Debt and Savings Update 2007 #3 - 12/31/2007

This is my last financial "snapshot" of 2007.

For me, 2007 is the year I finally got my act together and started my financial makeover. After years of carrying credit card and other consumer debt, I am tired of living paycheck to paycheck, floating through on credit cards, and paying out a full month's worth of expenses annually in finance charges alone.

I am looking forward to 2008, a year to continue my progress towards a brighter picture of personal finance - turn the occasional crisis into a mere inconvenience with emergency savings, lay a better framework for the years to come through investing, and most importantly, reduce the consumer debt so we can stop throwing our money away on interest payments.

So, here is the our Debt and Savings Update for 12/31/2007:

Savings - $890.53

Goal Savings (ING) - $190.53
Short-Term Emergency (Key) - $200.00 (Target: $500.00)
Short-Term Emergency (USAA) - $500.00
Long-Term Emergency (UFB) - $0

The Short-Term Emergency accounts are linked to each of our checking accounts and are there to help in a pinch if we fall short between paychecks. The challenge with these accounts will be their accessibility and the temptation to use them for impulse purchases. The target for the short-term emergency accounts is $500 each, enough to cover most of the little emergencies without putting too much money in a low-yield account.

The Long-Term Emergency account is my priority for the beginning of 2008. The initial goal for the account is $1,000, to cover any minor unexpected expenses, with the ultimate goal being 3-6 months of living expenses. I just opened an account at UFB with 5.10% APY, and plan to start automatic contributions with my next paycheck.

Investments - $2,195.12

Edward Jones - $1,870.12
Prosper - $175.00*
Lending Club - $150.00*

The EJ account will eventually be our house downpayment, and is growing slowly but surely. I opened the two P2P accounts more out of curiosity and boredom, but mathematically the returns seem to be worth the increased risk. I want to see how these first few loans work out. I am going to report the total value of the account, as remaining loan principle plus current account balance, for lack of any better idea how to report the value of the investment.

Debt - $43,545.67

Universal - $8,250.00 (1.99%)
Capital One - $0.00 (15.4%)
Citi - $2,970.00 (10.24%)
USAA - $10,231.07 (11.65%)
Student Loan - $4,424.39 (6.97%)
Toyota Loan - $15,622.64 (7.4%)
Medical Loan - $192.44 (0%)
Medical Debt - $1,855.13 (0%)

I made substantial progress on the medical loan, thanks to my christmas bonus and some other gifts. I will have the full medical loan paid off on February 1. The USAA Credit Card should be the next debt target, but I am contemplating hitting Citi first, since the interest rates are so close and the Citi balance is so much lower - it will be a psychological boost to pay the balance in full, and I think I can do it in a couple of months.

Total Net Worth - $40,460.02 (-)

Comparison:
12/15/2007: $44,616.04 (-)
12/3/2007: $46,230.24 (-)

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Changing the way that I calculate my Net Worth

Until now, I have been reporting my Net Worth by taking the sum of the checking and savings account balances and subtracting all of the debt:

My Checking
Her Checking
Billpay Checking
ING Savings
Investments
Credit Cards
Medical Debt

I was not including the auto loan, since the value of the car more or less negates it. However, in looking at the auto loan this way, I realize that I've been tricking myself into thinking I have less debt than I do.

In addition, I have been including the Checking balances, and usually recalculating Net Worth early in the pay cycle when our checking balances are up, further inflating the Net Worth calculation.

To provide a figure that is more valuable to me as a reflection of our current financial situation, I will be using the following values to calculate Net Worth:

Savings - $670.94:
Short-Term Savings (USAA) - $400.41
Short-Term Savings (Key) - $100.00
Goal Savings (ING) - $170.53
Emergency Fund (ING) - $0.00

Investments - $1804.34:
Edward Jones - $1654.34
Prosper - $150.00

Debt - $47,092.32:
Universal - $8,250.00 (1.99%)
Capital One - $0.00 (15.4%)
Citi - $2970.00 (10.24%)
USAA - $10,300.00 (11.65%)
Student Loan - $4,462.21 (6.97%)
Toyota Loan - $15,622.64 (7.4%)
Medical Loan - $3,361.34 (0%)
Medical Debt - $1,855.13 (0%)

Total Net Worth - $44,616.04 (-)

This is the calculation for Net Worth that I will report in my Debt and Savings Updates. The NetWorthIQ value will still include all assetts, i.e. checking and auto value. However, I think by excluding those when I look at the numbers, it will give me a far more accurate idea of our progress.

