Archive for the ‘Personal Finance’ Category

Capital Allocation

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.

I feel like I am entering a new phase financially.  I am looking at aspects of my financial life that I had not contemplated previously.  I have to say that I like it.  As I have stated recently, I am feeling more secure financially than I have ever felt.  What this has meant is that I am beginning to think more in terms of where to save my money and less about can I save money.  Now that the cushion is sufficient, I want my money working as hard for me, as I worked for it.

The Current

The cushion, as I like to call it, is divided between two accounts, my Vanguard brokerage account and my Capital One 360 savings account.  The savings account is where all of our savings go and I use a spreadsheet to keep track of the various things for which we allocate money.  For example, we set aside money for property taxes, gifts, car repairs, and the emergency fund.  The Vanguard account is strictly emergency savings.  

I started the two account approach about 3 years ago as a way to make it harder for me to access the money.  When I first started trying to save for the rainy days, I found it too easy to dip into the savings account.  The lack of discipline is what got us into trouble in the first place.  So, the brokerage was my way of making it harder to access the money.  Instead of simply transferring the money from savings into the checking account, I would first have to sell some securities, wait for the trade to settle, and then transfer the money to the checking account. 

Since the process would take more than a week, it gave me enough time to really think if the transfer was necessary.  I have only tapped the Vanguard once since I opened it, when we bought our house 3 years ago.  In the Vanguard account, we have about $5,600 and in the emergency category in Capital One, there is about $8,200. 

I know what you are thinking, that’s not a big enough reserve. 

I agree.  My goal is to have about $30,000 dedicated to emergency savings.  While I do not have that amount in the emergency bucket, I have other buckets that I could access in the event of an emergency.  For example, I have mentioned that we are saving for a Disney vacation in about 4 years.  Right now, there is about $5,000 in that category.  If I lost my job tomorrow, that $5,000 would become available to use.  So, without going into all the other buckets, there is probably another $13,500 available.

My Plan

I feel like I would like to have the cash portion of the emergency fund at $10,000.  So, I will add some portion of my bonus every year to it until it is at that level.  I figure it should only take a couple of years to get there.  Then I would like to have the Vanguard account make up the rest.  I plan on contributing to it on a regular basis and maybe even more so in the future.  I am sending $75 a month to the account now or $900 a year. 

At a minimum I would like that number to be $1,000 a year.  Depending on what, if any, salary increase I receive next year, it could happen then.  From then on, I would likely throw a little bit of the bonus at it every year as well, just to get to the finish line as quickly as possible.  My strategy is a result of the interest rate I am currently earning.  At 0.75%, any interest I earn is an after-thought.  As I said, I want my money to work as hard as I do.  I have the money invested in 4 different Vanguard ETFs to balance my portfolio.  The hope is never to need this money and maybe I can even use it in retirement.  I’m just glad that after digging out of the hole, I get to admire the grass.

Throwing Away 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.

I came across an article recently in the Wall Street Journal.  It was written as a tongue-in-cheek way on how to throw away a fortune.  It is written to show you how you might be spending or throwing away money by accident.  The author listed seven ways to throw your fortune away.  I was curious as to how many of these I was guilty of in the past, and whether I was actually still doing any of them today.

Delay Saving

Yes, I was guilty of this in the past.  It was one on the reasons I was in a financial hole to begin with.  My retirement savings did not begin in earnest until late 2007, when I was 32.  Now, I contribute 7% to my 401k, with my employer kicking in an additional 8%.  This year, I also began fully funding an HSA.  These steps, along with additional savings and paying down debts has allowed my net worth to go from negative to over $120,000 in about 7 years.

Shun Retirement Accounts

I can’t say I was guilty of this in the past or the present.  In the past, there virtually was no savings, so there wasn’t anything to put in a tax-advantaged account.  Today, I fully take advantage of the retirement accounts that I can.  With my 401k, 1% of my contribution goes into the Roth 401k option that is available to me.  Since I don’t know what taxes will look like in the future, it is my way of diversifying my tax position.

