Monday, December 31, 2012

Fear the Stock Market?

I’ve been wary of the stock market for a number of years now. I just think that for the little guy, it’s hard to win these days. Throwing my money into a fund that rises and falls with the overall market trends really doesn’t cut it for me anymore, and picking individual stocks, unfortunately has never been my thing.

As of late, my distrust of the stock market and feelings of wariness have grown. When I hear investment advisors immediately jump on IRAs and 401(k)s as their main form of retirement investment, and tell people to max out their contributions to maximize tax savings, it reminds of the good ‘ol days when the housing market was all the rage. “Buy a home. You have to buy a home. It’s such a great investment!” I kept hearing.

I’m of the opinion that if I hear that everyone is doing or advocating one thing, it’s probably best to step back, re-evaluate and maybe even do the opposite.
If you think I’m a little overly cautious, I’m providing a link here to a great article on NPR taken from the Associated Press about the current state of the stock market to back up what I’m saying. It’s not just me who is concerned.

Friday, December 21, 2012

What I can do with my Lifetime Income Number

I recently wrote an article about calculating my lifetime income needs. Obtaining this number involved looking at my estimated life expectancy, my past expenses, and my lifestyle inflation rate in order to determine what my expenditures would be over the next 45 years. Doing this allowed me to develop an average cost per year, which in turn gave me an overall amount that I would need to hit to continue in my current lifestyle from now until death.

While it’s not a perfect formula, it begins to help me take some of the financial guesswork out of life moving forward. Sure, there are plenty of unknowns; but that’s life. As much as I love to ponder and plan, I’m realistic. I know I can’t plan for everything. But I can plan for a lot.

Here are some of the things that having that lifetime income number helps me do using numbers and examples that don't pertain to my actual financial situation.

My Calculation
First off, here’s a quick review of my previous article and the equation I used to calculate my lifetime income number, using $20,000 (this isn’t my expense number, but it works for this example) as my current annual expense number and 3 percent as my annual lifestyle inflation number over the next 45 years (my life expectancy):

“Personally, I make this calculation by way of a financial calculator that I keep handy on my desk, but it can also easily be done by way of a future value online calculator, by inputting:

Present value: $20,000

% Change per time period: 3

Time periods: 45

Future value: $75,631.92

All things remaining constant, this tells me that my annual expenses could be running in the area of $75,631.92 by age 80 (kind of scary, isn’t it?). If I add that number to the current expenses of $20,000, I find that my expenses will average out to be about $47,815.96 per year or $2,151,718.20 over the course of the next 45 years.”

Looking at Income Needs
Having an idea of how much money I’ll need on an average annual basis can clarify a litany of work-related and career questions. If I know that I should be averaging $45,000 a year to build a secure current lifestyle not only for my family but a secure future and retirement lifestyle for myself as well, but I’m only making $30,000 a year right now, something needs to change. I either need to reconsider my current work situation, find more income streams, dramatically cut expenses or do some combination thereof.

Pulling Out Social Security
So let’s stay with my $45,000 a year annual average as my income needs number over the next 45 years. And let’s say that by using the benefits estimator at the Social Security Administration website, I can determine that by the time I retire, my benefits might be somewhere in the range of $1,500 a month – or $18,000 a year. This means that my retirement funds must provide me with and additional $27,000 to make up the difference. If my savings can’t do this, then maybe I need to reconsider my investment options or I need to pick up some work during retirement or even bump up my retirement age.

Determining Retirement Age
After seeing my income needs and Social Security benefits, I can begin to put a finer point to my retirement age number. Knowing that if I wait until age 70 to retire, that my monthly payments might be $2,000 instead of $1,500, I could wait to take my benefits in order to bolster my retirement income. Or working an extra five years or so could provide me with enough money to increase my income from retirement savings. If nothing else, it might tell me if I need to mix some amount of income earning work into my retirement to supplement Social Security and retirement savings income streams.

