Failed Miserably!!
After I gave the good news with our January budget, I need to send the bad news too. With respect to the monthly goal I set here, I didn’t do a thing about it. I have been procrastinating every weekday telling myself that I would do it during the weekend. And during the weekend, I sit with my craft projects and do absolutely nothing else. I had already planned a new thing to do for February. But looks like it’s gottu wait. Or do I take both up for February? Or can I reassign the Jan work to my husband? hmmm….Thatz interesting.
Anyways, jokes apart. Today I will consolidate the list of things to sell. I mean it. Today!!
Jan Budget Updates and Feb Budget
I feel that having monthly budgets works better for us than having a yearly budget. This allows us to allocate money for things that we cannot know well ahead of time.
This is how we did with our Jan budget.
The areas where the actuals were greater than the budget were credit card debt and miscellaneous. I wanted to get our credit card debt to $2000 and hence overpaid our credit cards. It’s a good thing. In fact I think often about paying it off completely. Having a 0% interest on the card is letting me prioritize other things. The miscellaneous category is overspent by $48. I can over look this one since the total of underspent categories is greater than $48. I am extremely proud that we spent only around $100 eating out. It is about 20% of what we normally(??) spend eating out. Overall I am excited about repeating this month after month.
The most important aspect of doing this for us was that it gave us an opportunity to know where our money was going. Not that we were shopping every weekend at the mall nor were we charging our credit cards left, right and center. It’s improved our awareness of how we spend. I think this is the most important step in getting our finances in order. If you look at any personal finance books or blogs, the first recommendation that everybody makes is to ‘Make a Budget’.
We have made a few changes to the February budget. 2 new categories, Gifts and HOA have been added. Food and Miscellaneous has been split into Grocery, Misc 1(for me) and Misc 2(my husband). I plan to bring down the credit card debt by another $500. The Misc 1 and Misc 2 includes any restaurant trips that we make during the month.
Networth update is due on the 10th of Feb. Check back to see how our networth has improved.
Index Fund Advantages
Index Funds are capable of performing better than an actively managed fund because
1) Index Fund managers trade less than actively managed funds. At the end of a year, actively managed funds retain only about 15%(data from http://www.fool.com) of the shares that they had during the start of the year. The cost of these transactions makes the return smaller by increasing the expense ratio of the fund.
2) Also in order to ‘time the market’, a percentage of the funds portfolio is held as cash. This brings down the total return on the portfolio.
S&P 500 Index – Average 10 year Return
After about a month and a half into writing this blog and reading about 100+ personal finance blogs everyday, I have a few basic ideas that I believe about investing.
1) Have a budget and spend less than you make – We created a budget this month and we seem to be doing pretty good. I will be providing our budget update end of this month.
2) Have an emergency fund before getting into investing – We have an emergency fund. It is not as big as what we want it to be. But it is a fairly decent amount.
3) Contribute to 401(k) – It is setup and is going to happen automatically every month. We can have a tick mark in this one too.
4) Reduce debt – With a mortgage and auto loans looming in our networth calculation, it is a process that is going to take time. We are committed to get rid of all our bad debt.
5) Invest in index funds - We have started our journey of learning how index funds work. My first experiment in this regard was to find how an index has changed over different 10 year periods.
The S&P500 % change for each of the years from 1989 to 2007 is as below:
(data from http://www.econstats.com/eqty/eqea_mi_1.htm)
For various 10 year periods, the average % change are as below:
Also for the entire period of 1989 – 2007, the average % change is 10.39%.
Just by looking at the data above, it looks as though the trend is going down. But if it is looked at in detail, the worst years for this index was 2000, 2001 and 2002 when the percentage change was -10.14, -13.04 and -23.37. All but one(exception of 1998-2007) of the 10 year periods that had these brutal years included in their calculations had an average return of > 8%. The 10 year periods that had one or two of these brutal years (periods 1992-2001 and 1991-2000) and none of the brutal years (periods 1989-1998 and 1990-1999) had an average return of > 10%.
The conclusion that I could reach from the above is that index funds are a sure fit for our portfolio. Though it might not have been the greatest in the one 10 year period of 1998-2007 compared to the current high yield savings interest rate(assumption of 4%), it definitely has the best performance with low expense ratios and low risk.
Economic Stimulus Package
I think the money should be given to household item manufacturers to reduce prices on their items(the total discount should be equal or more than the money given to them). This would make us all go and load up on major household items at a discount. Spend and save!!!
What do you think would go wrong with this?
Should We Refinance?