Forfeit the Employer Match

Yup, I was guilty again on this in the past.  It wasn’t so much that I didn’t get the match; it was that I didn’t leave the money in the account.  I pulled all of it out at one point in time and paid the tax penalty for doing it.  It was the right move at the time, but by doing so, I did forfeit the match that I had earned.  Today, I make sure I get every dollar for which I am entitled.

Buy Active Mutual Funds

I was guilty of this in probably a couple of ways.  The first being my 401k when I first opened it up years ago.  I was not as diligent as I am today at making sure my expenses are at a minimum.  I had probably picked whatever fund looked like it had a great return, with little thought to expenses or asset allocation.  Today, my 401k funds are all index funds with low expense ratios.  I have come to believe that market returns are good enough for me and that I don’t have to strive to try and beat the market.  I was also guilty of this in another way, trading costs.  When I first began investing outside of my 401k, I was guilty of paying trading fees.  Not knowing any better, I was paying for every trade I did and thus cutting the amount I had available to invest.  Since then, I have been investing with Vanguard for free.  The fund fees are miniscule since I invest in index ETF’s.  Thus, more of my money goes towards investing and growing my net worth.

Carry a Credit-Card Balance

Again, I was guilty of this in the past.  This was the hole that I was in.  I probably had $30K on credit cards at one point.  I tried to minimize as much as I could any interest I had to pay, but I still paid.  Today, I don’t carry a balance.  I still use credit cards, but they are always paid in full when due.  I haven’t carried a balance for at least 3 or 4 years, I’ve lost track of exactly when they were paid off.

Get a New Car Every 3 Years

This one I can claim not-guilty.  I haven’t bought cars that often, mainly because I knew I could not afford that large a purchase.  My current car has about 157,000 miles on it and I hope to get another 30,000 miles out of it.  I haven’t decided yet whether I will go brand new or slightly used when I buy the next one.  I’m still on the fence on that one.  I have typically gone the brand new route in the past, but my views on things have evolved over time.  I’m not sure that’s exactly where I want to be spending my money.

Remodel Your Home

I am definitely not guilty on this one.  I have never done anything to a home simply for the resale value.  When I first bought a condo years ago, I had new floors installed, but that was because I didn’t like the old floors.  I kept in mind what would appeal to buyers in general with my choices, but it was not done simply for the resale value.  In my current house, any remodel that is done will be done because that’s the change that I want.  I plan on being in the house for 30 years; I am not concerned about the resale value just yet.

Progress Made

It’s good to see that I am not guilty of these practices anymore.  I’d like to think I have learned quite a lot about how to manage my finances over the last 10 years.  I am always on the lookout for new things to help me or new ways to save money.  How about you, how many things were you guilty of?

Hacked

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.

I am a pretty laid back guy.  I tend to not get overly stressed or worry about things in general.  So, when I saw the headlines recently about the data breach at Home Depot stores, I mainly shrugged it off.  Yes, I had used one of my credit cards there during the time they were hacked.  So, in theory my account information may have been compromised.  The best reaction I can muster is a yawn.  Why am I not more concerned?  There are several ways in which I am protected, some of which I had already been doing already and one that is new since the breach was reported.

Daily Routine

It is not quite every day, but at least every work day, I spend five minutes and log-in to my accounts to check the activity.  This routine serves two purposes.  The first is used for my budget tracking; I record any new activity into my spreadsheet.  The second purpose is early fraud detection.  Any activity that I don’t recognize, I can instantly report it and hopefully limit any damage.  I have been keeping an eye on the card that may have been breached and have not noticed any unusual activity.  My card company has also informed me that they also are monitoring my card for any suspicious activity.

