Everybody Loves Your Money

I had a fascinating conversation with a friend of mine today. Okay, maybe not fascinating but I always enjoy talking to others about personal finances and this friend of mine, who we’ll call “Bill”, is never shy when it comes to sharing his financial situation. Between he and his wife I’d estimate that they make about $175,000 a year. You’d think that would mean they were living on easy street with no bills and the financial freedom to do whatever they’d like. That’s not the case.

As we were talking today the subject turned to conflict and he said, “Did you hear Betty and I arguing last month?” I joked, “Yeah I heard you guys. I called the cops! Didn’t they ever show up?” He laughed and proceeded to tell me what the argument was about. “After we got home from taking Jack to college Betty got mad at me when I mentioned that I wanted to buy a Harley”. I can’t say I was surprised to hear him say this because he’s been talking about it for quite awhile. I’ve watched them from a distance for years and know that money is often the flash point at their house. I asked him, “Would you say money is usually the reason that you guys argue?” He was honest and said, “It’s almost ALWAYS the reason we argue!” I found myself feeling bad for him because, with that much income, the last thing that they should be fighting about is money. Unfortunately they have never really come to terms with managing their spending. The checks come in and the checks go out, with very little thought about what they are spending their money on.

From their perspective I don’t think they have ever felt that they need to save some of their income and live within their means because they will each get a pension when they retire. Unfortunately that means that they live life right on the financial edge and are always one disaster away from being in significant financial trouble. I’ve had to stop myself more than once from offering him advice about how he could literally live like a King and still have an incredible financial security blanket. If they could just reduce their consumption by 10%, they’d still be living a very comfortable existence and have a lot more happiness in their lives. It would be so easy to change their consumption to reach that happiness too! Here are just a few of their “standard” expenses:

-Minimum of 3 vacations per year at an average cost of $3500
-$75 a month in DVD purchases
-Insurance for 4 cars, 1 boat, 1 RV
-Teenager expenses of at least $300 per month (latest clothes etc)
-$250 per month cel phone bill
-Car payment on one car
-Payment on boat
-Monthly golfing

Those are just the things I’m aware of. I know they have a number of other expenses that I don’t know of. (Cut me some slack. It isn’t exactly my business……

If they were to reduce their vacations to just one nice vacation a year they could save nearly $7000. Instead of buying DVD’s they could get a Netflix subscription for $17 a month and save almost $60 a month. As far as teenager expenses go, they could set limits on how much they’ll spend on clothing, accessories etc and easily save $100 a month. It’s reasonable to think that they could reduce their cel phone bill by $100 a month. I know there are family plans out there (with unlimited texting) for around $150 per month.

Let’s not take everything away from them. Just with those reductions to their expenses they could save:

Less vacations (supplement with staycations?): $7000
DVD’s: $720
Setting limits on their teenage expenses: $1200
Cel phone savings: $1200

Total savings for a year: $10,120 (not even 10%)

I’ve often thought about Bill when I see shows where a financial expert offers a family advice about how to reduce their bills and live within their means. I’d love to help them but unfortunately it just isn’t socially acceptable to step in and help a friend with his finances. I guess I’ll just continue to watch from a distance and hope for the best for them.

No matter how hard we try these days, we seem to keep spending money on major purchases. If you recall, we recently had to put a new roof on our house to the tune of $13,000. That hurt, but luckily we had been budgeting for that for quite some time and were able to pay cash, like we do for everything else. After that major purchase my wife and I agreed to buckle down for a few months to build our cash reserves back up so that we can feel more comfy about our financial state.

I’m disappointed to say the saving spree didn’t last very long, but it ended for a good reason. Let me explain. Our refrigerator is about 17 years old. I’ve always been under the impression that we could expect our fridge to last for many decades and we’d only replace it when it actually died. About 6 months ago my wife started pointing out how ridiculous it was that we hadn’t replaced the fridge. She opened the door one day and said, “Look at this!”. As I stared at the pile of food items in the bottom drawer of the fridge I knew it was only a matter of time. For the last 9 months or so we’ve had to just pile many of the items up in the lower “crisper” drawer because the shelf above that drawer broke so that there is about a 2 foot section of air space above the drawer with no top to it. Since the shelf is gone, the food has all been piled in to that lower drawer. There are a couple other shelves, but there never seemed to be enough room for everything, especially when we had leftovers in containers. If it was just me, I would have suffered with that for a lot longer, but since I don’t live alone and have an equal partner in the house, I had to listen up. The other thing about the fridge that actually did bother me was that it was on just about ALL the time. I could almost see the dollars signs rolling off the top of the darned thing. It’s safe to say the fridge wasn’t energy efficient, that’s for sure.

