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Woohoo!! Another Raise!!

Money Tree

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

Recently, I let you peak in on what I did with my performance bonus for this year.  Now, I am going to let you in on what I did with my salary increase for this year.  I find out both numbers at the same time, but the bonus is paid in March and the salary increase does not begin until the first April paycheck.  This year, I received a 2% increase on my base salary.  This translated in $1,900 more per year or just over $155 a month.  The next question is what did I do with the extra money?

Dividing the Extra

Over the last few years, raises generally have been used to help stabilize the budget and plug any deficits there may have been.  This year was different though.  I have been actively minimizing our expenses whenever possible.  The most notable one recently was my mortgage refinancing that I wrote about.  That freed up just over $300 a month, $200 of that went back into the mortgage payment, while the rest went to our monthly spending.  So, I did not need the raise to plug any budget holes this year.  That leaves me with a few options on to do with the raise.

I could increase our monthly spending categories.  We sent aside money every month for things like car expenses, kid expenses, house expenses or trips.  There is nothing wrong with a little lifestyle inflation; people should be able to enjoy the fruits of their labor after all.  I just felt that we could make our financial picture stronger rather than just increase our spending.  That means the bonus would be going towards savings.  Not all savings are the same though.

I consider our savings in roughly three categories, retirement, cash savings, and our brokerage account.  The cash savings are at Capital One 360 and the brokerage account is with Vanguard.  Between those two, we allocate about $150 a month, with a majority going to the Vanguard account.  Right now, I am comfortable with the balances of each.  I consider the two of them my emergency fund.  I have roughly 6 months of expenses saved in them.  Mind you, not all of it is purely dedicated to the emergency fund, but if I lost my job tomorrow, all of it becomes available for the emergency.  That means I don’t really want to up the monthly amount going into them.  That leaves retirement savings as the landing spot for the salary increase.

My company offers both a traditional 401k and a Roth 401k, so I need to choose which one I increase my contribution rate.  My current contribution rates are 6% for the traditional 401k and 1% for the Roth 401k.  I selected this allocation because the company only matches on the traditional plan and matches up to 6%.  So, anything less than the 6% and I am throwing away free money.  So, why contribute to the Roth at all?  I believe the tax treatment will allow the Roth to be better for me in the long run.   Currently, I take advantage of the income tax deduction for mortgage interest and tax credits for having children.  I likely will not be able to take advantage of these when I retire, because the house will be paid off and the kids will not be on my tax return anymore.  So, in all likelihood, I’ll be in a higher tax bracket upon retirement.  Going with that assumption, it makes the most sense to increase my Roth contribution by 1%.  This works out to $80.75 a month.  So, where did the remaining $74 a month go from the raise?  The short answer is taxes, mainly.  My tax bill is increasing by about $50 a month.  The remaining $25 went to increase our fun money, $10 a month for my wife and $15 for me.

It was nice to see the hard work of reducing the expenses pay off in the ability to increase my retirement savings.  Now, with the raise and increased savings, $15,500 a year will be going into the 401k.  This is pretty good considering that in 2009 I wasn’t contributing at all.  Did you receive a raise this year?  What did you do with it?

Bonus Time Again

Money

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

One of the benefits of working for a larger company is that there usually is a defined plan for an annual bonus.  Bonus plans can go by various names, but in the end they all boil down to extra money.  It is bonus time again where I work.

My Bonus History

I usually try to anticipate what bonus I might get and what I would do with the extra money. This year was a little harder for figure out what I might be getting.

Last year, I received a pretty big bonus of $20,000.  Our CEO had communicated a couple months back that the bonus pool would be larger this year compared with last year.  So, what did I guess?  I ran some calculations for a range of bonuses, $10,000 to $25,000.  I will admit the $25,000 was pretty optimistic, but I guy can dream, right?

I received on the lower end of the range, $14,000.  Which as it relates to the formal bonus plan is 5% above what I should receive.  I am never upset about receiving extra money, so I was not disappointed.  What did I do with the extra money?

Dividing Up My Bonus

The first thing that comes out of my bonus is actually my 401k contribution.  The same percentage that is applied to my paycheck is also applied to my bonus.  I could elect to either have a larger or smaller amount deposited, but the election would also carry over to my normal paycheck for one pay cycle as well.  Since I did not want anything different to happen, I decided to have the normal 6% regular 401k and 1% Roth 401k contributions taken out.  The company still matches the regular 401k contribution that it does in a normal paycheck.  Specifically, the company matches dollar for dollar up to 6% plus an additional 2% (in lieu of a pension) regardless of whether you contribute or not.  So, simply by contributing to my 401k, I effectively get a larger bonus, 6% of $14,000.  The net effect is that I put $2,100 into retirement savings.

