Stiffing Bank of Mom and Dad

I previously wrote that my Snowball Plan will come to a screeching halt now that I'm purchasing a condo. In actuality, I've just revised my Snowball Plan, yet again, to include my anticipated new debts: my mortgage and the down payment lent to me by Bank of Mom.

Come 10/31/2011, my debts will look something like this:

10/31/11	Fed'l Sub'd Student Loan	$ 50,558.49	@ 5.125%	Fixed
	Mortgage	$ 274,000.00	@ 3.875%	Fixed
	Down Payment	$ 68,500.00	@ 0.000%	Fixed
	TOTAL	$ 393,058.49

Based upon these estimates, here's my new Snowball Plan ver. 3.0.

I know that the "real" Snowball Plan requires me too pay off my debts in the order of the smallest balance to the largest. I do plan to pay off my smallest debt first, but I'll also be snowflaking $4,000/year to my Bank of Mom debt.

Some would argue that the $4k/year snowflake should be applied to my student loans instead of to Bank of Mom. But I feel that Bank of Mom deserves the not-so-insignificant snowflaking since she was generous enough to lend me the money interest-free. Additionally, my mom's 69. God knows how much longer she'll live. She got a relatively clean bill of health recently so I'm thinking that she'll be good for at least another 10 years. Hence, my goal is to pay off Bank of Mom in 10 years. I guess I should also be prepared to make a balloon payment for the balance in the event my mom's health deteriorates prematurely. The bottom line is, I intend to take my debt to Bank of Mom seriously and will treat it no differently than any other debt to a "real" creditor.

I'm going to switch gears now and I'm going to engage in some catty gossip. My best friend recently confided to me that she and her husband also "borrowed" approximately $20,000 from the husband's parents for their down payment. It's been 8 years and they've paid back $0.00 so far. In the mean time, they've taken vacations, bought a new car and made improvements to their house. My BFF claims she feels guilty for stiffing the in-laws, but not guilty enough to initiate a repayment plan. My BFF further feels that it's her husband's responsibility to make the repayment arrangements since they are his parents.

I'm appalled at my friend's cavalier attitude about how she and her husband are stiffing Bank of Mom and Dad. I guess since her in-laws haven't said a "peep" about being repaid, perhaps the in-laws intended to "gift" the money. Either way, the issue has been swept under the rug and no one is dealing with it.

I'm a bit disappointed with my friend. No matter how you slice it, she and her husband are deadbeats. They're deadbeats because they're stiffing their family members on a significant sum. Even assuming that the in-laws were willing to gift the money, my friend and her husband are deadbeats since they didn't pay taxes on the non-exempt portion of the amount that was gifted to them.

I wonder if the in-laws have forgotten about the "loan"? Or I wonder if it will always stay in the back of their minds that their kid and his wife stiffed them?

What Are You Doing with the Social Security Payroll Tax Cut?

I got my first paycheck of 2011 and it was more than I expected. (This is partly due to the fact that I reduced my 401k contributions by 1% back in August because I would have otherwise maxed out my 401k contributions before my last paycheck and missed out on some of the company match.) But it looks like my Social Security payroll tax cut accounts for an additional $80 per paycheck or so.

I'm not too thrilled about this tax-cut, though, because I've always been worried about the solvency of the Social Security program when I retire. As a sign that we probably can't afford this tax cut, the government is borrowing $112 billion to make Social Security whole.

I guess the thought behind the SS payroll cut is to stimulate the economy. Unfortunately, I'm probably not going to put the money back into the stream of commerce. I intend to use the money to pay down my private student loans and/or to increase my Roth IRA contributions. I guess I'm no better than the companies that are hoarding cash rather than hiring, despite tax cuts and other government cheap money.

If I'm worried that I won't be able to collect on Social Security, I might as well reduce my debt and sock this money into my Roth, right? But does this make me a bad citizen? Maybe to alleviate my guilt, I'll continue to buy I-Bonds despite the less-than-thrilling rates they've been giving lately.

Should I Set Aside Money for Morbid Reasons?

I've set aside $5,000 of my recent windfall for my parents. No, I'm not planning to give it to them - - I'm thinking about setting it aside to deal with their eventual death.



It's no secret that my parents seriously mismanaged their finances. They don't own their own home (they rent) and they live off of Social Security (which barely pays their rent) and a small pension from my dad's old job. They have no retirement or savings to speak of and no life insurance. My dad bought himself a $200,000 term life insurance policy that will expire some time in 2011.

My mom (age 67) is in relative good health, but my dad (age 73) is a complete mess. He suffers from serious COPD, or chronic obstructive pulmonary disease. Just think of the person with the worst case of asthma you know, who's constantly wheezing and sucking on an inhaler/nebulizer. If that wasn't bad enough, my dad suffers from advanced dementia. When I saw my dad this past holiday, his memory loss has progressed to the point that he can't even remember what he did/ate the night before. And one last thing -- my dad's a diabetic. In other words, my dad is no longer insurable for life insurance.

My parents have made no plans for their death. No wills or trusts (not that they need one since they have no assets) and no pre-planned funerals. With no life insurance, the cost of dealing with their death will be borne by my sister and me.

This article talks about how to plan for a frugal funeral. The best way to save money on a funeral is to plan it and pay for it now. According to AARP, the price of a funeral doubles an average of every seven to 10 years. You could also spread out the payments over several years and the price still won't change. The pre-paid money is put into an insurance policy or a trust and can't be touched. Merchandise isn't bought and stored.

I don't expect or wish for my parents' imminent death. I just want to be prepared for it now. After all, there are 2 certainties in life, tax and death. I haven't broached my parents with this topic yet and I'm not quite sure how without giving them the impression that I want them dead.

I asked an older friend for advice about this and she felt that the money should be spent on the living. Since there is very limited time left where my parents will be both mobile, perhaps I should use the money to go on a vacation with them. She especially feels that my mom deserves a break for caring for my sick dad. I have to admit, my mom's caretaker fatigue is clearly showing.

What do you think?

