plan is to spend it frivolously. At least you’ll know where it went.

How do you plan on spending your tax refund? Post your ideas in the comments below.

Featured Image courtesy of Arvind Balaraman / FreeDigitalPhotos.net

Why do you save money?

Kids

It’s the new year and I’m sure there are a lot of people out there who made resolutions to lose weight, eat healthy, get in shape, join a gym, or exercise more. How many people do you think vowed to get their finances in shape?

If you’re going to stick to your resolutions or goals, you must have a good reason to do it. It can’t be someone else’s goal and it can’t be because everyone else is doing it. Just feeling like it’s a good idea isn’t enough. There has to be meaning behind it. I’m going to share with you the reasons that my wife and I choose to make saving money part of our everyday financial lives.

  • Retirement. For most of us retirement is a long ways away, and the longer you put off saving for it, the longer away it’s going to be. Start early, make it a habit, and watch it grow over the long-term.
  • Our daughters. We don’t want them saddled with a ton of college loan debt when they graduate. As parents, many of us spend a lot of time telling our kids they can be anything. In reality, if they graduate with student loan debt, they can be anything as long as it makes enough to pay the college loan payment. Who needs that?!?!? My wife and I were fortunate to graduate without any student loan debt and it put us in a great place for the future and we want to pass that same opportunity on to our kids.
  • Vacation! We’ve been married over eight and half years. The first time that we actually took a real vacation other than just a weekend or so away was 2 years ago when we went to Disney World. After that, we decided that taking a family vacation was something we should be doing. The only option was to save up for the next one. No one should be paying off their vacation when the next one rolls around.
  • Emergencies. Big problems aren’t so big when you’ve got a nice big pile of money in the bank.
  • Car repairs and maintenance. We know we’re going to need your tires replaced and the oil changed. Instead of it throwing off our budget or messing up any other savings goals, we put a bit away each month to cover car items when they pop up.
  • Purchases. Sometimes we save for a specific purchase, sometimes we don’t. If we don’t have a specific thing we’re saving for and a great deal comes along, we’ve got the cash there to get it. Plus, using cash makes us think twice as to whether we really need it since we’ve spent so much time building the savings up.
  • FREEDOM, FLEXIBILITY, and CHOICES! While money can buy you a lot of things, there are some things you can’t get on Amazon. Job got you down? See someone in need? When you’ve got money, you’ve got control. It buys you options and choices that you wouldn’t otherwise have.

Those are just some of the reasons that we’ve made saving an important part of our financial life. If you’ve made any New Year’s resolutions this year, consider why you made them so you can stick to them!

Dave Ramsey’s Financial Peace University – Week 7

Investing

Week 7, only two more weeks left in class! Everything that has been taught in the classes so far leads up to this one. Some students may not be ready for it, while others may have been waiting for it a while. This lesson is the Retirement and College Planning lesson.

There can be a lot of fear around investing, but Dave makes it incredibly simple and breaks it all down. He starts off with a simple example of a 30 year old couple who invests $600 a month for 40 years. At 12% interest, they would have over $7 million! If they could manage to invest $833/month they would have $9.8 million.

If that doesn’t motivate you to start saving, I’m not sure what will. Even if you don’t get 12% on your investments, you’d still have a huge pile of money!

After the $1000 emergency fund, paying off all your debts but your mortgage, and building up a 3-6 month emergency fund, baby step 4 is to invest 15% of your income for retirement. Dave recommends the use of mutual funds since it helps take some of the risk out of investing by spreading your money across several different companies. He recommends splitting up your investments equally among growth and income funds (sometimes called large cap), growth funds (sometimes called mid cap), international funds, and aggressive growth (sometimes called small cap).

When you purchase mutual funds, you can purchase them through several tax favored accounts such as 401k’s and Roth IRAs. A 401k or Roth IRA holds mutual funds and other investments, it is not the investment itself. The type of account tells the government how to treat it when it comes to taxes. For example, with a 401k, you put all of the money in pretax, but when you withdrawal from it in retirement, you will pay taxes on everything you withdrawal. With a Roth IRA, money is put in after taxes have been paid, so all of the money grows tax free and you don’t pay any taxes on it when you withdrawal from it in retirement. You can read more about it here.