Now, I wish that I still had most of the bonus to play with, but by the time the government takes their cut, the bonus doesn’t look as big anymore.  The net amount that was deposited into my checking account was roughly $7,700.  This feels like a far cry from the original $14,000, but there is not much I can do about it.

I wish I could say that all of the money went into my emergency fund or I deposited it all in my Vanguard account.  I did deposit it into my savings account, but it is allocated essentially for future spending.  I set aside $1,200 for our Disney vacation 3 years from now.  We have been setting aside roughly that number for the last few years and now have built that bucket up to $6,400.  Our target for the trip is $10,000 by 2018 and we are on track.

We also set aside money for my wife’s gym membership, as well as some personal training.  The total on that amount was $1,700.  Her monthly gym membership is about $60 a month and then we set aside an additional $1,000 to cover the training.  I’ve have been with my wife for over 20 years, married for almost 12.  Little things like the gym and personal training help keep her on board with the broader budget goals and savings.  So, while setting aside the money for those things might not seem wise to some, in the broader picture it makes perfect sense.

Since, we set aside $1,700 for things for my wife; we set aside $300 for me.  I took that money and added it to my secret 2nd honeymoon fund.  We earmarked $1,500 for a vacation this year.  This has been the amount we have bucketed the last few years and seems to be enough for now.

The ‘Kid’ category also received a $1,000 allocation.  This category for is for just about anything related to the kids, be it an activity, clothes, or anything else I deem related to the kids.  There always seems to be something coming up with them.

The last thing we carved the bonus up for was the house.  Initially I had been planning on using some of the bonus for an extra mortgage payment, probably about $1,500, then setting aside additional money for house maintenance.  However, the house money set aside may just be used for some new windows.  I haven’t made the final call on that yet, so the money is just earmarked in savings right now for the house.

In the past, any extra money had been used for either debt repayment or padding the emergency fund.  We are in a position now where we don’t have to use a bonus for those purposes anymore.  It feels nice to be making progress.  Do you anticipate and extra cash this year?  What do you think you will use it for?

Credit Card Strategy

CC

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

I used to have a fairly basic strategy when it came to my credit cards…

I only used one.

I didn’t have multiple cards in my wallet.  There was one card that was used for everything.  I certainly tried to maximize the rewards or cash back that we would get from that card, but I really didn’t spend that much time thinking about it.  I simply paid my bill in full every month and pocketed the rewards that I earned.  My situation today has certainly changed.

Multiple Cards

The first time multiple cards came about was so that both my wife and I could have our own personal cards.  Rather than use our joint card for our own purchases and then figure out how to transfer money between our accounts, it was just easier to have separate cards.  The rule was, and still is, the card is paid in full and you are not allowed to carry a balance. I did not earn much cash back with my card, as I wasn’t spending much.

Extra Cash Back

It was probably about 6 months or so ago, that I came up with an idea to earn some extra cash back.  My wife had the Bank of America card that pays $25 per quarter (an extra $5 if you have another Bank of America account) if you pay more than the minimum due on your statement and paid on time.  I noticed that we had at least 1 recurring charge that would be more than the minimum on a statement every month.  So, I opened a card in my name and put this recurring charge on it.  I have set up the account to pay the full balance every month.  For this, I have received $30 a quarter.

The next few changes occurred more recently.  The first was actually a debit card.  I had opened up a Discover checking account around year-end to take advantage of a $50 incentive for new accounts.  One of the perks of the checking account is that it pays you $0.10 every time you use your debit card.  Since we do some of our grocery shopping at Aldi’s, which only takes cash or debit cards, I thought why not use the Discover one.  I’m certainly not going to get rich with, but why not collect $0.10 for something I was doing anyway.  I simply transfer the food money from my normal checking account to the Discover account at the beginning of every month.

The other changes are credit cards, two to be exact.  The first was a solicitation we received in the mail.  Since we are members of BJ’s Wholesale club, we received an offer for their branded credit card.  The biggest benefit to the card was receiving 5% back on in-store purchases.  On average, we easily spend about $200-$250 a month at the store.  So, that’s easily $10 a month in cash back rewards.  In addition, there is a $0.10 off per gallon of gas at a BJ’s gas station.  Since there was no annual fee, I signed up for the card.  The second card is the new card offered by Citi.  You earn 1% cash back on purchases and then another 1% cash back when you pay your credit card bill, for a total of 2%.  We’ve been using the 1-2-3 card from Bank of America as our main card and have averaged around 1.3% to 1.4% cash back.  By my estimations, making this switch could bring in an additional $250 a year or $20 a month.