My strategy of ignoring the complaints had been working for about 6 months when the neighbor down the street mentioned to us that they were going to buy a fridge and were working a deal through a friend of theirs that owns an appliance store. As soon as I heard the word “deal” my ears perked up. I love paying wholesale when I have to buy something! It turns out that we were able to buy a very energy efficient $2000 replacement fridge that we found in a couple different stores for less than $1300 out the door. A $700 discount on something I knew I’d need to buy sooner rather than later? You bet. After doing some research on the fridge and deciding that it was well rated and reliable, we pulled the trigger.

I’m happy to report that we installed it yesterday and it looks GREAT! It has the dual french doors on top with a bottom freezer drawer that slides out. While we really didn’t want to spend the money, we are glad that we did. I think my favorite part of the whole thing was seeing the yellow energy rating tag on the fridge when we unpacked it. It’s the first time I’ve ever purchased the most efficient fridge possible. The little rating was all the way to left side of the energy spectrum indicating it was the most efficient fridge in it’s category! My rough estimate is that we’ll save somewhere around $35-50 a year on energy with this new fridge which will help offset the purchase price over time. We also checked with our local utility and they will come get our old fridge and give us a $30 credit on our bill. SOLD.

It’s been a little over two and a half years since my parent’s house caught fire and my father passed away. In that time my mom has slowly gotten over the loss. I can’t remember if I ever mentioned when she was able to return to the house but it took a little over 8 months to finally get her back in. The good news is that her house is in outstanding shape and will be very marketable once she decides to sell it.

Now that my mom is about to turn 65 she is thinking more and more about retirement. For a long time my mother used to always say, “my retirement plan is that I’m going to work until I drop!” I’m happy to report that she is not going to have to do that after all. If you recall, my family owned a small independent auto parts store when I was a kid. The business was never wildly successful so saving for retirement was never at the top of the priority list. There just wasn’t ever enough money to cover the basic bills (and believe me, we lived a pretty frugal existence) and also fund their retirement accounts. (In fact I don’t think they even had a retirement account until they were nearly 50). Once they closed the family business and found other jobs, they were able to start putting a little money away but it just wasn’t possible to max out their accounts or anything like that. If they were able to put away $4000 away a year, they considered it a success. For those of you that are good at math, I’m sure you quickly realize that putting $4000 a year away, with modest returns doesn’t equate to a comfortable retirement when you hit 65. Couple that with the crappy economy and stock market as of late and it’s easy to see that my mother won’t be dining in a lot of 5 star restaurants. The fact of the matter is, my mother doesn’t have a lot of investments to generate interest income for her in her old age.

There is a bright spot for my mother. My parents were fortunate to use a bit of inheritance money and a lot of their excess income over the last 8 years to buy a small piece of property and build a small house out at the lake that I’ve blogged about. By paying cash as they went along, and completing a lot of the work themselves, they ended up with a nice 3 bedroom 2 bathroom house that was entirely paid for, on top of their main house that they still carried a mortgage on. This has given my mother a huge bump in her net worth and has always given her the option of selling her main house, paying off the mortgage and moving out to the lake full time. The only problem with that option is that she really didn’t want to live 70 miles away from the rest of her family. Complicating the situation further is the fact that she really didn’t want to sell the lake house because my father always envisioned us kids having it. That isn’t going to be a problem after all. My wife and I would have probably purchased the lake house from her except that we built our own lake house across the street a couple years ago so it would be pretty ridiculous to try to buy hers as well. (And the reality is that we can’t afford to). While we were sitting around the table talking about options a few weeks ago, I asked my mother point blank, “Mom, be honest. Do you really want to live out here when you retire?” My mother thought about it for a minute and said, “No, but it’s really the only option I have if I want to quit working, because the lake house is paid for.” It was at that point that I floated the idea of selling the lake house to my younger sister. “Why don’t you sell the lake house to “J” at a cost that equals what you have left on your main house’s mortgage and consider the difference in sale price and actual value an early inheritance for “J”?” My mom instantly liked that idea but she wasn’t sure if my younger sister would be interested. It turns out that she was interested and the sale will close on the 25th of this month.

This solves both of the problems that my mother has been facing. She didn’t want to sell the lake house because of the sentimental value of it and she really didn’t want to live out there. By selling it to my sister, she now will still have access to it, she’ll feel good about the fact that it is staying in the family and she’ll also own her main house with no mortgage. This gives her the ability to retire and live modestly but comfortably. The next step will be to work with her to generate interest income off of her current investments that she has been amassing since her early 50’s. With a little work, I think we’ll be able to nearly double her social security amount to give her plenty of wiggle room in her retirement budget. Before she retires she’ll also start investing more heavily with her excess income to try to further build up her nest egg. The important thing is that regardless of what she does from here on out, she should be able to enjoy a fairly comfortable retirement.

Laura over at Consumerism Commentary put together a good post about paying your mortgage off early. Most of her post talks about paying a mortgage off in 15 years but she also mentions that any extra you put towards the principle saves you interest. I completely agree.