Random Thoughts About My 3rd Paycheck and Bank Failures and One Confession

July is a 3-paycheck month and I got my first-of-three paycheck yesterday. I immediately transferred my money to my savings. I wish I could say that I "bank" my 3rd paycheck but alas, I can't. I instead disburse 1/6th of it to myself every month until the next 3-paycheck month comes along. Eventually, I hope to eliminate my debts to the point that I can just bank my 3rd paycheck as savings. Someday....

~~~

So my spendaganza goes on. I just bought myself my first EVER digital camera. Yes, it's time I joined the 21st century.

I bought a Panasonic Lumix DMC-ZS1, 10.1 MP camera with 12x optical zoom at Costco, using a $50 off coupon and a $100 gift card. The camera normally retails for $299-$330. With the discount and gift card, I paid about $155, including tax. The price includes a carrying case a 2 MB memory card. Not too shabby, wouldn't you say?



Costco offered a $50 off coupon last December. I really, really wanted it at the time, but decided not to. Ever since, I rued my decision of not taking advantage of the $50 off coupon. When I recently saw that Costco was offering the same coupon again, I decided to jump on this opportunity. I'm hoping that the 12x optical zoom will come in handy when I go see the Pageant of the Masters next weekend!

~~~

Holy guacamole. Have you seen the FDIC list of bank failures in 2009? Most of these banks had less than $1 billion in assets but it's still very unnerving.

As my faithful readers know, I'm arbitraging my 0% credit card debt by paying the minimum and putting my money in a 2.0% savings account at DollarSavingsDirect.

Bankrate gave Emigrant Bank (the parent company of DollarSavingsDirect) a 1-star rating as of 12/31/08.

Although I don't think Emigrant Bank will go under before October (when my 0% promotional rate expires), I also don't want to take any chances. I'll be transferring my money to SmartyPig (the online partner of West Bank). Bankrate gave West Bank 3-stars. Better yet, SmartyPig's current APY is 2.75%.