Credit Score

One of the perks of my Discover It card is that it shows me my FICO credit score every month.  So, I have the history of the last few months to see if there have been any changes.  Since I know that I haven’t been applying for any new lines or credit or credit cards, my score should remain more or less then same.  As it turns out, it has risen in the last couple of months. 

Credit Report

My next line of defense is my actual credit report.  You can check your report from the 3 main credit bureaus once per year.  I do check them one per year, but I do not check all 3 at the same time.  This was a trick that I learned from Crystal a few years back.  I check one of the bureaus every four months.  Then I wait a year and check them again.  By only checking one bureau’s report at a time, I am only four months away from checking my report at a time.  Granted, not every credit institution reports to all three bureaus, but I am much more likely to spot something sooner with a check every four months as opposed to every twelve months.

Credit Card versus Debit Card

Since it was my credit card that was potentially breached and not my debit card, there is some built in security.  With the credit card agreement, I am not responsible for fraudulent charges as long as they are reported in a timely manner.  With both myself and the company on the lookout for suspicious charges, I think we have this one covered.  The hackers also do not have access to my bank account.  With a debit card, they could potentially drain the checking account associated with it.  This is one of the reasons I prefer a credit card to a debit card.

Credit Monitoring

This is the one security measure that I started after the breach.  Mind you, I am not paying for it, it was offered to me by The Home Depot.  They offered to pay for one-year of service because of the breach.  I did really think I needed the extra protection, but at no cost to me, why not take the insurance.  The service will alert me any time a new account is opened and they have personnel to help repair any damage done to my credit history.

Status Quo

At the end of the day, the breach means very little to me because of the steps that I have already taken.  The only real change is I receive a monthly e-mail from the monitoring firm announcing that nothing has happened.  If you don’t check your credit report at least once per year, you need to start.  Since I have created an excellent credit history, I want to keep it that way.

Open Enrollment, Take 2

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.

Once again, it’s Open Enrollment time for my employee benefits.  As I discussed last year, there were some pretty big changes to my choices.  This year will be no different, but I am happy about the changes.  Naturally, there were calculations involved and of course I’ll share.  The changes are only occurring with the health insurance options, so thankfully there was only one moving part to worry about.

Current Plan

This was the first year of being enrolled in a high-deductible health insurance plan (HDHP) with a corresponding health-care savings account (HSA).  I personally did not feel like the deductible ($2,500) was all that high.  I was rethinking that slightly after the first month, but things settled down for the most part.  I also knew that we would hit the deductible without question given my son’s condition.  His annual check-up with his cardiologist is about $2,500.  Still, the premium was a reasonable $184 a paycheck or $368 a month.

New Choices

This year, the company is essentially moving everyone into a HDHP.  We have 4 choices, 3 HDHP and one preferred-provider organization (PPO) option.  The PPO was far and away the most expensive and one that I did not even consider. 

The 3 HDHP’s all have different deductible options and different co-insurance provisions.  For my family, we have the choice of a $3,000, $5,000 or $7,000 deductible with a 10% co-insurance for the $3,000 deductible or 20% for latter two.  To throw one more variable into the mix, the company would contribute $800 towards your HSA for the $3,000 and the $5,000 deductible options, but nothing for the $7,000 option.  Got all that? 

The premiums for the 3 options ranged from $156 a month to $404 a month.  So, which one is right for me?

Evaluating the Options

This is something that I love to do, figuring out which is the best choice for me because I love working with numbers.  In the end, I will either be paying my medical costs in premiums or directly via claims.  So, the first thing I did was to make sure my claims information is up-to-date.  Yes, I keep track of my claims; that started with my son and trying to make sure all the bills had been paid.  Now, I can use that information to actually keep track of my medical costs, so that in situations like this and know what numbers to use. 

The gross medical costs for this year were about $12,000.  If I just used that number, then the $3,000 deductible option (called the Value option) with the highest monthly premium was the appropriate choice.  When I thought about it some more, I began to question whether I should use all of the claims we had this year.  Specifically, my son had hernia surgery this year, and that represented about half of our total claims for the year. 

