Before you make that purchase...

Heather and I have come up with a system that has really started working to jointly control any compulsive spending and I thought I would share it. It started off with the first two questions but we have expanded it to 3 questions we ask one anothee in order to better think our purchases out. I added just some of the sub questions which have come up in my mind when thinking out the answers recently.

1) How often would you really use it?
-- Is it worth buying another item for how often it will be used?
-- Do you need it or just want it?
-- Can you borrow or try it out before committing to spending the money?
-- Is there something that you can sell or get rid of first to offset the cost? We do this with cars all the time, but not other things we buy.
2) Are their cheaper alternatives?
-- Does this purchase have reoccurring costs such as supplies being more expensive than alternatives?
-- What are the tradeoffs to the cheaper alternatives?
-- How long will the cheaper alternatives be good enough?
3) Can the money be better used elsewhere?
-- If you used the money to pay down debt would you end up being able to afford something better in the long run?
-- If you aren't going to use it often, would it be better to support a charity or a friend in need?
-- Would letting the money grow in a savings or an investment account be better while you think it out?

Try it and let me know if you come up with other short questions to add to the list

Saving for college

Reading this Sunday's Wall Street Journal article on saving for college, one might view our children's future ability to have a debt free education as hopeless. In the article, there were some important facts:

For the 2008-2009 school year, the average cost of attending a four-year public school for in-state residents -- including tuition and room and board -- rose 5.7% to $14,333, according to the College Board. The cost was up 5.6% to $34,132 for a private university. (These numbers aren't adjusted for inflation.)

Well, if you round up to $15,000 for public school and 6% per year, in 12 years that will double to $30,000 per year. If you have younger kids you might have a couple of extra years but let's assume those last few years won't get much interest as you pull the money out into conservative investments. It would mean that you have 12 years to save $120,000 per child. This is amazing to me and I can't even fathom at this point being able to save $10,000 per child per year. But, you have interest on your side, right?

Using an investment calculator, I figured that if you could save $430 per child per month for 12 years at 10% return per year, we could save our $120,000 in those 12 years. If you assume 12% return, you only need $375 saved per child per month. At 8% return, you need $500 per child per month. And that's just for an average public school!

What were we thinking having 2 kids only 1 school year apart? I can hope that we are able start saving $1000/mo within a couple of years for the kids but it can't be easy. I can also hope that we, as a society, get control of these college expenses and don't continue to let them grow at such a high rate assuming our children can bear the brunt of it through student loans. Until then - this is something to think about for sure..

The dream of a lake house

I was viewing a friend's pictures of their gorgeous lake lot and went down the rat-hole of looking into lakefront properties and the prices and viability of buying a lakefront home. I have been dreaming of owning a lake front property for years. It probably all started when going to my sister's in-law's house in Maine. (The picture above is from that lake house when Heather and I visited there in 2004). Heather and I also enjoyed multiple relaxing weekends in Virginia at her uncle's river house. These non-beach but very nice vacation homes have given us something to dream about for our future...

The problem is, as you know if you have been following my blog, I don't want any debt...let alone on a house we don't use frequently. Our ability to save up the money to buy a house will be near impossible in the next 10 years while meeting our other financial objectives relative to our primary residence, retirement savings, college savings, and schooling for our children.

I have to admit, the thought of waiting for 15-20 yrs to have my dream vacation home kind of stinks. Anyone else have a similar dream they are holding off on?

Paying down house vs Saving for retirement

I thought this was an interesting video from Fox Business debating whether to pay off your house or saving for retirement. The argument for saving for retirement was:
1) Lots of expenses when you are retired.
2) Housing is one of the few fixed expenses
3) You can make more after tax on your house.

The argument for paying down your house:
1) Emotional security of having the house paid off.
2) Expenses are down significantly with the mortgage paid off.

The guy arguing for paying down the house, Craig Carnick, did a poor job. His whole argument was emotional security. Ignoring that a bad couple of years in market like we might be seeing now could kill you in retirement if you are planning on that money to pay your mortgage. Not to mention the fact that when you are in retirement, you reduce he risk of some of your portfolio which makes beating the after tax mortgage payment with your after tax investments more difficult. Plus, a person making this decision probably has gotten their mortgage to the point they are paying a lot more principal rather than interest, meaning that "free" money from interest is probably not that much.

Ohh well, I do agree with Craig Carnick in that the paying off your mortgage reduces your expenses and allows you to have much more flexibility to maneuver around and meet your needs in retirement.

Poor Dad?

I read this blog from Sue Stock and thought, I hope my family isn't planning to spend $100 on my father's day gift. Last year my wife got me a wonderful card and some prints for my first father's day and this year I asked for a book about Daddys to read to my girls. Heather and I are pummeled with gift giving events by June with most of our immediate family's birthdays being in the first half of the year, valentines, mothers day, and our anniversary. In the end, I find myself saying my wish for father's day is not to spend anymore money!

Now, I am one of those guys who can always think of something cool to get. I love gadgets and electronic toys. For example, for my birthday this year my dad got me this cool 5 day wireless weather forecaster that takes radio signals from Accuweather and displays the current weather as well as the forecast for today and the next 4 days. It now proudly sits on my refrigerator and I look at it every day before I get my shower and dress for the day.