Bought 7 Shares of TIP

Update: Oh great. This guy thinks if there's theoretically one type of Treasury bond that the government can default on, it's TIPS.

~~~

I have on ongoing deal with my buddy. (He's co-worker #1 from my prior post.) We joke that we so suck at sports betting and investments, that we'll tell each other about our next bet/investment. For example, if I give my bookie $100 for the Lakers to win the next game, I need to warn him. Based upon my horrendous track record of ALWAYS betting on the wrong horse, he'll just "know" that the Magic will win.

Similarly, if I buy a stock, I need to tell him so he can AVOID that investment since more likely than not, it'll sink like a rock. (Conversely, if I sell, he'll buy since it'll suddenly sky-rocket for no reason.)

I consider today's post as a sort of public service because I bought 7 shares of TIP in my Roth IRA for $101.47/share (ACB $717.29, including $7 trading fee) yesterday. And sure to form, I've already lost money since it's currently worth $708.75.) But I'm not really concerned about the actual value of this ETF. I bought it because it pays out a monthly dividend.... usually.

TIP is the ticker symbol for the iShares ETF "that seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Barclays Capital U.S. TIPS index. The fund invests at least 90% of the assets in the inflation-protected bonds of its underlying index and at least 95% if the assets in U.S. government bonds. It may also invest up to 10% of assets in U.S. government bonds not included in the underlying index. The fund invests up to 5% of assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents."

In March 2008, I bought 3 shares of this ETF in my taxable account at $110.31 (ACB $331.23 since no trading fee incurred). Although the ETF value is down 8.2%, it's paid out $18.83 in dividends. This reduced my loss to -2.61%.

Since March 2008, the ETF paid dividends of anywhere between $.33/share to $.93/share. (Note: It didn't pay any dividends during November '08 to March '09, during the whole market crash turmoil, though.) Had I researched this ETF more carefully, I would NOT have purchased it in my taxable account since the monthly dividends make this a tax inefficient investment. So now I've purchased 7 more shares in my Roth.

I don't expect this ETF will be volatile nor do I think it will have much of a downside or an upside. I think it will continue to trade within the narrow price channel of where it is now ($99-$102/share).

So why did I buy it?

1. I'm obsessed with finding an income stream in retirement just in case Social Security goes BK. (I know, I know. Some of you have already commented that some form of Social Security may still be there when I'm over 60. But I'm just hedging my bets. And you know how bad my bets are!) If I accrue TIP and other high-dividend yielding funds in my Roth over the years, I may have some tax-free monthly income that I can supplement my 401k.

2. My spidey senses tell me that inflation is on its way. Maybe not this year and maybe not even next. My private student loan APR has already creeped upwards slightly (3.451% in January to 3.598% in March). The loan rate will be re-setting in July and I'm guessing it'll be higher. Owning TIPS (Treasury Inflation Protected Securities) is one way to hedge against inflation since it pays interest adjusted for inflation, similar to the I-Bond. Unlike purchasing TIPS directly from the Treasury, TIP may not be the perfect way to hedge against inflation, but this is the only way that I know of that I can own TIPS in my Scottrade Roth.

I ask you: Do you think inflation is on its way? What are you doing to protect yourself?

Hot Diggity! My Cost of Living's Goin' Down!

I got two pieces of mail yesterday that brought some good news -- my cost of living is going down!

Good News #1
In February, my rent went up by $20/month and I'm currently paying $1,275/month on a 6 month lease. I predicted that my rent will probably go up again in August. But lo and behold, my apartment is offering a six or twelve month lease at a monthly rate of $1,175/month for a cool $100/month savings.



The dilemma I face here is whether to sign a 6 month lease or a 12 month lease. With my job situation uncertain, I'm leaning towards the 6 month lease. After all, my biggest asset in a job hunt is that I'm not tied down to a mortgage and I'm completely mobile.

I hate to admit this, but my first thought upon learning about the decreased rent was, "What can I buy with $100/month????" (*Slap myself*) My next thought was to pay off my debts more quickly. Hmmmm... but my EF is under-funded. Hmmmm...

Ultimately, I've decided to put the $100/month into my savings, but not into my EF. I will earmark it into my cost-of-living-adjustment (COLA) fund. As explained previously, my COLA fund was set up to pay for any unexpected or unanticipated increases in my monthly expenses (e.g., increased insurance rates, cell phote rates, etc. etc.) Money from my COLA fund will tide me over until I can re-adjust my budget to the new realities of life. Since my windfall is from an unexpected decrease in my cost of living, it only makes sense to use it to prepare for an unexpected increase, right?

Good News #2
Waaaaaay back when, I purchased an Accidental Death Coverage insurance policy that I've been paying about $7.95/month. It covers me for a cool $1M if I die accidentally as a "fare paying passenger" but only $100,000 as an auto/pedestrian and $50,000 for all other "accidents". I'm not sure why I never cancelled the policy other than I thought I would be "jinxing" myself. (Did I not tell you I'm insane?)

Anyhoo, the credit card that this policy's automatic payment system is linked to was cancelled due to a security breach. I just got word that this bogus policy will lapse unless I call to update my automatic payment to another credit card. Fat chance.

But blogger M is for Money's post titled, "Dying Isn't Cheap", gives me some pause for thought. Rather than banking the $7.95/month premium, perhaps I should instead apply it towards a legitimate term life insurance policy? After all, God forbid I should die accidentally or prematurely, I do not want to saddle my parents or my sister with the cost of cremation, etc.

I guess that will be my next research project - buy myself a cheap term life policy.

I'm So Stimulated!

Woo hoo! My paycheck today has an extra $6.79 due to the stimulus federal income tax reduction. And I thought I wouldn't qualify for a tax cut, silly me!

Ohhhh... what should I get with the extra $6.79/paycheck?

• 6 songs from iTunes?
• 6 items from the 99 Cent Store?
• 2 boxes of Little Debbie Marshmallow Pies?

But alas, it's not enough to buy:

* An Aqua Globe ($9.99 on sale at CVS);

* A Flirty Girl DVD set ($9.99 for "Teaser Pack") [Note: It costs $10 to learn how to chair dance? I'm afraid to know how much it costs to learn how to pole dance!]

* An Old Navy Towngown ($25.00).

Speaking of towngowns, looks like everything old is new again. Oh Gawd. These dresses are giving me flashbacks of my fashion-challenged, misspent youth!! (See below, circa late 70's.)

Note to Parents: Dressing your children like this is child abuse! (Exception: Unless you're a cult member.)

Anyhoo, I'm just kidding about spending the extra $6.79. I'll bank it since I'll probably stimulate California by passing it through via my increased state income tax. (For cryin' out loud!)

Have a great weekend folks!

My Hypothetical 20% Pay-Cut Challenge