It’s out and loud that the fed lowered the fed funds rate by 3/4 point. I had a suggestion from a friend asking us to consider refinancing.
We have an 2 mortgage loans – one at 5.6% and the other at 7.25%. We intend to payoff the loan with the higher interest rate in the next 2 years. Given that bankrate.com quotes a 30 year fixed rate at 5.42%, 15 year fixed rate at 4.93% should we refinance?
What do you think?
Dollar Cost Averaging
Dollar cost averaging is the method of investing in a particular stock/fund at regular intervals. It suits a buy and hold investor. This provides insulation in a volatile market.
For example, if you decide to invest $1200 in a company whose stock price is $100, instead of buying 12 stocks on a single day, you spread your investment over a predetermined period of time, say 12 months. Each month you would buy that company stocks worth $100. Popular opinion is that irrespective of how the market moves, the investor should invest the alloted money in the company. This might not be suitable in all situations.
An illustration of how dollar cost averaging could provide insulation in a downward trend.
At the end of the 1 year period, if the investor used dollar cost averaging, the value of the 17.6 stocks is about $792. If he did not use dollar cost averaging, the value of the 12 stocks would only be $540. Also in order to break even, i.e., the total value of the equity to be $1200, the stock value has to increase to $68.19 which is about 51.5% growth with dollar cost averaging. Without dollar cost averaging, the stock value has to rise back to $100 which is a 122.22% growth.
If the value of the stock was rising instead of falling…
At the end of the 1 year period, if the investor used dollar cost averaging, the value of the 9.6 stocks would be $1486. If he did not use dollar cost averaging, the value of the 12 stocks would be $1860. This is a situation in which investing using dollar cost averaging does not provide as much profit as one without dollar cost averaging.
But this is a technique to be used when the market is volatile, i.e., the investor does not know which direction the market is going to go or when the stock price is wavering up and down too much. Personally, I would use dollar cost averaging since I am just a beginner. And this method would help me to start slow and grow without losing track of my investing goals.
Encounters with Bank of America
I opened a new checking account with Bank of America as soon as I started working which was sometime mid of 2007. I assumed that my employer was going to do direct deposits of my salary. So I went with a MyAccess Checking which is free if I used it for direct deposits.
3 months went by and everything was fine. End of my 4th month I saw an account fee being charged to my account. When I called up Bank of America they told me that my employer was not doing the ‘direct deposit’. Instead he was doing counter deposits. And that was the reason I was being charged. So I went ahead and changed the account type to Standard Checking which is free if I maintained a minimum balance of $1000 in my account.
On the day before that particular day, my account balance went below $1000 because of the above mentioned account fee. End of that statement period, I was again charged an account fee because of this. When I called again and explained to them about the changes to my account, they refund the deposit. Again this charge had gotten me below $1000. So they told me that I will have to call again once it is charged next month to get the refund. I decided that I was going to leave $1010 in my account to make sure I don’t incur this charge again.
Yesterday was my pay day. I ensured that my salary was deposited and then made a transactions to pay my credit card. When I looked at the account activity today, it was missing the deposited check but the credit card transaction was charged. So this again brought me back to below the minimum balance requirements. Apparently the bank decided to process the check today. I don’t understand how they could show it in yesterday’s activity but then decide to remove the activity.
When I called the bank, they suggested that I talk to my employer to get my salary as a direct deposit. Are you kidding me? My employer would change it just for me? Do they live in the same world as we do? Then I explained to them as to how many times I have called and that I had a mortgage with them. I told them that with all the accounts I have with their bank, the least they could do is give me a free checking account. And I got it.
When we opened the mortgage account with Bank of America, they told us that my account cannot be upgraded to premium unless I maintain a balance of $10,000. I don’t know when they took this rule away. Probably just when I showed them I was disappointed. Along with this free checking account, they also offered me another free checking account, a free MMA account and a free safe deposit box. Haa..Haa..What was I doing all along? I should have done this long back.
The other joke is that she offered me a MMA account with 0.35% interest rate and was claiming that this is way higher than their savings account rate of 0.25%. All I could do was smile. I have an online savings account for an interest rate of 4.5% APY. It felt so good to feel that I wasn’t wasting my money in a Bank of America savings or MMA account.
After I was done with this phone call, I could only think of “The Worst That Can Happen Is They Say No” post by Paid Twice. Crying baby gets the milk.
How to Use a Credit Card?
I have always wondered if I should
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Use a credit card for all the purchases and pay off the balance each cycle, or
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Never use it and have full credit available all the time
Which one improves my credit score?