To maximize your investments, Dave recommends funding your company’s 401k (or Roth 401k if they offer it) to get all of the match that they offer. You don’t want to leave free money on the table. After that, you should put money into your Roth IRAs until you reach 15% of your income. If you still haven’t reached 15% but have maxed out the Roth IRA, then go back and fund your 401k until you reach 15% of your income.

After covering investing for a while, Dave’s daughter Rachel Cruze comes out to talk about saving for college (Baby Step 5). They recommend saving in an Education Savings Account first, and then using a 529 after the ESA is maxed out. Personally, I’m not sure why Dave hasn’t completely adopted the 529 as the primary choice. The only thing I can think of is that there are so many 529s out there and they are different in each state. For example, in Ohio where I live, any money we put in up to $2000 per child is tax deductible from our state income taxes. I wouldn’t get that benefit from an ESA. Look at your 529 options closely. You don’t have to invest in the 529 for your state if you like another state’s options better.

Rachel warns against using insurance, savings bonds, or prepaid tuition to save for college. They don’t get the same returns as using mutual funds. Always look for something that allows you to control what you’re invested in and doesn’t change with age. Finally, they stress the importance of graduating from college debt-free. Some of their money saving tips are to go to an in-state school or community college, look at all your living options (including living at home), get tutoring for the ACT/SAT to improve your scores and get more scholarships, and finally WORK while you’re in school!

I agree with graduating without student loan debt. Personally, my wife and I were able to do it because of the work we put in while in high school and the scholarships we got. When a student graduates with debt, they don’t have the freedom to find the job they really want and instead are sometimes forced into a less than ideal position so they can pay their student loan payments. This makes no sense to me really. Parents and students spend all of this money on college so that they can have the “experience”. If they do it right, a person will be spending a lot more time in the working world than in college and the last thing they need to do is start off in a position that they despise and have student loans hanging off their back.

Next week’s lesson will be covering real estate and mortgages.

Featured Image courtesy of ddpavumba / FreeDigitalPhotos.net

Tracking Your Finances, the Easy Way

Mint.com Logo

If you’re anything like me, you’ve probably got a variety of checking, savings, retirement, and investment accounts, all at different institutions. On top of that you may have credit cards, a mortgage, or a car loan. It can be overwhelming to get a complete financial picture. That’s where Mint.com comes in.

I love using this service, even if it’s only to give me a rough idea of our net worth from time to time. After you create your account, you will add in all of your different financial accounts. They’ve already got integrations with tons of different financial places. I was surprised to find my local credit union available. For each place that you want to add, you provide the necessary credentials to allow them to read the information. I know at this point, a lot of people would probably freak out. For some reason, I haven’t been that concerned about it. They are well established and have been around for quite some time. If you’re concerned, do some research and judge for yourself.

So, you’ve added your bank accounts, retirement accounts, credit cards, and your mortgage. You can even add your car and that collectible Elvis painting in the attic. It factors it all into your net worth. Here are some of the things that I really like about Mint.com and I’ve found useful.

  • On the lefthand side when you log in, you get the running total of your accounts in one place. It updates when you log in and you get warnings if they couldn’t connect for some reason. If you scroll down to the bottom, you’ll see your net worth. Hopefully it doesn’t scare  you to death.
  • Each week Mint sends out a nice summary showing all of your accounts and how much they’ve increased or decreased. It also gives you your net worth and tells you how much it has increased or decreased. I’ve set it up to also send the same email to my wife so she is able to stay up to date with all of our finances as well.
  • It’s incredibly easy to set up goals. You simply pick what you want to accomplish, when you want to accomplish it by, and which accounts are linked to the goal. For example, if you wanted to save $4000 for a vacation, you enter that in, choose the account you’ll be using to save the money in and it will tell you how much you need to put away each month to reach your goal. If you want, you can put in how much you plan to save each month and it will tell you when you’ll reach your goal. Each month, you’ll get another email showing you the progress of your goals.
  • The Investments tab does a nice job showing you comparisons as to how your doing against each of the major indexes in a nice graph. You can also check performance, value, and allocation in graphs as well.

Mint.com Investments

  • The Trends tab is kind of like the Investments tab. Instead of being for just your investments, it covers all of your accounts. You can analyze your debt, net worth, income, and spending, all in nice looking graphs.
  • If you open up the Accounts window, you’ll see a button for Emails & Alerts. You can create alerts for large deposits, large withdrawals, low balances, bank fees, interest rate changes, going over budget, and a ton of other things. These alerts don’t usually go out right away since they only update information about your accounts on an occasional basis.