I've been talking to former colleagues who've already been laid off by my company. Few lucky ones have been able to find jobs with equivalent pay and comparable benefits, but most have taken jobs with pay cuts and fewer benefits. I asked how much of a pay cut they took, but none were willing to discuss specific figures. (I'm a bit ashamed of being so tacky and nosy, but I was curious for my own sake.)

It's not unheard of unemployed workers now taking 30%-70% pay cuts in their new jobs. In this article, one former bank employee went from a $125,000 salary to a $66,000 salary. Another former mortgage lender went from earning $110,000 to $33,000.




I'm relatively confident that based upon the industry that I'm in, I probably won't face such a dramatic salary decrease in my next job. But I AM expecting to take a significant hit in my salary, so I spent the weekend thinking how I'd deal with a hypothetical 20% pay-cut.

EXPENSES
I've concluded that I want to continue to maintain my current standard of living, so I'm not going to alter my spending, even in the face of a 20% pay cut. Fact of the matter is, I'm living a pretty frugal life right now. It's not like I'm living the high-life by subscribing to premium cable channels, drinking expensive wine, dining out regularly, buying Starbucks coffee, etc.

The big bulk of my expenses are eaten up by rent and debt repayment. The rest of my budget is quite modest. Although I'm open to the idea of a roommate, I'm not yet at the point where I am willing to share my living quarters with a stranger. With respect to my debt, my credit card should be paid-off by year end. However, I want to continue with my debt snowball plan and roll the credit card payments into my student loans. In other words, paying off my credit card really doesn't give me much relief.

Some people have suggested that I eliminate my cable TV/high-speed internet service/land line service. This is a great idea, but I'm not inclined to eliminate my internet service since I do a lot of online banking and I do not want to do so on a shared computer in a public place. Although I don't need cable TV, it's my primary source of entertainment, and I'm not going to give it up so easily. I also like having my land line, since out-of-state calls to my parents and big sis are included in the monthly flat fee.

INCOME ADJUSTMENTS
It's a bit depressing that a 20% pay cut will set me back to where I was in 2004. Looking at my 2004 paycheck, I've estimated what my take-home pay will be after taxes and other expenses. I then took out some expenditures that will help bring my take-home pay to what it is now.

	% of Current Paycheck	% of Pay-Cut Paycheck
Fed'l Income Tax	15.01%	16.25%
Social Security	6.15%	6.21%
Medicare	1.44%	1.45%
CA Income Tax	5.04%	5.60%
CA SUI/SDI Tax	1.09%	1.18%
FSA	0.51%	0.63%
ESOP	3.0%	0.00%
Long Term Disability Ins.	0.55%	0.00%
Personal Accident Ins.	0.09%	0.00%
Pre-Tax Dental	0.13%	0.38%
Pre-Tax Medical	1.06%	3.09%
401k	15.00%	2.00%

Through this exercise, I've concluded that I need to do the following:

• Eliminate my ESOP contributions;
• Eliminate long-term disability insurance coverage;
• Eliminate personal accident insurance coverage;
• Reduce my 401k contribution from 15% pre-tax to 2% (ouch).

I've also discovered that my current company's medical and dental benefits are cheap compared to other employers'. Based upon what my big sister is currently paying for her medical and dental benefits, I'm anticipating that these costs could easily increase 3x.

It pains me to have to dramatically reduce my 401k contribution and savings rate, especially at a time where I can dollar-cost average my retirement investments cheaply. But at least I have the comfort of knowing that I won't be sacrificing the pace of my debt elimination. Once my debts are paid off (hopefully before 2014), I'll boost my 401k contribution at such time.

Oh, what a fun exercise this was...

Avoiding the Near-Retiree Stock Market Crash Freak-Out

I'm seriously afraid of being one of the near-retirees who freak-out in a serious market downturn and pull out all of her money from the stock market. (Actually, I'm more worried of becoming one of those crazy, old, cat-ladies. But that's another post.) Is there anything I can do to prevent the "near-retiree-stock-market-crash-freak-out"?

Money Magazine's latest issue highlights a 61 year-old whose retirement account asset allocation before the 2008 market crash was 85% equities and 15% bond funds. (Egads! I'm half his age plus 6 and even I'm not that aggressive!) As you may have already guessed, his portfolio got slammed 40%. Ouch.

My current 401k asset allocation is primarily based upon using CNNMoney.com’s asset allocator. And I also compare my allocation against the conventional wisdom of subtracting my age from 110% and putting that amount in equity funds. This should work fine while I'm young or while the market's going up.

But asset allocation won't necessarily protect me when I’m 57 and my account drops 25%+ with a possibility that the market won't recover in the next 10 years. But at the same time, the money will probably need to last another 30+ years, so I can't panic and suddenly become too risk averse either.

This got me thinking about Jim Cramer's advice that money you need in the next 5 years need to be out of stocks, which is similar to Motley Fool's advice of :

1. Any money you need in the next year should be in cash.
2. Any money you need in the next two to five (or even seven to 10, depending on your risk tolerance) years should be in a safe fixed-income investment, such as certificates of deposit or bonds.
3. Any money you don't need in the next five to 10 years is a candidate for the stock market.

Currently, retirement is decades away, so I can be as aggressive in my asset allocation as I'm comfortable of being. But, perhaps as I get older, maybe I need to stop looking at my 401k as a monolithic account and I need to think of it more like 5 different "buckets of assets" with different time frames and apply a different allocation to each bucket.

For example, suppose I'm 55 with a target retirement age at 60. (Let's also assume that I already have 8 months' emergency fund saved up and I'm also on track to saving 1 year's living expense in cash by the time I'm 60.)

In this scenario, bucket #1 will account for 20% of my total 401k asset that I'll be planning to tap between ages 60-66. I have a time frame of 5 years so the asset allocation in bucket #1 will have 30% equities and 70% bonds/stable fund. As I get closer to 60, bucket #1 will eventually be all stable fund.

Bucket #2 will have a longer horizon of 10-15 years, so the asset allocation in bucket #2 will be 75% stocks and 25% bonds/stable fund. Eventually, as bucket #1 gets depleted, the asset allocation in bucket #2 will move towards 30% equities and 70% bond/stable fund. So on and so forth.

Based upon a rudimentary number crunching I did over the weekend, this is what my asset allocation could potentially look like in my mid-50s:

TOTAL ALLOCATION RISK (Age 55): High

Equity Fund: 75%
Bond/Stable Fund: 25%

Consisting Of:
Bucket #1 (20% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #2 (20% of total funds): Equity 75%/Bond-Stable Fund: 25%
Bucket #3 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%
Bucket #4 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%
Bucket #5 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%

TOTAL ALLOCATION RISK (Age 61): Medium

Equity Fund: 57%
Bond/Stable Fund: 43%

Bucket #1 (20% of total funds): Equity 0%/Stable Fund: 100%
Bucket #2 (20% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #3 (20% of total funds): Equity 75%/Bond-Stable Fund: 25%
Bucket #4 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%
