Highlights

Emergency Fund

I gifted $5,000 to family, which means that my emergency fund is down to one month again. I have to work on getting it back up to three (and then six months). This will happen sometime in 2010, however, because the discretionary funds in my paycheck are currently going towards my IRA account.

ESPP

The ESPP withdrawal was planned. $3,000 of it was transferred to K529 plan, $1,000 got put in my emergency fund, and the rest is earmarked for spending.

401K

I did some tinkering around with asset allocation. A couple of hundred dollars shorter, I’m meekly going back to my original allocation. I’m so pissed off with my plan.

Roth IRA

Most of the increase due to contributions. I’m no longer contributing to Roth IRA. Rather, I’m going to make the remainder of contributions to my Traditional IRA. More on this later.

Traditional IRA

I started contributing to my Traditional IRA again. Given my tax bracket, it doesn’t make sense to contribute to a Roth IRA.

K529

I contributed $3,000, and I also transferred around $500 from another plan.

I529

The money is not needed for this person anymore.

Daily Use Card

This month definitely marked out-of-control spending. I went impulse-shopping one day and I bought more than I had ever purchased in my entire life on non-essential items ($70). This is a weird month and hopefully I can return to normal in October. Fortunately, $70 of this will be reimbursed to me in a couple of weeks. (Before I paid it off, the credit card had a balance of over $400.)

Taxes

I did some quick calculations and realized that I had to adjust my federal withholding to pay the right amount of taxes (more). :-( This means that my check has gone down a lot, which will essentially manifest itself in contributions to the Traditional IRA (since everything else is on auto-pilot and can’t be changed). I might end up having to make an eventual one-time payment from my emergency fund to max it out.

Year End Goal

To have a net worth of $106,000 by the end of the year, I’ll have to save $6,325 for the next 3 months. Since it’s highly unlikely that I’ll be able to save that much over, I think I might not be able to meet my goal unless the markets do really well. I’ll be happy to come close, though. :-)

Net Worth Progress

A down-month, as expected. I had one of these before… ;-)

Automatic enrollment in retirement plans. Research shows that people are more likely to participate in retirement savings if they are auto-enrolled. The administration is planning on clearing technical and bureaucratic hurdles to make it easier for small- and medium-sized businesses to auto-enroll their employees. Score one for President Obama.

Tax refund in the form of savings bonds. This change will create a checkbox in tax return forms that will allow people to receive their tax refunds in the form of savings bonds, which will ostensibly make it harder for them to spend it right away. However, I’m not sure savings bonds are the best way of saving. If the government were looking at forced savings, it would be better to have a checkbox that will let them put into a Traditional or Roth IRA account or even a high-interest savings account or money market fund account.

Unused vacation and sick time to retirement accounts. This change is to help employees transfer their unused vacation and sick time pay into retirement savings instead of getting a check for it from their employer when they leave the job. The contribution limit remains the same, however. This is also a good idea, IMHO, but I can’t see it being used by many people, unless it’s done automatically and people have to opt out.

As all the changes are technical in nature, they do not require approval by the Congress. Also, none of the changes will force employers or employees into changing their spending habit or saving habit; they simply encourage them down one path.

What do you think?

There isn’t much to say, other than that my spending in groceries doesn’t bother me. It came out of my discretionary spending and was spent on actual groceries, anyway (instead of junk food). I don’t know how I ended up with just $28.19 for discretionary spending for the last 2 weeks; I think I screwed up the calculations somewhere, because $53 – ($5 + $6.57) = $41.43.

September Budget

Not very interesting here, either. As I mentioned previously, I’m supposed to have $41.43 from last month’s unspent discretionary fund to roll over into this month, but my checking account somehow doesn’t have it. Is it because I prepayed some of my August bills last month instead of waiting until September? Could be. I’m going to wait until October to revisit my play fund. For now, I’m going to give myself a nominal amount of $20 per month or $5 per week. As you can see from the budget, there isn’t much variability for September, either. Most of them are bills that have to be paid (so I took the liberty to fill in the actual amounts, as well). What remains is how much I spend on gas and junk.

The program is set to expire on December 15, 2009, so be sure to take advantage of it before then.

Highlights

1. Most of this month’s unusual activity is related to the emergency fund. I dipped into it to pay off the 0% APR card. After looking at its bloody tatters for several days, I caved in and sold most of my stocks to replenish it. I also put in an additional $900 into it. I also had a couple of hundred dollars sitting in a separate account earmarked for some fun stuff, but I closed the account and transferred the money to the emergency fund. All of which brings it up to just slightly less than three months of emergencies.

2. A good chunk of 401K and most of Roth IRA increase comes from contributions. It will be a good meaningless validation to cross the $50,000 mark, hopefully sometime late this year (or early next year).