Using these new values, here are the Net Worth recalculations for the previous Debt and Savings Updates:

Debt and Savings Update #2 - 12/14/2007 - $44,616.04 (-)
Debt and Savings Update #1 - 12/3/2007 - $46,230.24 (-)

Debt and Savings Update 2007 #2

Debt and Savings Update 2007 #2 - 12/14/2007

Checking - $1,483.31

Savings - $670.94

• Short-Term Savings (USAA) - $400.41 - I am within $100 of fully funding my short term savings account at USAA. The goal for this account is $500, to use as a personal "line of credit" in the event of unexpected expenses to float until the next paycheck.
• Short-Term Savings (Key) - $100 - I just opened this account today and plan to use it just as I use the USAA Savings account, as a short-term "credit" line to cover unexpected expenses until the next paycheck.
• Goal Oriented Savings (ING) - $170.53 - The first of my biweekly $20 contributions went through today. Still no specific goals for this account, though I'd like to step up the contributions for the account and use this for our vacation this year.
• Long-Term Savings (ING) - $0 - I still haven't started the emergency fund account yet, but this is going to be a priority for 2008.

Investments - $1,826.69

• Primary Investments (Edward Jones) - $1,676.69 - I started $50 monthly contributions in November and will make the second monthly contribution on the 20th. I am also sending $150 on Monday, to bring the cash balance in the account to $250, the minimum to jumpstart my new fund. Progressing towards the downpayment for the house.
• Prosper - I moved $150 to Prosper, the peer-to-peer lending service. I have my concerns about investing in personal loans for two reasons - the risk of default is small but nevertheless present, and Prosper does not currently offer any means of selling loans if I need cash in a hurry. However, the returns are promising and the default rate is only 3%.

Credit Cards - $21,520.00

• Universal - $8,250.00 (1.99%) - Paid $125.22 today
• Capital One - $0 !!!!!!!!!!!!!! Paid $577.67 today
• Citi - $2,970.00 (10.24%) - Paid $56.24 today
• USAA - $10,300 (11.65%) - This is the next debt to attack.

Other Debt - $9.948.68

• Student Loan - $4,462.21 (6.97%)
• Medical Debt - $5,486.47 (0%)

Net Worth - $27,629.07 (-)

Comparison:

12/3/07 - $27,994.99 (-)

10/1/07 - $30,175.92 (-)

Until Next Time,

Jonathan

Debt and Savings Update 2007 #1

I am trying to decide what format is best for providing financial updates. Between my wife and I, we have three checking accounts, two savings accounts, an investment account, four credit cards, one student loan, one healthcare loan, one miscellaneous debt account, and one car loan. To post the entire list every couple of weeks would take a great deal of time and, frankly, nobody really cares about the specifics.

I thought about posting every detail about our recurring monthly expenses, but instead I will only post information about those if there is a change from the norm. As for balances, I will only post the balances that have changed.

So, here is Debt and Savings Update 2007 #1 - 12/3/2007

Checking - $2,120.99

My Checking (USAA) - $87.45 - Usually right after pay day I have about $100-150 remaining for two weeks worth of personal expenses. I drove to Mass. this past weekend for military training, and with the price of gas it hit hard. I need to drive to CT this coming weekend for more training, and may have to dip into the short-term savings to pay for the gas. I will pick up a couple extra days of pay for the training, so it will not be hard to refund the savings account.

Her Checking (KeyBank) - $89.99 - Again, right after pay day Jen should have $100-200 remaining for the two weeks. However, her friend had a baby shower over the weekend that Jen contributed to both the planning and financing of, which took its toll on the balance. She also bought cat food over the weekend, which actually comes out of the grocery budget, so I'll end up transferring that money back to her checking account once we're done with the grocery shopping. If she is careful with the next two weeks, though, she should be able to make it through.

Billpay Checking (USAA) - $1,943.55 - This is right about where it should be. After all of the scheduled payments, there is about $47 extra in the account. Once I am certain that money is clear, it will go towards the credit cards.

Savings - $450.94

Short Term Savings (USAA) - $300.41 - I moved $50 from the last paycheck into the Short Term Savings account, the low yield account destined to bail us out when we underestimate our expenses between paychecks. The goal is to reach $500, which should be right after the first of the year.