Although I love the toys, I feel more and like I would rather have my family pocket the money instead of spend it on non-necessities. How can I convince others to do that? I have been slowly trying, stopping or slowing Christmas presents to close friends and family so that we can both keep our money. For example, my close friend John and I used to consistently exchange the same amount in gift cards from Best Buy every Christmas. What's the point? We put a stop to that.

So, the question is how do you get your family to hold back on gifts and let you hold back to? Especially with all the weddings, baby showers, birthdays, kid's birthdays, etc that are going on in our lives? Heather has a group of like 10 friends who meet for a playgroup all of which have 2nd birthdays between now and October. If we just buy a $25 gift for each of them, thats $250! How can we politely say, I won't spend it if you won't? Especially since a lot of these same friends just bought us baby shower gifts.

To take it back to the first mentioned blog...I don't want to be "Poor Dad." I would rather slow gift giving and be rich dad! How do we stop this consumerism and save more money without insulting people?

Savings Account Interest Rates keep getting slashed

Wow...this week my savings account at HSBC had its interest rate slashed once again. Here is part of the letter entitled "A Personal Message from Our Executive Vice President regarding Your HSBC Direct Account."

In these challenging times, having a savings plan is more important than ever. At HSBC Direct we are committed to helping you with your savings goals by providing the best rate we can.

As you are undoubtedly already aware, there has been a general trend of reducing interest rates in the U.S. market over recent months. These changes have been influenced by the Federal Reserve moving its target interest rate down in response to developments in the economy and financial markets. Last week the Federal Reserve again reduced this key rate, by 0.75% to 2.25%.

At HSBC Direct we review our rates regularly in the context of market conditions, the federal funds rate and the overall economic environment to ensure we are providing you a competitive rate at all times. Following a further review of all of these factors, we have reduced our Online Savings Account rate by 0.50% to 3.05% APY* effective 3/20/2008.

I wonder what makes this message "personal?" Later, Mr Kevin Martin, the supposed author of this email, states:

The good news is, you’re still getting a competitive rate — 7x the national savings average.

Well, gee Kevin...that is great news! When I signed up for HSBC Direct it was the promise of 5.05% interest rates that had me create an account. Meanwhile, I am paying 5.875% on my mortgage to your company. Since you dropped my interest rate down 2% now, can I have a 2% drop on my mortgage interest rate in the name of fairness? How about just a 1%? Since there is a "a general trend of reducing interest rates in the U.S." I think I would like to join in this trend with my debt as well :-)

Unfortunately, HSBC is still #3 on the bankrate.com list for savings account interest rates in my area. All I know is that HSBC is not gaining my customer loyalty through their continuous reaction to the market. I guess I would have been liked to been told at the beginning that the interest rate was going to track near to the fed's rate directly. That way a fed rate increase would allow me to immediately also see an increase in my savings percentage.

Refinancing

Heather and I have been considering refinancing our house but found that the fees of our current lender, HSBC were higher than we had though they would be ($2200). The first thing I did to see if refinancing made sense was to try the Bankrate.com refinancing calculator. Well, this calculator bases whether it makes sense on how much you would save on your monthly payment...not how much you pay monthly or when you will pay off you house and how much you will actually save. I thought this calculator was useful for someone planning to go to full term on their loan, but not someone that is looking to pay off the loan early. So, I had to go to Excel and adjust my amortization to change the rates, payment levels, and either have the new rate or the current rate plus $2200 paid immediately..plus calculate tax advantages of the different rates. What a pain, I may just have to write a web application to do this for people. In the end, $2200 paid immediately for us was a better fit rather than refinancing.

Movie Rentals....

Heather and I can be pretty frugal...but this entry isn't purely about the cost savings. See, we like to use Redbox to rent videos and watch them. This was an idea brewing for years but now is very very useful. We go to our neighborhood grocery store, Harris Teeter, which is about 1.5 miles away, and pick up the newer movie we want from a box slightly larger than a soda machine. It gets better, because we are able to make the decision which movie we want online and reserve it there..so we don't need to wonder if we can find something while in the store. Redbox charges us $1 + tax each day until we return it for a maximum of 20 times...after 20 days you own it. Its brilliant, and there rarely has been a time when i have thought my $1 was not well spent.

See, I have my own unique rating system. Its called, how much money would I have paid to see the movie in hindsight. Most movies I see come in at least $1..and with redbox I am paying $.50 per person...so I am always happy :-)

The sad thing is we can't see older movies or movies not on the mainstream. So, we do have to make the occasional trip to Blockbuster to pick up movies like Facing the Giants. But, thats probably twice a year max.

Time to refinance?

What should be good news to the ailing mortgage industry is that the talk of the office today was whether or not to refinance their homes for those that bought houses in the past 2.5 yrs. Bankrate.com has the going rate at 5.42% and our current lender and bank, HSBC, had a rate posted of 5.50% earlier this year. For those that would be waiting for lower rates like me, I suggest you try the bankrate alerts where you can specify the rate you want alerted at.