3. As I mentioned a couple of times before, I transferred my Traditional IRA from a crappy high-fee, front-loaded, and back-loaded mutual fund account to Vanguard. My money will no longer be used to make other people rich.

4. Home equity went up as usual. I paid the regular amount plus a nominal $2.00 extra. Wish I could pay more. Sigh.

5. I no longer have any student loans! Wahoo! OK. They aren’t really student loans. More like credit card debt. I paid for my MBA mostly with cash (wasn’t that fun), but I ended up having to take the 0% APR card mid-last year to pay for a couple of classes so that I didn’t bankrupt my emergency fund yet again. At that time, I thought it was a good idea, but having lived with ongoing credit card debt for a year (even if it’s at 0%), I’m more convinced than ever about the evils of debt. Never again.

6. I did unusually well with discretionary spending in August, and my daily use credit card balance reflects it. :-)

Year End Goal

Modified year end net worth goal is $106,000. I’ll have to save $3,914 a month for the next four months to meet it. According to my calculations, I’ll be able to reach the goal without any help from the markets (but not if the market goes south). We’ll see.

Net Worth Progress

Net worth moved in the right direction and did better than one would expect from a linear progression. :-)

I doubt I’ll spend any of the money on day-to-day expenses this week. Since it’s also the last week of the month, it means that I don’t have to worry about keeping the money for any big unexpected expenses for the next week. What should I do with the money? Should I roll the amount over to the next week? Should I put into savings? Should I force myself to spend it?

Snow Leopard

I can’t help but notice that I have almost enough to pay for Snow Leopard, Apple’s latest Mac operating system. Unlike all other upgrades, it’s ridiculously cheap (but that’s because it does not have any UI changes). Should I upgrade to it? It’s supposed to be much faster and people are saying that it’s a no-brainer upgrade.

After saving for four weeks, I don’t feel like Snow Leopard is a good enough purchase to hand over $29.

Roll it over to next month

This option sounds good to me. I just don’t know if I’ll be able to spend it on anything I want. Let’s look four months into the future. Assuming I “save” the same amount every month, I will have around $100. If I can’t get myself to spend $29, what’s the chance that I’ll spend $100? On the other hand, there are some nice things I can buy for $100. Instead of “wasting” $29 on whatever, I could wait until I have enough to buy something nicer.

Decisions, decisions…

According to Wikipedia, it is defined as:

Guilty pleasure, something one enjoys despite feeling guilt for it

So let me ask you today. What is your guilty pleasure?

My guilty pleasure is easily eating out. I love eating out. If I had millions of dollars, I would eat out every day, maybe even three times a day. Yes, I know it’s not as healthy as eating at home, so maybe I won’t eat out three times a day. Maybe just once a day and maybe just 5 times a week. But I have to admit that money (rather than health) is the reason I’ve stopped eating out; if money were no problem, I don’t think the health concerns are enough to make me stop eating out.

When confronted with the question, I thought going out to movies would also be a guilty pleasure, but then I realized that while it was a pleasure and obviously cost money, I did not feel any guilt over it. Unless I spend more than required on tickets and/or at the concession stand.

So there it is. What about you?

The IRS will announce 2010 contribution limits for 401(k) plans in October, based on a formula tied to the inflation rate in the third quarter vs. the year-ago quarter. For 2009, most workers can contribute up to $16,500 to their 401(k) plans, plus an additional $5,500 if they’re 50 or older.

Unless inflation picks up in August and September, the IRS could be forced to reduce the cutoff to $16,000 in 2010, according to an analysis by Mercer, a human resources consultant. The threshold for catch-up contributions could be reduced to $5,000. This would mark the first time the IRS has reduced 401(k) contribution limits.

Am I worried? Not really. In the grand scheme of things, putting only $16,000 into 401K one year instead of $16,500 won’t make or break anything for me. And remember, you were only able to put in $15,500 last year. Will Congress pass a law between now and October to give IRS the option of not lowering the limit during deflationary periods? Doubtful. Lowering the limit only affects people who are maxing their 401K accounts. Only 3 to 5 percent of the people do that, which isn’t a lot. I’m sure our government has a lot more “important” things to do.

“I make only $30,000 a year and feed 4 kids. There’s no way I can save for retirement. I’m just barely making ends meet as is.” You can’t save $24 a year ($1 a paycheck)? That will leave you with almost $3,000 in 30 years. Just $120 a year ($10 a month) will leave you with $15,000. If you can manage to save just $20 a month, you’ll have almost $30,000 in your salary. You are telling me that you can’t spare that little? (And remember, if you’re making so little, the gov’t will pay you money to save for retirement.)

2. I make a lot (and I don’t need to save)

“I make $300,000 a year, so there’s always time for saving. I can save in one year what people usually save in 10, so let me enjoy my life now.” If you aren’t saving now, what’s the chance that you will suddenly start saving later?