Bucket #5 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%

TOTAL ALLOCATION RISK (Age 66): Low

Equity Fund: 31%
Bond/Stable Fund: 69%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (25% of total funds): Equity 0%/Stable Fund: 100%
Bucket #3 (25% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #4 (25% of total funds): Equity 75%/Bond-Stable Fund: 25%
Bucket #5 (25% of total funds): Equity 90%/Bond-Stable Fund: 10%

TOTAL ALLOCATION RISK (Age 72): Low

Equity Fund: 35%
Bond/Stable Fund: 65%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (0% of total funds): DEPLETED
Bucket #3 (33.4% of total funds): Equity 0%/Stable Fund: 100%
Bucket #4 (33.3% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #5 (33.3% of total funds): Equity 75%/Bond-Stable Fund: 25%

TOTAL ALLOCATION RISK (Age 78): Low

Equity Fund: 14%
Bond/Stable Fund: 86%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (0% of total funds): DEPLETED
Bucket #3 (0% of total funds): DEPLETED
Bucket #4 (50% of total funds): Equity 0%/Stable Fund: 100%
Bucket #5 (50% of total funds): Equity 30%/Bond-Stable Fund: 70%

TOTAL ALLOCATION RISK (Age 84): Low

Equity Fund: 0%
Stable Fund: 100%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (0% of total funds): DEPLETED
Bucket #3 (0% of total funds): DEPLETED
Bucket #4 (0% of total funds): DEPLETED
Bucket #5 (100% of total funds): Equity 0%/Stable Fund: 100%

I'm not sure if this type of mental planning will help me avoid the "near-retiree-market-crash-freak-out" I dread. If anything, perhaps I can take some solace from reading about another couple in Money Magazine:

In 2000, a year after David McMickens retired from his 40-year job as a State Farm supervisor, he and his wife Judy lost half of the $500,000 portfolio when the tech bubble burst. It’s not hard to see how: At the time, they had 90% of their savings in stocks – a risky allocation for their age and retirement status.

But the McMickens didn’t panic. Between their Social Security benefits, pensions and ample cash in the bank, they simply delayed tapping their nest egg, giving it time to bounce back. By 2005, it had, and they began working with financial planner Stephen Iaconis to create a more balanced portfolio, now 60% in stocks and 40% in bonds. Though they’ve lost 24% in the past year, their experience taught them not to worry; once again, they’re relying on pensions and Social Security ($80,000/year), plus a cash cushion ($75,000), to help them postpone tapping savings. Says David: “We can just sit tight and wait for our nest egg to grow again.” – Ismat Sarah Mangla for Money Magazine, March 2009 issue, Page 69

What I can't take solace in, however, is that I won't have a pension and I may not get any Social Security.

Now what?

Dave Ramsey Is A Big Fat Liar

Eh, I’m just joking, but not really. Based upon my own personal experience, Dave Ramsey's book, The Total Money Makeover, is premised upon a flawed concept that is common to all self-help books. Specifically, it bases its advice upon a generalized assumption of human behavior, when in fact, most individuals are complex and often irrational.



As you all know, Dave advocates the debt snowball which requires you to pay off your debts in the order of smallest balance to highest, regardless of interest rates. The debt snowball is based upon the notion that paying off the little debts quickly gives you a “psychological boost” to tackle the next debt.

Well, I just recently paid off my first debt (car loan) and I have to admit, I’m happy, but not AS happy, as I thought I would be. I’ve waited and dreamed over 3 years about the day I would pay off my car loan. I imagined handing my check to the credit union teller and jumping for joy and squealing when she hands me the zero balance receipt.

Truth be told, I was excited that morning, but the whole event itself was disappointingly anti-climactic. Perhaps I was building the whole final payment event up in my mind to the point that I was setting myself up for disappointment.

Worse yet, I expected to feel the way Dave Ramsey said I should, but haven’t. Dave virtually promises in his book that I would feel so great after paying off my first debt that I would be extra motivated to tackle my next debt!!

Uhhhhh…. In reality, I am just relieved to have the $788/month obligation lifted from my shoulders. As a result, I’m now feeling a strong desire to give myself some “breathing” room in my monthly budget. And as I’ve previously mentioned, I’m battling spending demons as I write this.

I’m getting tired of constantly monitoring my spending, deciding what’s a need vs. want, and choosing to forego relatively minor purchases like a $40 cordless phone. (Wah, wah, wah, whine, whine, whine, I know!)

Perhaps I never had the “gazelle intesity” necessary to successfully follow-through with the debt snowball. Or, hopefully, as Abigail from I Pick Up Pennies suggests, maybe I’m just suffering from “frugal burnout” that waxes and wanes. Or, perhaps I’m feeling blue and I’m seeking retail therapy.

I don’t know. But I feel like a recovering addict who is tempted to revert to old habits.

So let this be a warning to all: the purported pyschological boost of the debt snowball is overrated. Instead, you will find yourself at a fork in the road after overcoming your first hurdle.

Next month, I have the choice of either: 1.) saving the $788 car payment with the purpose of paying off my credit card debt in October as per my revised snowball plan, or, 2.) spending some or all of the car payment money on other stuff.

I know which is the right road to take. I just don’t know if I have the emotional strength to do the right thing.

Friday the 13th Is My Lucky Day – I Paid Off My Car Loan!!

According to my original Snowball Debt Reduction Plan, I was planning to pay off my car loan in July. Instead, I decided to take money from my earmarked savings and my Emergency Fund to pay off my car loan early. Woo hoo!!

MSN Money recently highlighted a post from Kristy at Master Your Card, that discussed whether using one’s EF to pay off a car loan is appropriate. (Blogger Kristy opined that an EF should not be used to pay off a car loan.)

I felt a bit defensive, so I left a comment that one should do what one feels comfortable doing. I personally would not feel comfortable wiping out my EF or reducing it down to $1,000 to pay off a car loan, but I certainly felt comfortable spending $1,716 of my earmarked savings (bye-bye computer) plus an additional $2,219 of my EF to pay off my car loan. I still have $6,089 remaining in my EF and $1,908 remaining in my earmarked savings. Admittedly, it’s not much, but I still have something left.

Additionally, my EF is currently only earning up to 3.05% APY in interest, but my credit union is charging 4.75% APR interest on my car loan. Paying off my car seemed like a no-brainer.



Before I go on, here are some facts about my car loan:

Date borrowed: 12/15/2005
Total Purchase Price: $25,500 incl. tax, title and registration
Amount borrowed: $25,000
APR: 4.75%
Term: 5 Years (But paid off in 3 years, 2 months.)
Minimum Monthly Payment: $469.10 (Total of 60 Payments: $28,146)
Total Paid: $27,336.24
Interest Paid: $2,336.24
Interest Saved From Early Pay-Off: $809.76

Now that my car loan is paid off, I’m planning to use the car payments to pay off my credit card. Since my credit card debt is currently at 0% APR, I will put the car payments into a “high”-yield savings account until the promotional 0% interest-rate expires in October.

I’ll also remove the Blue Book value of my car in my net worth calculation at the end of the month since my car is a depreciating asset and I have no intention of selling it any time soon. I might as well take the write down now, rather than later.