Goal Oriented Savings (ING) - $150.53 - The high yield account will start its automatic funding on 12/14, at $20 per paycheck. Any extra money after expenses will be split between debt snowflakes and goal oriented savings. We still don't have any goals established for this money, but I'm leaning towards a few days of R&R this spring.

Investments - $1,770.12

I have had one investment account, we'll call it "Primary," since my grandmother started it as my graduation present. She continues to add to it for birthdays and gifts for other occasions -- probably the best gift anyone has given me. Starting in November, $50 each month will automatically transfer, to start to build the account so that, one day, it will fund the downpayment on a house. I haven't done the math yet, but $50 per month over five years is $3000 invested, and the fund's 5-year average return is 15.33%. It won't be the entire downpayment, unless I can up the $50/month contribution substantially, but it should take care of some of it.

I recently opened a second investment account at Sharebuilder, and I was planning on using it to diversify my investments a little. There is $100 sitting in their money market account waiting to be invested, but I've been second guessing that move. I think it would make more sense just to send the money from Sharebuilder to the other investment account. Still working on this one.

Credit Cards - $22,297.03

Broken down, it is:
Universal - $8,360.00 @ 1.99% - Paid $136.52 today.
Capital One - $435.00 @ 15.40%
CitiSimplicity - $3,000.00 @ 10.24% - Paid $185.98 today.
USAA - $10,502.03 @ 11.65%

This week, $202.03 is posting to the USAA account, bringing it down to $10,300.00. The balance on the cards continues to drop, though not as fast as I would like it to.

Other Debt - $10,098.68

Student Loan - $4,462.21 (6.97%) - Making the standard payments. ($70.00)

Medical Debt - $5,636.47 (0%) - This is actually a composite of several major accounts, one healthcare finance account and a collection of what started as six medical bills that we are making payments on.

The healthcare finance account was going to pay for Jen to get braces, before she decided that she really didn't need/want them. The balance remains for now, but the orthodontist is supposed to be refunding the money to the creditor soon.

We started with six medical bills last year, totalling $3,995.00, and we've knocked it down to three bills remaining for $2,005.13. We are scheduled to pay $150 monthly, but I usually try to put in a little extra.

12/3/2007 Net Worth - $27,994.99 (-)

Comparison:
10/2007 Net Worth - $30,175.92 (-)


That's my update for now - I'm still working on the format and the "right" amount of information to put with each update.

Until next time,
Jonathan

The Plan: Savings

Overview

I've mentioned in previous posts that I am still developing a plan, working out the budget, finding the right balance between repaying debt, building savings, and still having enough left over for here-and-now spending. I have spent a good deal of time in the past year evaluating my own behaviors, and I know that without some intervention, any money left over after paying the bills will go to here-and-now spending at the expense of any savings whatsoever.

I never realized the impact our lack of savings had until recently when I started looking back on the last 12 months of Quicken records. I found a pattern that repeats itself many times - paycheck comes in, bills go out, and I'm getting good at sending most of the balance towards the debt and holding back a small amount for us. What keeps happening, though, as the next paycheck draws nearer, something comes up that exceeds my cash on hand and we put it on the credit card with the good intent to "pay it off as soon as we get paid." The problem, though, is that my next credit card payment goes mostly towards the recent expense and does nothing for reducing the overall debt.

To counteract this pattern, build a larger emergency fund, and lay the framework for goal-oriented savings fund, I developed the first version of our Savings Plan. I established four basic savings categories:

- Short-term "float to the next paycheck" funds, to cover the small unexpected expenses that used to crowd my credit card statement.

- Short-term and Long-term goal funds, to save for future big-ticket items such as vacations, furniture, or "other." A not so short-term goal is the downpayment for a house, also in this category.

- Long-term Emergency Fund, should the worst happen, to cover three to six months of living expenses in the event of catastrophe.

- Financial Future fund, i.e. Retirement.

Short-term "Float to the next Paycheck" Funds

Over the last year, our overall spending has been less than our overall income, and our overall debt balance has gone down. About once a month, though, we're charging expenses that we shouldn't be, and this fund is designed to limit that.

I have a low-yield savings account with the same bank as my checking account, USAA, which offers the convenience of same-day transfers between them. I want to minimally fund this account to cover those unexpected expenses that I know I can cover out of the next paycheck, while not leaving too much cash at a low interest rate. I also know if the money is there than so is the temptation to spend it, so I don't want too much on hand.

