Off Topic - Budget Crisis

When we bought our place a year ago, I put together a monthly budget to make sure we could afford it on one salary, should one of us be out of work for an extended period of time. At the time it seemed doable. Now, I am extremely unhappy at work, and have been looking at our family budget from a new angle: "Can I afford to quit?"


So inspired by today's post on the Juggle Blog, and the State's finances.....I am seeking some budget advice. Before I start in, let me preface this by saying, we have really tried to find a financial advisor, but have not had any luck. Advisers tend to fall into several camps, they only deal with folks with high net worth (focus on fewer clients), they work on commission only (we don't have investments outside our 401ks/IRAs), or they don't follow up with you.


Ideally I would like to get answers to questions like, "Are we saving enough for retirement?", "Do we have a big enough cash cushion?, " "How much life insurance is really necessary?"etc.

Looking on the web, I find lots of advise, but none of it seems that realistic. Do people really have that big of a cash cushion, or that much life insurance? (given that the personal savings rate in this country is so very low).

I have attempted to go it alone, and created a large spreadsheet for retirement projections, factoring in inflation, SS earnings, contributions, and withdrawals. It all seems reasonable, however because retirement is so far off for Mr. BT and I, the projections are especially sensitive to the assumptions due to all the compounding, so the exercise becomes almost meaningless.

If I were to quit, we would no longer be able to save for retirement, and we wouldn't have much extra cash to start saving for our kids college education. On the other hand, we do have a substantial nest egg by national standards (we have been putting away the max contribution in our 401ks for several years now). Mr. BT and I used a combination of loans, work study, and scholarships to pay for our educations.

So any words of wisdom or advice? I'm really not satisfied with any of my options at this point.

Or perhaps a financial advisor to suggest. The irony in all this, to get a financial advisor, you have to have a lot of investable assets. But how do you get a lot of investable assets if you don't have a financial advisor?

Quieting the Cold Calls

I can almost sympathize with the individuals mentioned in the media who received so many pestering calls they eventually relented, and refinanced or took out equity. I have heard that when there is a NOD, owners receive a flood of calls and offers of services.

In the last week or so, we have received numerous calls fishing for loan or credit card problems. We don't have trouble with either, hence I assume they are fishing. But if they are fishing, then that means they are violating the Do Not Call registry rules, since they aren't calling related to a company we do business with.

One time I humored them and got connected to a series of people offering to help. Of course they wanted all kinds of personal information. It's hard to believe people would actually give this type of information to a cold caller, but I supposed when you are desperate, emotion tends to win out over reason.

If you resent getting telemarketing calls at 6am the way I do, you can sign up for the do not call registry here. To be fair, we disconnected our number and reconnected the same number at the new house, so it could be our number was taken off the registry.

Investment vs. Shelter

Adjusted for inflation, a home is not a very good investment, especially if you consider transaction costs and maintenance. So if you are looking for long term gains on investment, there are many other relatively safe alternatives that offer higher returns.

This is why I have never been very concerned with when the bottom of the cycle occurs. If I were looking at a home as an investment, the buy low, sell high, would be the rule to follow.

So if it's not an investment (as many were led to believe during the boom), then what exactly is it?

• As long as you don't have a neg-am loan, a home is a forced savings account. With each payment, your equity grows (in a normal market).
• If you do have equity, a home can also be a source of emergency cash in times of crisis (medical bills etc.).
• It could also be a hedge against inflation should it spiral out of control as it did several decades ago.
• And of course most importantly, buying is an alternative to renting.

Hence, I always get a chuckle out of the "now is a great time to buy," which I have heard countless times since we bought our home in Feb. This is part of an investment mindset. When I meet people who are thinking of buying a home because "now is a great time to buy," I always bring up the analogy that they aren't stocking up on gas, since it is now half off what it cost last summer. Why is a home any different?

Obession Pays

I was recently asked about why I obsessed about the housing market. In a nutshell, it makes financial sense to do the research.

People spend time on Sunday's clipping coupons to save $5 - $10 dollars at the grocery store the following week (not to mention the time it takes to find the items on sale). People drive to out of the way gas stations to save 5 cents a gallon (even at 20 gallons, that's only $1). People will go from store to store, and spend countless hours online to save $20 or so on a purchase.

In those cases, the return for the extra time invested is very very small. Not so with housing.

Given my obsession which has lasted approximately 2.5 years, assuming I spent 1.5 hours a day on housing related research during the work week, and also assuming we saved $150,000 on our purchase price (what homes our size sold for 2.5 years ago), I saved approximately $256 for ever hour of my time invested. Totally worth the time if you ask me.

Conventional wisdom encourages people to do independent research on their financial investments (like stocks and bonds). Relying on a commission based broker for all investment advise creates a conflict of interest. This same wisdom should apply to home purchases as well.