I plan to keep my current car for another 10 – 12 years. If all goes to plan, (knock on wood), I’ll pay off all of my outstanding debts in 6 years. I can spend the final 4-6 years of my current car’s life to make “imaginary car payments” to myself to save up for a new car that I will buy with cash-ay. I vow NEVER to borrow money to buy a car again.

Anyhow, hope you're having a great Friday the 13th. I certainly am! :-D Hope you have a Happy Valentine’s Day tomorrow too!

Paying Myself Insurance Installment Fees

J. Money at Budgets Are $exy wrote an amusing article about how much he pays for auto insurance, which got me thinking about mine.

J wrote that "a co-worker also told [him] that some companies will knock off a few dollars if you pay the entire price up front too! Never came across that... but ... [he's] a big fan of breaking them into monthly payments than paying a huge chunk anyways."



I too was a big fan of monthly installments since that was the only way I could afford my insurance. Heh heh.

The only problem with monthly installments is that my insurance carrier that shall remain nameless (but rhymes with "Ball State"), charges me $3.50/installment for the pleasure. (So I guess J's buddy was right, in a way, about getting a discount for paying the premium all at once.)

Starting this year, I've decided to suck it up, use some of my earmarked savings and just pay the doggone insurance premiums at once. (Actually, I charged it onto my credit card so I can earn cashback rewards. When it comes due, I'll pay it in full out of my earmarked savings.)

I'll then pay myself back from the money I've budgeted every month to pay for insurance. In essence, I'm now paying myself $3.50/installment x 2 (for auto and renter's insurance) per month.

Hot diggity, folks! That's $7.00/month that I'm now paying myself that I used to pay others! I'm suddenly having thoughts of world domination! I'm on my way to becoming a loan shark! Bwaaahahahaha!!!

OK, back to reality. But to give you some perspective, if I put that $7 service fee into my savings every month at 3.5% APR, I'll have nearly $4,000 by the time I turn 65. I'm just imagining what a fabulous retirement dinner that $4,000 will buy me. Bwaaaahahahaha!!!

Covering My December Short-Fall

I've been racking my brain trying to figure out how to make up the $98.27 shortfall in my December budget without tapping my EF.

Good News #1:
As I previously reported, I bought TurboTax from Costco in mid-December so that I can estimate my tax bill and start saving ASAP, if needed, for April. As luck would have it, Costco issued a $10 off coupon AFTER my purchase.

I was sufficiently miffed that I went to Costco yesterday to see if they will refund me $10. No dice.

But the kind customer service representative said, “Just buy another TurboTax with the coupon and return it using your original receipt.” Brilliant!

So now I'm now only short $88. Now where can I find $88 in the next 10 days?

Good News #2
As readers of this blog know, I gave Chase the boot and transferred my credit card balance to Bank of America's 0% offer.

My monthly budget to pay my credit card is $265. I paid Chase $30 immediately to cover the interest that accrued to date. With this, hopefully, Chase is out of my life for good.

The best news is that BofA's bills won't come due until 2/15. I'll use part of the remaining $235 of my January Chase budget to pay for the $88 shortfall immediately. I'll now have some extra time to come up with the extra $88 to cover December's shortfall.

The bad news, though, is with the 3% transfer fee, I've incurred an additional $358.17 on to my credit card debt. Blech.

But not to worry folks! I've got a plan to eliminate my credit card bills before the 0% offer expires in October.



Stay tuned... I'll unveil my plan on Friday the 13th in February!!

Reinstating My Envelope System

I just tallied up my December spending and… HOLY [bleeping] CANOLI! My total expenditure in December was $3,153.91! (Note: This was not totally due to my personal spending. A lot of this included business expenses for which I’ve mostly been reimbursed.)

I thought I had everything accounted for, but I obviously didn’t, since I’m short $98.27 in what I’ve set aside to pay for my December expenses.

For most of last year, I kept track of my spending using a modified envelope budgeting system which worked extremely well. But I got really cocky and fell off the wagon in November. {Sigh} This is what I get for my hubris. I guess it’s time to reinstate my modified envelope system again.

The basic concept of the envelope system is to keep a pre-established amount of cash in an envelope to pay a certain category of expense for that month. Once the cash is spent, there is no more money available for that expense item until the following month. (Dave Ramsey is one of many advocates of the envelope method. His method can be found here.)

I normally pay for irregular expenses (i.e., monthly expenses that differ month-to-month, like groceries, food, gas, toiletries, incidentals) with my credit card. So I tailored the envelope system to suit my needs – my envelopes don’t hold cash, but receipts.

I have a monthly budget of $500 to pay for irregular expenses. When gas was $4.50/gallon last summer, I set aside $130 of my budget to pay for gas. I also set aside $100 as a "cushion". If I had any of my "cushion" money left over at the end of the month, I earmarked it in my savings to pay for other future expenses. That left me with $270/month (or, $8.70/day) for groceries, food, toiletries and incidentals.

On one side of the envelope, I keep a day-to-day tally of my expenditures. On the other side, I keep a day-to-day tally of my "accrued" budget. For example, on the 5th day of the month, I would write down the accrued budget amount on one side of the envelope: e.g., $43.50 = $8.70 x 5. If I flipped the envelope and saw that I’d already spent $50, I'd immediately know I was $6.50 over-budget.

This method worked well for me since it kept all of my receipts in one location and it also made me aware of how much I was spending.

In hindsight, it was extremely stupid of me to fall out of the envelope system during the holiday season. Now I know I can’t manage without it.

Tragedy Leading to Weekend of Reflection

This past Saturday, I attended a memorial service for a young man (age 34) who committed suicide over New Year’s weekend. I was merely an acquaintance of this young man (i.e., friend of a friend), but the news greatly saddened me.

For the past few days, I’ve been trying to make sense out of this seemingly senseless act by a handsome, witty young man that seemingly had everything going for him.



Nothing still makes sense, but here are a couple things that I hope to have learned from this tragedy.

Seek Help for Depression
During the service, the father of the young man explained that the decedent suffered from clinical depression, which runs in the family. The decedent didn’t seek help but chose rather to self-medicate with alcohol. The father implored everyone to seek help if they are depressed since it won’t just go away.

This struck a chord since my family has a history of depression and suicide. My family never discusses this issue since this is considered a "disgrace" within my culture.

According to WebMD, major depression affects about 14 million American adults or about 6.7% of the population 18 or older in any given year.

Untreated clinical depression is a serious problem.