All in I will probably earn about $1,200 in rewards this year for doing what I was going to do anyway.  By not carrying a balance and not paying any annual fees, I am able to bring in some extra money.  I am not going to get rich off this money, but it helps pad the budget just a little bit.  I’ll take any extra cash I can.

Mortgage Refinance Odyssey

Home

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

My odyssey started back in October 2014 and did not end until the end of January 2015.  What I thought would be a pretty straight-forward process, turned into anything but.

The Beginning of Mortgage Refinance

I am not sure how or why I decided to start looking into a refinance, maybe I was just looking to cut another expense.  The thought crossed my mind in October and I mentioned that I might be looking to refinance to a coworker.  Since they had recently purchased a house, she referred me to her lender.  I’ll call them Lender A, so things don’t get too confusing.  I was looking to eliminate the mortgage insurance from my monthly payment.

Since I didn’t have the 20% down payment when I bought the house, I was required to have mortgage insurance.  That mortgage insurance premium represents $300 a month.  When I contacted Lender A, they were sure that they could execute a refinance that would eliminate the mortgage insurance.  After taking the necessary information for the application, they ordered an appraisal of the house.

Appraisal

I’m not sure what delayed the appraisal, but it ended up taking a few weeks before the appraiser was able to issue their report.  The report did not come back as a surprise to me.  When we had purchased the home back in 2011 it was appraised for $345,000.  This appraisal came back at $340,000.  Lender A said that they would be able to refinance using a primary fixed loan for 80% of the value and a variable home equity as the second loan for the remaining balance.

It was around this time that my rate-lock was nearing its expiration.  As it turned out, rates had gone down slightly.  I inquired with Lender A about what would happen if my rate locked expired.  They simply said they would just extend it until my closing.  I can’t say I was very happy about not getting the benefit of a lower rate.  So, I decided to look around to see if any other lenders could give me a better deal.

Other Mortgage Refinance Options

I connected with 2 other lenders, Lender B and Lender C.  Lender B was a little vague at first, so I decided to proceed with Lender C.  Lender C was able to offer me a single fixed rate loan for the entire amount.  This was much more attractive than the variable rate with Lender A.  Once again, I started the refinance process.  This was probably around the beginning of December.  The process with Lender C was very quick.  The appraiser was out in just a few days and we had the appraisal report back shortly thereafter.  That’s when a wrench was thrown into the process.

This appraisal came back at $285,000.  I tried disputing the appraisal, but in the end, Lender C was satisfied that the appraisal was adequate.  Since I owed more than $285,000 on my house, there was nothing they could do for me.

Within the next week, Lender B had contacted me again.  I explained that I would only be looking to refinance if I could have one loan with an interest rate of 4.125% or less.  I had done some calculations and determined that that was my breakeven point.  If I couldn’t get those terms, it would not make sense financially to do it.  I also explained the situation of the competing appraisals.

Lender B said that they would order another appraisal, but that if it didn’t come back with a good valuation, that they could use the first one.  So, once again I started the process and the third appraisal was ordered.  This one came back with a valuation of $345,000.  Lender B now is able to give me the final terms of the new mortgage, 3.99% fixed for 30-years.  My payment would be going down about $320 a month from what I was paying previously.  I closed at the end of January.

Successful Mortgage Refinance

In the end, I paid for an extra appraisal.  Lender C credited me back the cost of the appraisal when the valuation came back in too low.  I was out the $400 I paid for the appraisal for Lender A because I had decided not to proceed with the loan.  I’m ok with that.  I have used that extra $300 a month a couple of ways.  The first was to plow a majority of it back towards my mortgage.  I am applying and extra $215 a month towards my mortgage principal.  With that and allocating some of my bonus every year towards the mortgage, I should be able to pay the house off in about 20 years.  The remaining $100 a month went to shore up some of our monthly expense items.  This should allow me to increase my 401k contributions when my salary review occurs in April.

How are your finances shaping up for 2015?

Expense Reduction

Accounting

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

One of my financial goals is to always try and reduce my expenses. I always want to be efficient with how I am spending my money and to control the leakage that seems to occur when I am not diligent.  That leakage is what got me into financial trouble years ago.  I simply was not paying attention to where my money was being spent and ended up spending more than I was making.

Now, whenever I can, I reduce expenses.  Since I have been doing this for a few years, there are often no big changes, but this year, I managed to reduce my expenses by about $150 a month.  There was another change that began when 2015 started and another change that is currently in the works.  Those two additional changes will reduce my expenses by another $300-$400 a month.