A Bountiful Backyard

Rather busy this week preparing for a conference...but I wanted to comment on something I read in the WSJ related to psychological depression trends (emphasis mine):

"They are taking cash out of the bank in preparation for a long-haul bad time. A friend in Florida told me the local bank was out of hundred-dollar bills on Wednesday because a man had come in the day before and withdrawn $90,000. Five weeks ago, when I asked a Wall Street titan what one should do to be safe in the future, he took me aback with the concreteness of his advice, and its bottom-line nature. Everyone should try to own a house, he said, no matter how big or small, but it has to have some land, on which you should learn how to grow things. He also recommended gold coins, such as American Eagles. I went to the U.S. Mint Web site the next day, but there was a six-week wait due to high demand."

I was rather surprised to read this, as it is reflective of my thinking as well. We went for a bigger lot (smaller house), which will allow us to grow fruit trees and have a garden. I figure not only is it fresh produce, that is more or less organic, but its also not shipped from Chile, and is a good hedge against supply disruptions or massive price increases. Of course this all assumes we have a green enough thumb to keep things alive, and the weather cooperates. Little did I know, the foothills are a great place to have a backyard orchard. On the problematic side, I had forgotten about the whole, you need two trees for cross-pollination to occur.....so we'll see how far we actually get with this endeavor.

Whose Guidelines?

On the internet, calculators abound for "how much house can you afford," or "rent versus buy."

But there are many many ways to do these calculations. Recently the government has come out with some guidlines, suggesting that payments of 31% of pre-tax income are manageable. But even in that case, what exactly is a "payment"? PITI (principle, interest, taxes, insurance)? Or just P&I? Other guidlines I have seen are PITI no more than 28% of take home pay.

Most of the sites with these calculator are trying to sell you something banking or financing related. They also tend to have much looser guidelines and built in assumptions, so it's tough to find a non-biased opinion about the best parameters. Some of the calculators I have seen go so far as to obscure biased assumptions, i.e. using a default tax rate of 31%.

When I compare rent verus buy, I look at PITI, minus tax deductions (interest and taxes), plus maintanence (varies by the age/condition of the house). Yesterday's WSJ article on renting versus buying suggested that only PITI is compared to rent.

So I am curious what guidelines others follow?

Can you Bank on It?

Last month we pulled our down payment out of a savings account at national bank (where we had banked online for the last 8 or so years) and put it into a regional institution. Call me paranoid, but I like the idea of having a branch office in times of turmoil.

Wondering how others feel about this national vs. regional issue when it comes to banking. Do you have a local/regional bank or credit union to recommend? Or do you feel big national banks like BofA are the way to go, since they are likely "too big to fail"? Or do you chase the best returns, wherever they may be?

I've never been one to shop banks.....I tend to be a creature of habit and convenience.

I understand the FDICs need to keep people from pulling their money out of troubled institutions, however it would be nice, to have some understandable and objective ratings as to an institution's liabilities and exposure. I used Bankrate's safe and sound ratings to check but they seemed kinda generic.

In particular, with the local/regional institutions, I worry about their commercial real estate exposure. It can't be a pretty picture. All I see around EDH is empty commercial space, with even more being built!

401-Keg Plan

A little mid-day humor. If your 401 looks like mine, you could probably use it.

_______________________________________

RETIREMENT PLAN INVESTMENT TIP
If you had purchased $1000.00 of Fannie Mae one year ago, it would now be worth $31.00.
With Freddie Mac, you would have $37.25 left of the original $1000.
With Lehman Brothers, you would have less than $5.00 left.
If you had purchased $1000.00 of AIG stock you would have $44.00 left.
If you had purchased Bear Stearns, you would have nothing left

But, if you had purchased $1000.00 worth of beer one year ago, drank all the beer, then turned in the cans for the aluminum recycling refund you would have $214.00. Based on the above, the best current investment advice is to drink heavily and recycle.

This is called the 401-Keg Plan.

Above Average Unemployment

National unemployment is now over 6% .....but I don't think the whole story is being told. In my family alone, there has been considerable unemployment and underemployment in the last year an a half. This undermines the stability of young families and makes it difficult for them to save money.

Of my step-brothers & sisters, my brother, and my husbands brothers & sister (numbers include most spouses)....

4 were laid off within the last year and a half, but have found work. One was laid off and is still looking for work, and 9 are still employed. Another ships off to Iraq in a month, he couldn't find work so he rejoined the military. The one in jail doesn't count since he's not looking for work.

Of my extended family here in Sacramento, my aunt is still out of work, but Mr. BT's cousin found a new job that is better than his last one. My uncle, is being asked to take days without pay since they don't have much work (I consider this underemployment).

Have other families been impacted this much in recent years?

Bemoaning the Budget

Since budgets are all the talk right now in Sacramento, I thought it would be a good topic for the day.

When average folks have a goal, like home ownership or early retirement, the standard advise seems to be "make a budget". To me this is a lot like the "food diary" advise for weight loss. Nice in theory, but just way to intrusive and hard to keep up for a busy family.

I do reconcile our credit cards, bank statements, etc. in Quicken every couple months. I also categorize the purchases, but there are many items that fall outside a normal budget (like loans to family, or work expenses), or ATM cash that just disappeared. I have tried on several occasions to use the budgeting functionality in Quicken, but for some reason or another, it doesn't get me what I am looking for.

This leads me to wonder, does anyone actually have a household budget and if so, do you follow it?