Now, the choices look much different.  The best option is between the $5,000 deductible (Standard) or the $7,000 (Basic).  I also remembered that my daughter had some vision therapy in the first half of this year that would not be repeated next year.  Removing those claims brought the total down again by about a $1,000.  My anticipated expenses for a year were actually closer to $5,000. 

This means the Basic option is actually the most cost effective choice.  I will be paying for virtually all of my medical expenses with only major events triggering the insurance to kick in.  My premiums are going to drop from $384 a month down to $156 a month while still fully funding the HSA.

Taking on More Risk

By selecting the Basic option, I am basically accepting more risk for lower premiums.  This is a trade-off that I am more than willing to make.  Since my financial position is more secure and stable, I can accept more risk.  Should costs end up higher than anticipated; I have the money in the HSA and also my emergency fund should we approach the out-of-pocket maximum. 

Do you have any changes for your benefit options this year?

Three Cheers for Savings!

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.

Three cheers for saving!! You generally cannot go wrong by saving money and in my case it helped rescue me from myself. I know the rules for managing your finances, but sometimes I am still surprised by them when they work. I have talked before that I was opening an HSA for this year and how the first month of the high-deductible plan went.

In opening the HSA and fully funding the account for the year, I kind of expected to have a decent amount leftover. I have tracked my medical expenses explicitly for the past 4 years. It started when I had to track all of my son’s bills after he was born. It was mainly to make sure we did not forget to pay anybody, but I have kept up with the process since then. I always feel that more information helps me manage our finances. So, going into this year I expected our expenses would run in the $3,000ish range. That’s based on what we spent the last 2 years roughly. I may not have as much left as I expected.

The Unexpected

The first medical expense surprise that we got was my root canal. It turns out even with insurance, that root canals are pretty expensive. Between the crown that I needed and the root canal itself, the bills totaled $1,459. My dental insurance has a $1,500 payment cap for a given plan year and I easily hit that with both procedures. I wish I could say that will be my last root canal, but given the previous damage I have done to my teeth, more are likely in the future. I have some rather large fillings, that when they are replaced will likely result in root canals. The second and third surprises came from my son. It was nothing serious or life-threatening, thankfully.

The second was he simply needed a hernia operation. His 2 ½-year check-up revealed the problem in May. It was a simple surgery and we were in and out the same day. It did not seem to even bother him much, he was back to running around in a few hours. I certainly did not expect my 2-year old son to be having surgery this year, cardiologist check-up sure, but not surgery. His bills totaled up to $5,649, but because we had already hit our deductible for the year in April, our portion was only $565. The third surprise was some developmental therapy for him. He is a little behind where he should be and we have some therapists working with him to catch him up. Those bills will come out to be about $720. It is a state program, so thankfully I do not have to pay the full amount.

Benefit of Saving

When I was evaluating whether to go with the high-deductible plan with the HSA, I was I could say that saving for the unexpected medical expenses was the primary driver. I was more focused on the tax savings and the long-term savings potential. As I said in the beginning, I was expecting to have around $3,000 leftover in the HSA to invest for the future. Thankfully by paying myself first, my finances have not been disrupted in the least. I can remember years ago when an unexpected doctors visit would cause me some anxiety about how I would cover the cost. Now, I can honestly say I did not even blink when any of the costs came up. Even if there are more surprises this year, the HSA can pay for them. Once the HSA is exhausted, we are not that far away from the out of pocket maximum for the health insurance. Three cheers for savings!!!!

Hidden Benefit of Financial Security

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.

Living in the Northeast, as I do, heating my home is a significant annual expense.  Since, I have been living on my own, I have used the three main types energy, gas, electric and oil.  It has been difficult to compare the costs between the different types as the sizes of my homes or apartments have varied.  The cheapest by far was when the heat was included in the rent, but I can’t seem to get my mortgage company to cover that now.  I bring this up because it’s time to renew my oil contract for the winter.  I have several options that I can choose from and I am actually making a change from last year.  In case you have to go through a similar exercise, I’ll take you through my thought process.