Dry Cleaning

It was probably May or June, when I began to think about cutting out my dry cleaning expense. I wear a shirt and tie every day to work and I would have the shirts and pants cleaned at the dry cleaners.  I would clean the shirts after wearing them just once and the pants I would wear twice before cleaning them.  My average cost per month was about $115-$120.  The more I thought about this, the more I felt this was a want, rather than a need.  There were other areas of my budget that could benefit from this money.  I in turn, could simply clean and iron the shirts and pants myself.  I can say I haven’t exactly been thrilled each time I have to iron my clothes, but at least I was able to chop a significant expense from my budget.

Media

The other area that saw a reduction was my cable/phone/internet bill. I was able to take advantage of a 2-year promotional rate that locks in my price while also reducing my cost.  I generally view most cable providers as interchangeable, so I do not have a problem switching from one to the other.  The switch I did over the summer allowed me to reduce my bill by $25 a month.  The cable bill is one bill most people would probably cut entirely, but it’s a luxury that my wife and I indulge in.  My job is to simply keep the bill as small as possible.

Benefit Costs

The item that changed starting in 2015 was my benefit costs. This expense was one expense that was brought to me, rather than me seeking it out.  My company changed our medical plan to be mainly a high deductible plan and you had three choices for deductibles.  After some analysis, I opted for the highest deductible, $7,000.  This election reduced my medical expenses by $140 a month.  The reduction has allowed me to completely max out a HSA, with money left over.  My fingers are crossed that the money can stay in the HSA and will not be needed for medical expenses.

Mortgage

I am in the process of trying to reduce my greatest expense, my mortgage. I am looking into a refinance option where I would no longer have to pay for mortgage insurance.  Since I have a pretty good credit score, banks are willing to overlook the fact that I do not have the necessary 20% equity in the home.  The interest rate would be slightly higher than I currently pay now, but I would be able to eliminate the nearly $325 a month for the mortgage insurance.  If this happens, my plan is to plow $225 of the savings into paying the mortgage off that much faster.  The remaining $100 would go to some of the other spending buckets, so that we can enjoy a little of the savings.

By staying on top of my expenses, I am able to spend my money in the areas that I most want. This allows me to save for things like vacations and retirement, while still enjoying daily pleasures such as cable.

How have your expenses changed over the last year?

Year-End Financial Grade

Accounting

 

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

There is one number that I am diligent about tracking at year-end, my net worth. I use it as my scorecard to see how I did financially during the previous year – here’s mine for 2014.

My History

As I have said before, I was in a pretty deep financial hole.  I am not sure exactly how deep it was, but my net worth was probably in the negative $30K range.  This past year was not my best year in terms of dollar or percentage increase, but it was solid.  My net worth increased about 22% over last year and about $23K overall.  I am pretty happy with that increase.  I’ll discuss where the biggest changes occurred and where I think I might end this year.

Yay 401k!

The biggest change, by far, was in my 401k. That represented almost all of the gains in my net worth.  Between my contributions, my company’s contributions and market gains, my account was up $20K for the year.  I contributed just over $8K for the year.  That was 7% of my gross earnings, with 6% going to a traditional 401K and 1% going to a Roth 401k.  My company contributed just over $9K.  There is a matching contribution, dollar for dollar, up to 6% and then a flat 2% contribution.  The 2% contribution is in lieu of a pension plan.  The remaining amount came from market gains.  I managed to earn just over $3K having my 401k invested in the stock market.  I have a relatively aggressive allocation, with about 90% invested in a few stock funds and about 10% invested in a bond fund.  Since I probably have about 30 years before I retire, I feel this is appropriate.  According to my statement, my return for the year was an even 7%.  Naturally, I would prefer more, but I will take 7%.

Debt Reduction

The next change was debt reduction. I did not take on any additional debt during the year, I just paid down my existing loans.  Between my mortgage and car loan, I reduced my obligations almost $10K.  I did not prepay either loan.  I plan on adjusting that philosophy if I am able to refinance my mortgage and eliminate the private mortgage insurance.  In that case, I will add an additional $200 or so every month to reduce the mortgage, as well as using a portion of my bonus to pay down the mortgage.

Assets

The final change was actually a reduction in my assets that offset some of the gains I had in the 401k and debt reduction. A good portion of the savings reduction was due to planned purchases.  We had budgeted and saved for a snow blower, which we purchased early last year.  I also took advantage and pre-bought my heating oil.  The combination of the two lowered my savings amount by over $4K.  The other thing that lowered my assets was the depreciation of my two cars.  My wife’s car is a 2012 and mine is a 2001.  I checked on what the values would be for the cars given the current mileage of each.