There are a few features that are available that I don’t use. One of them is the Transactions tab. On this tab, you can see all of your transactions and categorize them. This helps with some of the other graphs that  tell you where you’re spending money. Honestly, I don’t have the time to go through and categorize them all. Another tab I don’t use much is the Budgets tab. Here you can say how much you want to allocate to different categories and it will tell you how close you’re getting to hitting that amount. Green is good, yellow is a warning, and red is overspending. Of course, this requires that all of your transactions are categorized correctly.

Finally, you’ve got the Ways to Save tab. I have to imagine this is how Mint.com makes their money. From here, they try to connect you up with different financial products like credit cards (stay away), checking, savings, investments, and more. Do some additional research before jumping into something because they suggest it.

I’m sure by now you may be skeptical, or you may not have gotten this far because you were so eager to check it out for yourself. If it’s not for you or after using it you’re concerned about security, you can always delete your entire account. Did I mention that they’ve got a mobile app for your smart phone too?

What is a Roth IRA and why do I need one?

Beach

I’ve been pretty focused on finding products and services that will save you money in each post. However, this week, I wanted to take a break from the usual and discuss the Roth IRA. I’m sure everyone has heard of them by now, but perhaps you’ve still got some questions. Well hopefully I’ve come up with just about every question you might have and answered them below. If there is a question that I missed, please post it in the comments and I’ll get the answer for you as quickly as possible.

What is a Roth IRA?

A Roth IRA is a type of retirement account that usually contains one or more mutual funds.

What makes a Roth IRA special?

When you put money into a Roth IRA, you put add to it after tax money, which means the money that you take home in your paycheck. The special part about this is that it grows TAX FREE since you used after tax money to fund it.

Grows tax free? What does that mean?

It means that if you put in $1000 into your Roth IRA and it grows over several years to say $50,000, you can withdrawal money out at retirement and not pay taxes on any of it, including the growth. If you had $50,000 in a 401k and decided to pull it all out at once, it would turn into something like $35,000-40,000 after taxes are paid to the IRS. Plus, who knows what tax rates will be like in the future. If they go up a lot, then you would get even less from your 401k when you make withdrawals.

Can I contribute to a Roth IRA?

As long as you have a job and report your earning on your taxes, you should be able to contribute to a Roth IRA. There are income limits however. If you are married filing jointly and make $178k or more, or you’re single and make $112k or more, you should check with a professional to make sure that you can contribute to a Roth IRA.

When can I take money out of my Roth IRA if I start one?

When you turn 59 1/2 you can usually start withdrawing money from your Roth IRA as long as you’ve been putting money in for at least 5 years. You can take your contributions out at any time before 59 1/2, but if you touch the earnings or growth, you’ll be paying a penalty. It’s best to leave it alone if at all possible. For example, if you put in $5500 each year for five years and then one year you decide that you want $2000. You won’t be able to put in $7500 the next year to try to repay the amount you took out.

But I’m a stay at home mom, can I still open a Roth IRA?

As long as your spouse is working, you can open a spousal Roth IRA and contributions can be made on your behalf up to the limit.

How much can I contribute to a Roth IRA?

The limit is currently $5500 ($6500 if you’re 50 or older) for you and your spouse, for a total of $11000. However, you can’t contribute more than you made so if by some chance you made less than those amounts, that would be your cap. Chances are if you make less than that, you’ve got bigger concerns than contributing to a Roth IRA.

Can I start a Roth IRA for my child?

In most cases, the answer is no, unless they made money and you file a tax return for them. So if you’ve got a child actor on your hands, then you might as well start a Roth IRA early for them to maximize the savings.

What does it mean to put money into a Roth IRA?

When you invest in Roth IRA, what you’re really doing is putting money into an investment, such as a mutual fund under a Roth IRA umbrella. The Roth IRA umbrella is what determines how the IRS treats it.

I hope this has been helpful. Before opening a Roth IRA, I would suggest speaking with an investment professional to make sure that you invest in mutual funds that meet your desired goals.

Featured Image courtesy of Vichaya Kiatying-Angsulee / FreeDigitalPhotos.net