The Plans

The first option is simply to have the oil company automatically deliver and charge whatever the spot price of oil is for that day.  I went this route my first winter in the house.  Having never had oil heat before, I was unsure of what to expect.  The biggest downside to this program is the spot price.  When you need the heating oil the most is when the price will be the highest, supply and demand. 

The second option available to me was a contract where there is a price ceiling.  This contract would allow the price to drop if the market rate dropped, but came with a $100 fee.  When I calculated costs, I figured the price would never drop low enough, long enough for me to recapture the $100 fee.  Again, the likelihood of the price dropping in the winter when demand is high is pretty low.  I have never used this option. 

The third option is a straight fixed price with a $50 fee.  Essentially, I reserve a set amount of gallons at a fixed price and pay when it is delivered.  This is the option that I have used for the past couple of years.  The benefits are twofold; first I know that my price is locked in, so that no matter how cold the winter is, my price doesn’t change.  The second benefit is there isn’t a large upfront cost, as I pay as the oil is delivered.  The last option available to me is similar to the fixed price, but with a few main differences.  The first is there is no fee, the second is you pay upfront and the third is the cost per gallon is $0.10 per gallon lower.

My Choice

As you might have guessed, I am going with the last option.  Reserving and paying for my oil ahead of time.  I’m buying 800 gallons, at $3.699 per gallon, which is my historical average usage over the winter.  By going with this plan, I will be saving about $130 over the plan that I used last year.  The money isn’t substantial savings, but it is certainly more than I would be earning in interest.  At best, I might be earning about $20 in interest.  A couple of years ago, I couldn’t even make this choice.  I didn’t have enough money in savings to cover that amount.  Now, I can use the money I have to save money.

Flexibility

The savings has allowed me to choose the best financial option.  It’s also what I do with my auto insurance.  I pay that in full every year to take advantage of a lower price.  Rather than pay a fee ranging between $2 and $5 a payment, I pay it all off in one shot.  As my financial position becomes more secure, I keep finding benefits that I never contemplated before.

Our Life Insurance Plan

Life Insurance

As I have mentioned before, Mr. BFS and I purchased a 10 year term life insurance policy for each of us after we decided to both go self-employed.  The reasoning was that we’d save enough in 10 years to be self-insured by the end of the policies.  Or in the unlikely event that we decided to have a child, we would want to revisit the policies anyway.

Our Current Plan

Our current life insurance policies cost us $27 total per month.  It’s $12 for me and $15 for Mr. BFS.  There is that reminder that guys tend to pass on faster.  Odd.

Anyway, the policies are for $250,000 each in case of accidental death.  It seems to only cover $37,500 each if we die from natural causes.  Even though I didn’t exactly realize this little point before, this sort of coverage suits us right now since $37,500 would cover our funeral costs and $250,000 would cover the funeral and could even pay off our current mortgage.  Or one of us could live off of $250,000 (or what’s left after the government takes its cut) for at least 2.5 years even if we completely stopped working.

Contemplating Our Options

As we get a little older, I realize that we may need to look into our options like HBF’s life insurance plans.  If we decide to have a kid, we’ll need to raise our coverage.  I’d want to make sure the surviving spouse has enough to live on with our kid for 2 years without working AND have at least a little to cover some of the larger kid expenses that will pop up like braces, a used car when they learn to drive, and even a little help with college.

If decide to stay kid-free, we still only have 7-8 years left of this plan.  We’re probably not going to be so well off to be self-insured as I thought, although we do keep healthy savings just in case.  I think another 10 year policy for each of us could do the trick though.

What do you think?  Is a $250,000 term life policy enough in your world?  What are you comfortable with?

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