Untreated depression increases the chance of risky behaviors such as drug or alcohol addiction. It also can ruin relationships, cause problems at work, make it difficult to overcome serious illnesses, and even result in suicide.

Clinical depression, also known as major depression, is an illness that involves the body, mood, and thoughts. Clinical depression affects the way you eat and sleep. It affects the way you feel about yourself and those around you. It even affects your thoughts.

People who are depressed cannot simply "pull themselves together" and be cured.

I've personally witnessed the devastation suffered by survivors of suicide. I would never want to put my loved ones through such an ordeal. I hope and pray that should I ever suffer from major depression, that I would have the strength and courage to seek help. There is no shame in seeking treatment for depression.


Take Care of Your Loved Ones After Your Death
The young man was engaged to be married this summer. The home that he shared with his fiance was only in his name, and the fiance is currently pondering where she will live next.

I don't know whether the young man's estate will be distributed via probate or via intestate laws. But this demonstrates the importance of estate planning at any stage of your life.

Every estate plan should include:

1. a will (a written document that says who gets what and names guardians for minors);
2. signed durable power of attorney (which names a person who can make financial decisions for you when you are unable);
3. a health care proxy (which names the person who will make medical decisions for you in the event of your incapacitation), and
4. a written living will (which sets forth how much medical intervention you want to receive).

Additionally, as Miss M wisely points out, it would behoove all of us to create a financial inventory which would help if someone needs to handle your finances for you (e.g., your attorney-in-fact vis a vis a durable power of attorney).

None of this will alleviate the survivors' pain associated with the death of a loved one, but it will ensure that the deceased's assets are protected for the benefit of the survivors.


Do Not Be Isolated
Many people attended the young man's memorial service. I wondered how many of these people did this young man reach out to and vice versa?

Just as a better quality of life may lead to more social interaction, a more developed social network probably promotes better quality of life. Therefore, interventions that target social interaction should be part of the support for people suffering from depression or other illnesses.

Suze Orman Free e-Book Download Thursday

Suze Orman will be launching her new book, Suze Orman's 2009 Action Plan, on The Oprah Winfrey Show on January 8, 2009 (Thursday). The show will offer a free e-book download in English and Spanish on Oprah.com for one week, culminating in a live webcast on Thursday, January 15, 2009, at 9 p.m. EST/6p.m. PST.

(A free e-book and BCS championship game all on the same day? Looks like Thursday will be a red-letter day!)



I already have Suze's book, The Road to Wealth, which provides a comprehensive (if somewhat very broad and basic) overview on a lot of topics ranging from managing debt (Chapter 1), home ownership (Chapter 3) and stocks, mutual funds, bonds and bond funds (Chapters 7-9).

I'm not sure what more she can add in her 2009 Action Plan that haven't been covered in her prior books already. But I think her Saturday TV program gave us a preview of the theme of her new book: the need to confront our financial demons to vanquish them (or, in her terms, "Face It To Erase It").

She cautioned that the next financial crisis will come from credit card companies that will slash the credit limits of anyone who carries a balance and is only making minimum monthly payments. Because these people will owe in excess of their newly reduced limits, the credit companies will automatically trigger a provision that will allow them to increase their interest rates to 25%-30%.

This isn't really ground-breaking news. But you better believe if I can get her new book for free, I'm gonna download it!

Speaking of Suze, I love Stephen Colbert's spoof on Suze and the US government's $700 billion bailout program:

My Post-Christmas Economic Stimulus Activity

I got a couple of gift cards this Christmas and I shall do my duty as a good citizen to spend it to stimulate the economy! (Eh, who am I kidding? I'm going to use them as fast as I can, before either of these stores go bankrupt.)



My parents gave me a $100 gift card from Ann Taylor. This is a thoughtful gift from my mom, since she is aware of my weird superstition of wearing a new outfit (including new underwear) on New Year's Day. A male friend once said it sounded like a bogus superstition I made up to justify buying a new outfit. Ha ha ha. Maybe it is, maybe it isn't. ;-P

I already bought my New Year's outfit when I went shopping with my BFF and big sis, but I wouldn't mind buying something extra as well. If you look at my monthly budget, you'll notice I have no allowance for cosmetics or clothing. That is one of the many things I nixed from my budget when I vowed to bring my finances under control. If I need want to buy clothes or cosmetics, I'll have to pay for it from my food budget or pay for it out of my miscellaneous earmark fund. With this gift card, I'm excited I'll be able to shop for clothes without worrying how I'm going to pay for it.

My IT guy gave me a $50 gift card to Bed, Bath and Beyond. (My IT guy at work and I developed a strange tradition over the years of giving each other gift cards for our birthdays and Christmas. It's a total wash, but it's fun.)

The BBB gift card will come in handy since I'm planning a frugal bedroom makeover before the end of the year. I purchased a bed-in-a-bag on sale from Macy's a couple years ago. (See, picture at right.) I haven't taken it out of the bag yet since my current yellow, floral lampshades will clash with the brown/teal color scheme of the new bed covers. I'm planning to get new lampshades from BBB and possibly some new bath towels. And you better believe I'm going to be using all the 20% discount coupons I've been collecting the past few months for my purchases!

I'll repeat: I LOVE gift cards. :-D

Keeping My Fingers Crossed for a Debt-Free December

I hope everyone had a great Christmas. Mine was certainly relaxing and downright frugal (at least for the day).

Anyhow, I've been keeping track of my spending for the holidays and so far, I'm under-budget. But to be honest with you, I'm only under-budget if I count some financial chicks that haven't hatched quite yet.



My holiday budget was based upon:

1. My Christmas fund (which was woefully underfunded at $150),


2. My December food/gas/toiletries/incidental budget ($500),


3. Several pending business expense reimbursements from my company ($821), and


4. A monetary bonus that I should be getting for successfully completing a professional designation program ($480 after taxes).

Part of the problem with my budget this month was that I had couple of expenses that arose unexpectedly (e.g., my cat's $275 vet bill and $744 to replace my tires.) I've tapped my other earmark funds like my "pet fund" and "car maintenance fund" to pay for these items, but alas, they too were inadequately funded. Therefore, I'll have to access my "new laptop fund" to pay for some these expenses.

I also took an ill-timed $288 girls' getaway weekend with my BFF early this month. My BFF and I agreed that the weekend will be our Christmas gift to each other and that helped a little bit. I'll be paying for the weekend out of my "Vacation Fund", but again, the fund is insufficient. (Sigh...)