3. I’m too young (it’s too early)

“I’m 15. I don’t want to tie up my money for 45 years.” I want to introduce you to the concept of compound interest. If you put $1,000 in today and don’t make any more contributions for 45 years, at an average 8% interest, you’ll have almost $32,000 for when you retire ($9,000 in today’s dollars).

4. I’m too old (it’s too late)

“I’m 50. It’s too late to save for retirement.” It’s never too late to save for retirement. If you can save $16,500 into your 401K this year, you’ll have $35,600 for retirement. That’s $35K that you didn’t have last year. Saving $16,500 for 10 years will leave you with $300,000.

5. I have to save for something else (usually kids’ college)

“I’ll save for retirement, but first I have to save for my children’s college expenses.” No, you don’t.

6. Money is there to be enjoyed

“I work hard. I deserve to spend the money.” No: you work hard, you deserve to not worry about how you will leave for 30+ years on nothing.

7. I could die tomorrow

And you could live until 110.

8. It’s too complicated

“Saving for retirement…I don’t really understand it. It’s too complicated.” No, it isn’t. Even if it is, your retirement depends on it. Would you rather spend 10 hours now figuring out what it is you have to do or spend 30 years wishing you had saved more?

9. It takes too much will power

“Saving every month for retirement for 30 years takes too much will power.” No, it doesn’t. All you need is enough will-power to setup an automatic deduction from your paycheck or, in the unlikely case that your employer doesn’t this option, your checking account to go to a 401K or Roth IRA plan. After that, it’s all automatic.

10. Someone else will take care of it

“My spouse/parents/siblings/government will take care of it.” Are they thinking the same thing? Do you really want to depend on government handouts? Do you really think you’ll have the kind of lifestyle you want on social security?

Bonus: I’ll win the lottery

The chances that you will win the lottery are so small, you’re more likely to get abducted by aliens.

But a mortgage is the way of life, a necessary evil. What can you do, right?

Paying cash for house?

Everyone (even Dave Ramsey) agrees that you can’t buy a house for cash, but is it really true? In a market like San Francisco, maybe. But in reasonably-priced neighborhoods, good houses might start at $160,000. To have $160,000, you’ll only need to save $16K a year for 10 years. I suppose I should also account for inflation: at 3%, the $160,000 turns into $215,000, so you’ll have to save $21,500 a year, not $16,500.

Is saving $21,500 a year really impossible?

Especially during your twenties?

It might be difficult, especially if you are not making that much money, but is it impossible? I don’t think so.

But maybe it is impossible for someone with your income and your expenses. Maybe you can only afford to save $12,000 for a downpayment. In which case, you still end up having $120,000 in 10 years, which is more than enough to buy a nice condo or, in some locations, even a house. It might not be a mansion with 70 bedrooms, 150 bathrooms, 20 pools, and 8 fireplaces, but it’s a house nevertheless. If you keep saving an additional $12,000 every year after purchasing the house, in another 10 years, you’ll be able to upgrade to a ($120,000 x 1.03^10 x .9 (for closing costs)) + $120,000 ~ $265,000 house. In another 10 years, you’ll be able to upgrade to a $440,500 house. In another 10 years, you will be able to pay cash for a house that’s worth $650,000. The more you are able to save a year, bigger the house you are able to purchase. (You, of course, shouldn’t be sacrificing saving for your retirement so you can buy McMansions; that goes without saying.)

According to the National Association of Realtors, people tend to move homes every seven years. By staying at a home for three years more, you are able to consistently upgrade your home every ten years. But at no point in your life do you own anybody a single dime. If you suddenly get laid off, you don’t have to worry about how you’ll pay the mortgage. (You will still need an emergency fund but for the typically far smaller bills like utility, property taxes, HOA dues, etc.) You need to move? You don’t have to worry about selling your house. (Yes, you might eventually want to sell your house so you can buy another house where you’re living, but you don’t have to sell it right now because you can’t afford to pay this mortgage along with rent/mortgage where you’re living.)

If everybody paid for houses with cash

Banks might hate us, but there would be fewer housing bubbles, fewer (no?) foreclosures, fewer credit crunches, and fewer illnesses. Savings rates would explode, everyone would have an “emergency fund” of sorts, grass would be greener, sky would be bluer, and little kids would be watching pigs fly.

Dang it.

Back to reality and negative savings rates.

Conclusion

We have been indoctrinated to think that it’s impossible to buy houses for cash, but as we just saw, that’s not really the case for most people. (Yes, if you’re making $30,000 a year, it might be impossible to buy a $160,000 house for cash, but should you be taking a mortgage on it, in the first place?) Through careful planning and diligent saving, you can enjoy owning your home without also dealing with the worries that come with homeownership.