There are many categories, in which I am unsure about how much to budget. For instance, how much to give to charity, how much should we allocate in gifts to family and friends, how much for travel and vacations?

Both Mr. BT and I grew up in families that struggled to pay for basics like food and clothes during some periods of our lives. This environment shaped our financial habits. We don't buy on credit unless we can pay off the bills immediately. Now that our massive student loans are paid off, we have relaxed the reigns a bit and spend a bit more freely.

I have an idea how much we spend on things, but I don't know if its above average, or if we are really pinching pennies. Talking to my uncle, who's family makes considerably less than us, I feel like we really pinch pennies on things like food, auto and cable bills compared to them. But I don't know if they are over spending, or if we are underspending.

With finances a somewhat taboo subject among friends and colleagues....how do people figure this stuff out?

Deer in the Headlights

I am off the grid for a mere 5 days (our annual Yosemite trip), and I come back to find our nation's financial system teetering on the precipice.

Coming back to all the news reports, which I still haven't quite sifted though, my general mood about the future has gone from nervous trepidation, to helpless and overwhelmed angst.

Let me start by saying, we are a very average American family. We don't have an army (of accountants, financial advisers, lawyers, tax preparers etc.) at our beck an call to offer advise and expertise. We also come from working class families, so we really don't have any trusted relatives we can turn to for this type of advise.

While my gut has been telling me we were headed for rocky economic times, I have been at a loss as to what actions to take in response. The vast majority of our savings is in 401k (except our down payment). Back in January I attempted to read up on my 401k investment options to look for a safer choice going forward. But with all the disclaimers they put in, its really hard to tell what the true risk is for each fund....even the money market and cash reserves seem to have large disclaimers about no guarantee on your principle. Needless to say, I didn't get very far, and gave up. In hindsight, I would have been much better served to have found some help on this.

At this point I am a bit like a deer in the headlights. To preserve the purchasing power of our down payment, I feel we should buy a home soon, as a hedge against inflation and higher interest rates. But at the same time I don't want to purchase a depreciating asset, which is also a quick way to lose our down payment.

I have developed this nagging feeling that I need to be doing something to prepare ourselves financially and physically for hard times ahead, yet I am at a loss as to what exactly those preparations should be.

I am also starting to wonder if I would be better off in ignorant bliss. I would love to know what others have done in response (to the future prospects of our changing economy), if anything.

Whoo Hoo....Phew

Mr. BT found out today his contract has been renewed! So we have at least a 1-1.5 years of job security for him (although we had thought that the first time they got the contract).

A relatively secure job certainly makes house shopping easier.

Why do we Wait?

Why do we wait out the housing bubble? Why do some hate giving money to the government (taxes)? Why do others regularly fret over their investments? Why do we clip coupons and shop around for the best deal?

In the end, I guess it boils down to having more money to do with as we please. But what exactly does that get us?

Most Americans seem to view money as an end in itself, a symbol of status and power. So I was delighted to see a column in the WSJ that addressed this issue a little differently. What’s more, most of the benefits outlined in his column do not require vast sums of wealth. It’s all about lifestyle choices and pursuing what makes us happy. Of course, this avenue of thought caused me to reflect on my personal situation.

Since we moved back to California I have been the happiest I can remember (which to some degree, I define as the absence of stress in my life). In fact, I keep waiting for the other shoe to drop because my life’s experiences have taught me to expect tough times. We have paid off our enormous student loans (around 100k), so the only debt we have is a small car payment. Now that we are back in California, we are just a short drive away from family and friends, whom we see on a regular basis. We have also met some really nice families and made some friends (I have come to realize that the snobby attitude in EDH comes more from the people who work here, as opposed to the people who actually live here). And last, but certainly not least, I have a family and a job I love. None of these things are directly tied to our income level. In fact we took a sizable pay cut, in Mr. BT’s salary to come back to California.

All this to say, I don’t think money necessarily buy's happiness, but it does allow you spend more time on the things you enjoy (assuming you choose to do so). All the $$ we are saving by waiting out the bubble won't necessarily make us happier, but it will relieve financial stress and will likely go toward our childeren's college education.

A tragic 401k reminder from Bear Stearns ...

For years I have been listening to financial pundits on tv tell us not to invest our 401k's in the company that we work for. For all of their claimed financial savvy, apparently many Bear Stearns employees failed to heed this advice and are now likely to lose not only their jobs (it has been reported that J. P. Morgan will can 50% of the Bear Stearns employees), but have also lost virtually all, if not all, of their retirement, and for some, life savings.

I don't profess to be a financial person, but those that I listen to are adamant about diversifying retirement and savings. That means never invest in the company you work, so that if it fails, you only lose your job, not your job and life savings. It also means investing outside the sector that you work in ... After all, how good of a plan would it have been for a Bear Stearns employee to invest all of his/her 401k stock in Thornburg Mortgage (now trading at less than $2/share)? Many of the pundits recommend investing across a minimum of 5-7 other sectors.

Even knowing the advice of the pundits, I am regularly guilty of being too invested in cash equivalents (which historically pay too little), or too invested in one sector. I wish I had the self-discipline to follow the advice of the pundits!

Paul