Based upon my spreadsheet, I won't incur new debt this month so long as my company reimburses/bonuses me before my credit card comes due on 1/26/09. If my company doesn't come through in time, I will either have to tap my EF or sell some company stock to pay it off. Either scenario is not great, but I am determined not to incur any new debt.

Let this be a lesson to me to avoid creating budgets and spending money based upon money that I don't yet have in hand!

Opened A True Free Checking Account

It dawned on me over the weekend that my checking accounts with two different brick and mortar banks are not truly free since they require automatic deposits.

Although I survived the most recent round of layoffs, I'm not sure how much longer I'll be employed. In the event that I'm laid off, my automatic deposits will stop and my brick and mortar checking account will start charging me a fee.

Of course, I have the option of transferring some of my savings money to my non-interest bearing checking accounts so that I can meet the minimum balance at which the banks will waive the monthly fee. Screw that.



I currently have an automobile loan and a muy pequeno savings account with a local credit union. (The majority of my savings are with online banks like ING and DollarSavingsDirect.) I decided to open a checking account with my credit union since it offers free checking (minus cost of paper checks) with electronic statements. Sweet!

But in order to open an account, the credit union ran my credit report. Uhhhh... Not so good. I was recently so happy about increasing my FICO score to 712. Bummer. This'll take a hit.

With my new checking account number in hand, I tried to link it electronically to my ING savings account. Unfortunately, I was stumped by ING's security questions. I clearly got one or all of the questions wrong. For example, it gave me a list of phone numbers and asked me to choose the number I've had in the past. Are you serious? None of them looked familiar. Does anyone really remember the phone number they had during college?

[Sigh.] I'll now have to order paper checks and send a voided copy to ING to link my account. What a hassle!


While we're on the topic of ordering paper checks, in this age of online banking, I surprisingly have occasions where I still need to write paper checks (e.g., my rent, linking online banks). So I usually purchase my paper checks from Checks in the Mail. When ordering, I always check to see if anyone has posted any discount codes on the web. Sure enough, I found a couple: "couponcraze" (save $1 off check order) and "save20" (save 20% off check order). Cha-ching!

Once this is all complete, I'm also considering opening ING's Electric Orange checking account and making that my primary checking account since it offers an interest rate of 1.5% APY. ING is currently running a $50 bonus promotion right now to those who have an existing Orange Savings Account. (Reference code: EM227). The only problem with this offer is that you'll have to activate your Mastercard debit card and make 3 signature-based purchases within the first 45 days the account is open.

Maybe my goal next year should be simplifying my banking. This is getting out of control!

I Opened a Treasury Direct Account!

No, I'm not running for the hills... Yet... (I joke! I joke!) But, the recent stock market crash did give me some food for thought.

Why Buy Bonds?
Investing in bond funds is safer than investing in stocks but this recent stock market crash made me sufficiently concerned that bond funds alone are an insufficient means of providing income as well as capital preservation in retirement.

Suze Orman's book, The Road to Wealth, defines a bond as

[A] debt security, or IOU, issued by a corporation or government agency in exchange for the money you lend it. In most instances, bond issuers agree to repay their loans by a specific date and to make regular interest payments to you until that date. ... With most bonds, the issuer must give you your investment money back, at face value, on the maturity date of the bond.

A bond fund, on the other hand, is

[A] mutual fund that is made up entirely of bonds. Bond funds come in all shapes and sizes, just as bonds do, but the interest rate on a bond fund is not fixed, as it most often is on a single bond. Bond funds pay income every month, however, and investors like knowing they can rely on that check. ... Bond funds do not have a maturity date. ... Because bond funds don't have maturity dates, you can't be sure how much of your original investment you will get back when you sell your shares.

So, in essence, bond funds have the advantage of being more liquid than individual bonds but they don't guarantee the return of your principal.

My bond fund (PTRAX) in my 401k demonstrates this perfectly. PTRAX (PIMCO Total Return/Intermediate-Term Bond Fund) pays dividends regularly, but as of October 18, my cost basis for the fund is $15,848.59 but the current value (including the reinvested dividend) is only $15,107.25 (or, -$741.34, or -4.68%). (Of course, the loss in this bond fund is nothing compared to the losses in my equity funds!)

Why Savings Bonds?
My recent attempt to invest in a short-term California muni-bond was thwarted by the minimum purchase amount. My Scottrade account also has a prohibitive minimum amount of $5,000-$10,000 (and $1,000 increments thereafter) to purchase various bonds.

Sigh... what's a small (and I mean small) investor like me to do?

According to CNN Money's site, U.S. Treasurys are the safest, most liquid investments on the planet next to cash. Per Suze Orman, the U.S. Treasury's Series I Bonds are perfect for non-retirement account money:

1. that you want to keep safe and sound,



2. don't need current income from, and



3. will not need to withdraw for at least 5 years.

Series I bonds have a variable interest rate (4.84% through October 31, 2008) that is tied to the consumer price index (CPI) and thus provide protection against inflation. If inflation goes up, so does the interest rate on these bonds (theoretically).

Many talking heads on CNBC are flappin' their gums about a deflationary economy. But I'm betting that we're headed more towards a '70s-style stagflation. But what do I know? Notwithstanding my bachelor's degree in Economics, I clearly can't read economic tea-leaves (and I still have quite a ways to go to fully fund my emergency fund), so my preference is to only invest a small amount.

The beauty of Series I bonds is that you can purchase the bonds electronically in $25 denominations at TreasuryDirect's website.

Another advantage of the Series I bonds is that the interest on the bonds are tax-deferred until I redeem the bond. Even when I do redeem the bond, I will only have to pay federal tax (all I-bonds are exempt from state income tax, with some exceptions).

For those with little ones, interest earnings on the I-bonds may be excluded from Federal income tax when used to finance education.

The drawback of I-bonds is that I can't redeem the bonds for at least 6 months and I will get penalized with 3 months' interest if I redeem in less than 5 years.

(Please note my disclaimer on the sidebar.)

My Plan
I've been living one pay raise behind this year. Rather than increasing my discretionary spending by the amount of my raise, I've been funneling my raise (approx. $30/paycheck) into my savings. I'll just start investing $25/month in the Series I bond instead.

This will give me some inflation protected income in the future. Perhaps I can use some of the proceeds from the I-bonds as a down payment for my first house. :-D