Sunday, December 16, 2012

Determining Financial New Year’s Resolutions

Overall, I’m not a big fan of New Year’s resolutions. I tend to believe that goals should be set when and where needed through the course of the year, not just at the start of a new year. However, this doesn’t mean that I’m against them completely, and can’t see the positive aspects behind such resolutions, especially when it comes to our personal finances.

Over the years, and throughout resolution successes and failures, I’ve developed certain rules that help me to develop and achieve my financial New Year’s resolutions when I do set them.

Start Early and with Variety
I find that it’s a good idea to start forming my resolutions in December and sometimes even earlier than that. Waiting until the last minute can leave me scrambling to come up with financial resolutions that might not be the most effective or pertinent to my financial lifestyle or needs.

But just starting early isn’t where I leave my New Year’s resolution preparation. Instead, I consider multiple resolutions that are both short and long-term in nature. Meeting a few resolutions shortly into the new year can provide the motivation to maintain interest, keep pushing to meet my longer-term resolutions throughout the rest of the year, and maybe even set more goals.

Make Resolutions Lofty, Yet Realistic
While I might use certain short-term, simpler-to-meet type resolutions to push myself to attain various goals during the year, I don’t make the majority of my resolutions too easy to achieve. Instead, I like to set certain lofty, yet realistic resolutions to push myself.

What’s the point of setting goals, if they don’t push me to achieve?

Therefore, I utilize a combination of easily met goals, paired with loftier financial expectations to drive me in meeting a tiered goal structure. For example, cutting expenses a little each month helps drive me toward an overall 10 percent expense reduction goal year-over-year, or increasing productivity by an extra 5 percent each week can help me achieve a goal of producing an overall increase in profits for the year of 20 percent.

Make Resolutions that are Pertinent to My Financial Life
I find that it’s important to make New Year resolutions that somehow affect my regular financial life, or if nothing else, build up toward larger resolutions. Just saying that I want to quit a job and start an independent career as a self-employed individual without doing things like investigating my career interests or forming a business plan could leave me with a resolution that’s difficult to attain on its own.

I had leaving my job as a New Year resolution once, but there were plenty of mini-resolutions that accompanied that goal. Yet, by meeting those goals, which included building a business plan, testing out my chosen profession before leaving my job, having an exit strategy, and similar items, I was able to achieve my larger, all-encompassing resolution.

Writing Resolutions Down in an Easily Visible Location
I’ve often seen this sort of rule on other New Year’s resolution related articles, but I feel it’s a good one by which to abide. Writing my resolutions down and keeping them out where they are visible and seen on a regular basis can be important to keeping them fresh in my mind.

This location doesn’t necessarily have to be on a calendar, the refrigerator, or even a sheet of paper. I tend to put my goals on my income/expense tracking spreadsheet -- something I view on a daily basis -- to help me stay on top of my financial resolutions and hopefully ensure steady progress. Just bear in mind that if these are financial goals that are not items you’d like to share with the general public, you might want to reconsider placing them in a visible place at work or some other spot where they might be seen by others.

Tuesday, December 11, 2012

New Blog: Simple Man's Money

Hi there readers!  Wanted to let you all know that I've started a new blog -- Simple Man's Money -- focused on simple saving tips, tactics, and techniques that I use -- or at least attempt to use -- to maintain a simple, low-cost lifestyle.  Feel free to pop by and take a look.  Don't forget to add yourself as a follower while there!


Monday, December 10, 2012

The Cost of Car Ownership

Thankfully, since I work from home, we’re only a one vehicle family. Add to this the fact that we keep costs relatively low by owning our vehicle outright, which means we avoid car payments and any associated interest on those payments. However, owning a vehicle outright doesn’t mean that we still don’t put plenty of money into our vehicle…mainly through the costs of maintenance as our vehicle ages. And with our vehicle now over 10 years old, those maintenance costs seem to be getting higher each and every year.

Here is a breakdown of the costs of our vehicle ownership over the past year, which can illustrate just how costly owning a car can be, even when that car is paid off.