2015

I obviously can’t forecast what the stock market will do this year, but I can control how much money I save and how much of my debt I payoff. My 401k contributions will remain the same in 2015.  I will contribute 7% of my salary and the company will contribute 8%.  That will mean at least another $14K going into the 401k.  If I am lucky enough to get a raise or a bonus, that number will only go up.

I also plan on continuing my savings in my Vanguard brokerage account.  I am setting aside $85 a month or about $1,000 for the year.  I’m comfortable with that number right now.  If the raise happens to be a significant one, I would likely increase that amount.  The car loan will be reduced on the normal schedule, which means a principal reduction of about $3,600.  If my mortgage refinance is successful, my plan is to use some of the savings from the reduce payment towards the mortgage.  I have estimated that I might be able to reduce the principal by about $8,400.  All in, it looks like I should be able to increase my net worth by about $20,000.  Some of my gains will be offset by the depreciation on the cars, but I also hope to see some market gains as well.  Fingers are crossed.

How was your year-end financial check?

There’s a New Way to Look at Retirement Calculations?

Money Tree

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

This article I found in The Wall Street Journal somewhat surprised me.  It discusses how advisors are now counseling their clients, not on the size of their nest egg, but rather on how much income it might be able to generate.  The surprising thing to me was that this is what I have been doing all along.

It was probably about 5 years ago, that I wanted to seriously analyze my retirement savings.  I had some decisions to make and needed to figure out what my retirement savings would look like in 30+ years.  I tried looking at various on-line calculators, but found myself disappointed in them.  Essentially, the calculators weren’t robust enough for me.  I couldn’t change some basic assumptions that were built into them.  So, I built my own.  It is simply an Excel spreadsheet that takes my assumptions and turns them into an income projection.  The key to the calculations are the assumptions that I made in order to forecast 30+ years into the future.

Employers’ Plans

The first thing I looked at was what retirement benefits my employer offered. The company provides a matching contribution to the 401k, along with a fixed percentage of salary contribution regardless of whether I contribute or not. The assumption I made here was that the plan would remain the same throughout my working career.  Not very realistic, but it would be too hard to guess what the changes would be in the future.  One thing to take note when looking at your plan, is what compensation is included in the employer match?  Is it against base salary only?  Are bonuses and overtime considered?  My company made a change in the past year to include bonuses in the 401k.  Not only am I now able to set a portion of my bonus aside in my 401k, but that the company also matches that contribution.  So, essentially I receive a larger bonus.

Salary

The next assumption I made was related to my salary. How did I think it would change over time?  I wanted to be a little conservative, but also have faith in my ability to grow my earnings.  Here I decided to grow my salary at 4% every year from its current level.  I felt this was reasonable given my track record since I graduated college.  I have managed a 6% average annual growth over the last 15 years.  I might change this in the near future, as my desire to advance up the corporate ladder has diminished.  Keeping pace with inflation maybe a better assumption, I may have to revisit it next year.

Savings

The next decision I made was how my contributions would change over time. This was the biggest drawback I felt to the on-line calculators.  I wanted to increase my savings over time.  For me, I wanted to assume that I would increase my savings by 1% of my salary every year.  The thinking is that when I receive a raise, I can raise my savings rate and not notice a decrease in my take-home pay.  I’d like to say that I have been consistent increasing my savings every year, but that has not been the case.  I have increased it in other ways, such as opening a healthcare savings account.  I considered those savings as retirement funds as well, just not a 401k.

Investment Return

This is perhaps the biggest unknown. I assumed an average return of 9%.  Some will argue that is overly aggressive, but I am comfortable with it.  I feel like over the course of 30 years, I should be able to generate that level of return.

Inflation

Here is another assumption that can have a huge impact. When I calculate what my savings will be in 30 years, what I need to know is will that be enough?  I translate the future amount back into present dollars via the inflation factor.  I used 3% as my assumption.  That has been the historical rate of inflation and I felt it was a reasonable assumption.

Do I have enough?

In the end, trying to figure out if I have enough is just a guess. The bottom-line I looked at was whether my savings would be enough to generate an income equal to my take-home pay when I retire.  I assumed a 4% withdrawal rate.  I figure if I am living off my take-home pay just before retirement, then that amount should be adequate to retire on.  As I get closer to retirement, I’ll have a better idea of what my spending will actually look like.  Have you calculated your retirement number?

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