We recently refinanced our house and opted for a 30 year fixed loan at 4.875% interest. Just dropping our interest rate by almost a whole point is going to save us a significant amount of interest over the life of the loan but we also signed up for bi-weekly payments so that we are automatically paying an additional payment each year. This will help us shave years off of our loan. The best part about this bi-weekly program is that it’s a free service from my credit union. (Yet another reason to LOVE credit unions). I imagine that they are making a bit of money off of me with this program because they withdraw half my payment every two weeks but only pay the loan down when they have a full amount. Basically, they are holding some of my money interest free before the payment is made. Even considering that, I’m still happy to participate in the program!

On top of the bi-weekly payments, I’m randomly paying additional money on the principle when I’m comfortable with our savings account levels. I would imagine I’m making about 3 extra payments a year when combined with the bi-weekly program. That should help me pay off the balance relatively quickly.

How much quicker?
Just participating in the bi-weekly program is going to shave 67 months off of my loan and save me over $55,000 in interest. That’s a lot of money for something that seems transparent to me.

When I add in what equates to about 2 extra payments worth of contributions each year, my loan shrinks by a total of over 12 years (including bi-weekly benefits) and saves me over $116,000 in interest over the life of the loan. That’s HUGE. Basically I’m changing our loan to an 18 year loan instead of a 30 year loan.

Now that I’ve run the numbers, I may have to increase the contribution a bit more. I’d like to get this below 15 years, and in actuality, I’d like to get it paid off before my daughter goes to college in 12 years. That’s going to take some work!

CNN Money has a great article, (or set of statements) from key people on Wall street discussing what it was like during those crucial hours and days of the Wall Street collapse. It’s interesting reading.

If only I could easily decipher who to despise and who to feel sorry for……

http://money.cnn.com/galleries/2009/fortune/0909/gallery.witnesses_meltdown.fortune/index.html

When we first moved in to this house about 6.5 years ago we were enamored with all the wonderful features. One that I really enjoyed was the sprinkler system. All the nozzles were dialed in just right and it kept the yard beautiful and green all through the summer. It was about late August that first year when we received our summer water bill. I was shocked. That summer I single handedly almost caused a western US drought. Our bill was nearly $400 for one month.

At that point I pretty much made up my mind that I’d be much more careful about watering. Since then we’ve averaged about $250 a month in the summer for our water bill.

This year I decided to take a different approach. As the ground thawed and Spring arrived, I didn’t take the sprinkler system out of it’s “winterized” state. Instead I decided that we’d leave the sprinkler system off and switch to the old school method of watering with a hose. I have always found watering a lawn somewhat therapeutic. This summer I only consistently watered the front lawn (about 2-3 times a week) by hand. Luckily we have a pretty small front lawn so each watering session took about 15-20 minutes. We also watered a little bit in the back yard, but it wasn’t done very consistently. As you’d expect, the backyard lawn turned about 65% brown (trees kept some of the lawn shaded so it didn’t burn). I kept it neat and trim and it really didn’t look that bad. We also hand watered a few key plants in the yard to keep them from dying but that was also kept to a minimum.

Our water bill just arrived. After having one of the hottest summers on record here in the Pacific Northwest (including the all time hottest day in our city) our water bill was $145. We saved over $100 a month during the summer just by being a little more careful about what and how much we watered. We didn’t have the greenest, nicest yard in the neighborhood but we still managed to keep our place looking nicer than 90% of the other houses in our area. Success!

I suppose I’ve known it wasn’t getting better yet and this week’s unemployment numbers confirm it. Unemployment is now at a 26 year high. We’re still cutting jobs but some economists are starting to think we’re nearing bottom as the number of cuts shrinks each month.

Anecdotally, I’m seeing more people lose their jobs around me and my company anticipates further reductions. Unfortunately, a lot of the reductions are due to outsourcing major chunks of work to India so it’s unlikely those jobs will return once the economy turns around. While I’m feeling okay from a job security standpoint right now, there could be rocky roads ahead.

Because of this uncertainty, we are taking a renewed effort to increase our emergency fund. Right now we have about 6 months expenses on hand (assuming that both my wife and I were out of work). If I lose my job but my wife stays employed, our emergency fund would last us about 2.5 years or so. I’d prefer to plan for the worst so we will be attempting to double our emergency fund so that we can comfortably live for a year without income. If we are able to sock that much away, we can always use some of those funds to pay down our home mortgage or invest once the economy starts taking off again. Having that much cash in the bank during a downturn is great, but I’d hate to keep it all liquid when the economy is going strong.

It’s times like this that it becomes painfully obvious that it’s not really what you make but what you spend. We have managed to keep our expenses at about 49% of our after tax income. By keeping expenses as low as possible while still enjoying some luxuries, we are ultimately going to have to build a smaller emergency fund than if we had spent money more loosely.