Repairs and Maintenance
While we’re lucky enough to own our vehicle outright, this doesn’t mean that we get off without other costs as our vehicle ages. This year we’ve put over $1,400 into vehicle repairs. For some, this amount could almost equal the total they make in payments each year; and for us, it’s an indication that the time to buy a new vehicle is drawing nigh. Add another $500 for new tires just this week and we’re at about $2,000 this year for repairs and maintenance costs.

Of course it was this year that my wife got a job that required a roundtrip commute of 50 miles each day. And of course, it was this year that gas prices in the Chicagoland area easily exceeded $4 a gallon.

This meant that our gas costs -- excluding summer since she works in a school district -- averaged about $250 a month. With summer costs down to about $100 a month, we managed to average about $200 a month for the entire year, still costing us nearly $2,400.

You’d think that the insurance for our aging SUV would be fairly cheap; however, our annual policy coverage cost for our 2002 SUV is roughly $700 a year. This provides us with a $500 deductible 100/300/100 (thousand that is) limits for bodily injury and property damage, and 100/300 limits on our uninsured/underinsured coverage.

Unfortunately, due to our urban living environment, we end up having to pay for parking. The privilege of utilizing a city parking lot costs us $40 a month. In addition, we must pay $40 for an annual town sticker, pushing our total for vehicle parking related costs to $520 a year.

This means that we paid at total of about $5,500 this year for a vehicle that we own outright. It’s kind of a shocking total considering that we didn’t even have to make a single payment on it, and it’s a good example of just how costly vehicle ownership can be.

Sunday, December 2, 2012

Why Association Fees are Good for Owners Like Me

For years after I graduated college, I had a negative attitude toward condominium living. While I’ll admit that as a condo owner now, I can still see a variety of potential pitfalls and issues with the lifestyle, there are certain things that I truly enjoy. Strange as it might sound, one of those things is our monthly association fee.

Even though I’m a good saver and I could handle the upkeep of our property on my own, having a set $300 monthly fee to pay to cover items such as common insurance, water/sewer/trash fees, exterior maintenance, snow removal, and landscaping, as well as fund a condo reserve account, is great for a person like me, here’s why.

Proper Insurance Coverage
Now I’m not one to scrimp on homeowners insurance, but I’m not going to sink a ton of money into over-insuring a property. I’m more apt to get the standard coverage and be done with it. This means that should a damaging event occur to the property, we’d be covered, but not necessarily covered to the extent of certain other homeowners.

With our condo association though, I’m well covered in this area. With the combination of many individual owners throughout our condo building, we have a much higher liability limit that most of us would likely assume on our own, and this is just made a portion of our flat monthly association fee.

Preventative Maintenance and Upkeep
While in our previous, single-family home, I did pretty well at maintaining our property through a lot of do-it-yourself type projects, it’s kind of nice to have someone take care of many such aspects of home maintenance for us. It was always hard for me to take on preventative maintenance work in our previous home. I hated spending money on things if they were still working, being more of the mindset of waiting (if possible) until they broke completely to fix them.

However, such an attitude isn’t always the best one to take, and while it can save money in the near-term, it can end up costing money in the long-term. This is why it’s nice to have regular maintenance projects such as tuckpointing, drain rodding, door repairs, cleaning of public areas, landscaping, and similar items that I’m forced to pay for whether I would have done them myself or not, thus maintaining the appearance and quality of our living location without forcing me to make decisions upon what I’m going to fix, when, and how much I’m willing to pay to do so.

Repair Reserve
Even when I set money aside for a repair or a repair fund, to me, it’s still like it’s saved money and part of my asset total, so it doesn’t make it any easier when I eventually have to spend that money on repairs. This is why I really like paying our association fee. It takes that ability to choose whether or not I want to spend the money on repair work out of the equation, plus it acts as a communal pot into which we can all pay to fund larger projects down the road.

This means that when it comes time for new windows, a new roof, or similar big-ticket repairs, I won’t be left “going cheap” on the cost of the repairs and getting a lousy product in return. And since our association fee goes to fund a general reserve for such items, it makes for great peace of mind knowing that by the end of 2013, that fund is projected to be at nearly $200,000, which can go a long way in funding repair work for which I won’t have to pay any additional funds.