Short Term Funds - Goal: $500.00
Short Term Funds - Current: $247.01
Short Term Funds - Method: Initial funding will be $50 per paycheck until the target balance is reached. After that, funding will be the maximum "residual" from each paycheck as needed to maintain the target balance.

Short-term and Long-term Goal Funds

The sad truth about our financial situation, to this point, is our tendency to be impulse oriented on big-ticket items are concerned. We decide on a big purchase, research the best price, and buy it on credit. Although we have always stayed within our means, technically, on the payments - i.e. we have never missed a payment in the three years we've been handling our finances together, it doesn't do much to research the best price only to pay more in interest.

For the Short and Long Term Goal Savings, I setup the Automatic Savings feature at ING Direct to transfer money from the Billpay account biweekly. That transfer is small right now, since debt-repayment is our biggest savings priority. Different portions of those deposits will fall into different sub-categories, depending on our savings priorities.

I also have an investment account that is automatically funded every month for the long-term goal funds. It tends to have a higher return rate over the long-term but it fluctuates more. Our plan to purchase a house is dependent upon eliminating our consumer debt, which will likely take at least five years. Once the consumer debt is eliminated, we can evaluate the state of the funds and, if necessary, wait for a shift in the returns. Although there is still some risk that the return will take a turn for the worse, the flexibility in timing will hopefully counter that.

Short-term and Long-term Goal Funds - Goal: TBD
Short-term and Long-term Goal Funds - Current (ING): $150.02
Short-term and Long-term Goal Funds - Current (Inv.): $1,659.60
Short-term and Long-term Goal Funds - Method: ING is setup to take $20 biweekly. The investment account is setup to take $50 per month. I make seven payments every month towards our debt, and as each debt is paid, the payments will be increased on the remaining debts. However, I think after every other payment is eliminated, I will split the balance of that payment between goal savings and the remaining payment.

Long-term Emergency Fund

I don't usually like to think about worst-case scenarios, but should the worst happen, we need to be prepared. Most personal finance authors seem to be in agreement that having three to six months of living expenses in the emergency fund is reasonable. Since predicting catastrophe is quite difficult, the risk that our investments will dive right before catastrophe strikes is a great concern, so ING Direct wins this one. A second ING account will eventually be the Emergency Fund.

As far as the rate of building the emergency fund, I've decided to hold off on building this rapidly for now, and focus the money instead on reducing our living expenses through debt-reduction, since debt payments are our biggest expense right now. There are two reasons behind this decision: First, we work in an industry that is always short-staffed, and should either of us lose our current employment, I already know of several employers where we have a standing offer. Second, in the event of accident or illness, our disability insurance will cover the same three to six months of income that the fund will. Eventually, the fund will take the place of the accident and illness disability, thus eliminating the monthly premiums, but for now the interest on the debts exceeds the premium amount, so our greatest payoff is reducing the debt.

Long-term Emergency Fund - Goal: $10,000.00
Long-term Emergency Fund - Current: $0.00
Long-term Emergency Fund - Method: Eventually, automatic transfers will fund the account biweekly, but not until a few of the debt payments are eliminated. The plan now is after three debt payments are eliminated, a portion of those payments will be directed here.

Financial Future Fund

Also known as retirement, the finanical future fund is in its earliest stages of development. I submitted the paperwork to enroll in my company's 401(k) plan this month, so starting January 1 it starts to grow. My company matches 50% of my contributions, up to a total employer contribution of $1000, so for the first year I am going to maximize their contribution.

Financial Future Fund - Goal: Maximize
Financial Future Fund - Current: $0.00
Financial Future Fund - Method: Automatic pre-tax contributions at $77.00 biweekly, with the employer match at 50%, for a total of $115.46 biweekly or $3002.00 annually. As with the rest of the savings plan, I want to push this contribution up as the debt payments go down.

The Principles of the Savings Plan

1) Save the money before we miss the money - By transferring money to savings before it even figures into the account balances, we are less likely even to realize that the money is gone.

2) Redistribute the money before we miss the money - As debts are paid off, that payment will be immediately added to the remaining debt payments, and periodically added to the savings transfers, and never added to our here-and-now spending budget.

3) Frequently evaluate the balance of the plan - Finding the right balance between debt payments, savings, and here-and how spending will take a while. For the first couple of months, we will most likely be reviewing our contributions biweekly to make sure we are still moving towards our goals.

Until next time,
Jonathan