Bush tax cuts expiring will affect you!

This (shouldn't be) just in - Bush's tax cuts put more money in your pocket! Based on the normal readers of my blog, this is a fairly safe statement to make. These tax cuts expiring will mean you will be paying more money to the federal government. I have said this to many people and people continually had accused me of being far right or fear mongering - but you can read a good in depth article here at Yahoo! Finance courtesy of the Wall Street Journal's SmartMoney. Here are some of the top ways you will be paying more, quotes from the aforementioned article when possible:

1) Higher tax brackets for all. "The current six rate brackets of 10%, 15%, 25%, 28%, 33% and 35% will be replaced by five new brackets with the higher rates of 15%, 28%, 31%, 36% and 39.6%." Your first dollars will be taxed at a higher bracket. You can see the tax brackets here at MoneyChimp. The 10% tax brackets currently covers the first $8375 for singles and $16750 for married filing jointly. Thats immediately another $400 for single and $800 for married couples just for the first tax bracket.

2) Higher capital gains and dividend taxes. "Right now, the maximum federal rate on long-term capital gains and dividends is only 15%. Starting next year, the maximum rate on long-term gains will increase to 20%. The maximum rate on dividends will skyrocket to 39.6%." "Right now, an unbeatable 0% rate applies to long-term gains and dividends collected by folks in lowest two rate brackets of 10% and 15%. Starting next year, those folks will pay 10% on long-term gains and 15% and 28% on dividends (compared with 0% now) unless a change is made. "

3) The end of many more specific fixes to the tax code. The marriage penalty comes back. Itemized deductions and personal exemptions. begin to be phased out again for higher income individuals. You can check out the article for more specifics.

I hope this helps you understand better that we all used to benefit from these tax breaks and losing them will hit all of our wallets. I hope that it doesn't affect YOUR budget too much!

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

Family income with kids

I found myself thinking about what life is like on one income based on a book Heather checked out of the library, a conversation at work with a friend, and chatting with another coworker and my cousin about their part time jobs. Finally, Dave Ramsey has been asking for what people do to earn extra money as stay at home parents and will have a show on it. All of this has occurred this week, and has had me thinking about what life is like on one income.

I think the first question is normally can people afford it. If you have researched the subject, you will hear many people talk about the hidden costs of working and sending your kids to daycare. Doing some searching, I found this "Second Income Calculator", which is supposed to help you figure out how much you are really making or saving paying for childcare.

Whether the second income from the father or mother results in additional income or not, it may mean you are living off less income either way. The DINK (dual income no kids) lifestyle is great but can lead to higher expectations of lifestyle after kids. No one wants to lose the luxuries we enjoy after having kids. But, whether you keep two incomes or one income, your lifestyle must change unless you either:
1) Increase the incomes significantly in one year
2) Live on less than one income before kids

In the end, cutting back will probably be necessary. Sacrificing is necessary. Otherwise, you may end in heaps of debt.

The good news, as I pointed out to my friend, is that later as your family income grows you can easily begin budgeting in the luxuries you used to enjoy again. You can get digital cable again, get an iPhone or something better later, and re-add those services you are losing out on now because you have learned to live on less.

The ramifications of our financial decisions

I have been considering more and more the ramifications of our financial decisions. There are a couple of financial situations in my past that have rippled into other areas of my life and its interesting to try to find those today. The first time I have seen this pattern in my life was when I had bought my first house at 22 years old and was house poor. The stress from that financial decision rippled into my work life and affected my job satisfaction. For the most part, I kept it out of my relationships although I was upfront with the girl I was dating (who would later become my wife) and we dated differently then. I often cooked her dinner instead of taking her out and when it came to us getting engaged, she got a hand-me-down ring my dad gave my mom instead of a big shiny rock. (Yes, she has the big shiny rock now but she didn't get that until after we were married)

I have read a lot about how personal financial stress can affect you throughout your life. In the workplace, some examples are people unhappy with how much they are earning, not getting good results at work because they are distracted by their finances, becoming workaholics to get overtime or to ensure they keep employment. In relationships decisions are made that can negatively affect people. Some examples include people avoiding activities because they can't afford it, ruined relationships because one person is trying to mask their financial problems, and avoiding trips to see relatives and friends that you haven't seen because of the cost. There are lots of other ways this personal financial stress can eat away at your life.

Recently, I found another area that I myself have allowed a financial decision to affect relationships. I found this when considering this Sue Stock blog posting that said that CarMax claims SUVs have gone down 25% in value and she asked how our lives in SUVs have changed. I wrote the following:

Unfortunately where it hurts us the most is our trips to see friends and relatives that live further away. Our SUV is our primary kid carrying vehicle. Traveling nearby is not so painful, however when traveling to neighboring towns like Chapel Hill from North Raleigh can be a painful commute. I think we reconsider plans with friends and relatives when the trip itself will cost $20-40. What used to be a "one and a half hour each way trip" to see parents has now become a "$40 trip." Cost starts to become the largest factor rather than distance/time.

With cost now bubbling to the top, we do tend to make fewer trips and use the vehicle more sparingly.

I think that letting relationships suffer in the name of keeping our monthly gas expense down may be a bad decision. What do you think? Should we cut other areas to keep making those "$40 trips" to see relatives and friends? Or should we be locking down and cutting out excess trips?

A generation who isn't prepared to sacrifice?

I met a young man on the flight back from New York yesterday who just graduated from college and was visiting his girlfriend. He lamented about whether or not he could go up there. He had a good job down south where cost of living was lower...so he also had a nice car and apartment. He feared not being able to find a job around NYC that would allow him to live so comfortably and was not ready to move. I told him that one thing I learned from my grandparents and parents is that sacrifices must be made sometimes for your priorities. If this girl was a real priority, then he can make the sacrifices to make it work. Sure, he may live in a bug infested apartment where he can touch two opposite sides of the apartment at once, but he can live there. Its all about making those decisions to sacrifice for things that are important to you in life.

I read recently but cannot find the reference now that we are a generation unprepared for sacrifice. That our generation expected to live a lifestyle similar to that of our parents while we are in our mid-20s. Our parents may have had 20 years to make it there in life, but thanks to credit and debt we can make it there tomorrow. Its like, lets say that a person in my generation needs a new coat. He/She goes to Macy's and finds one she loves. Most of the people my age would buy it and worry about paying for it later. A couple may save and wait to buy the coat, freezing their butts off in the process. Fewer of us would do what our grandparents would have done...went to Walmart or the Thrift store and bought a coat and kept our money for things more important to us...for our priorities. Now, just because you don't spend anything on clothing (lots of people I know are proud of that) doesn't mean this axiom doesn't apply to other areas of your life.

When Heather went to be a stay-at-home mom, we knew we were going to have to make sacrifices. Heather had a very well paying job at Fidelity Investments and we just wouldn't have the wiggle room we once had. We played with our budget and at one point stated the non-obvious....if it doesn't work we will start cutting to make it work. This means cable. This may mean (gasp!) cell phone. This may even mean moving to a less expensive house. Finally, it may mean we save less. Cable, cell phone, and our house were on the block before savings. Our savings represented our future as well as our children's future, and that was more important than even our house. Our house is larger than either Heather or I grew up in, by over 1000 square feet. That means its more expensive to maintain and pay for utilities. We could buy an older smaller home if we needed to and live comfortably as we did when we were children.

But thats just it with our generation. We want to have as good or better than our parents had...only not put the 10-20 years in to create that wealth. My parents lived in dumps when they first had kids. They made sacrifices consistently to keep us afloat. Some of our friends parents also have done amazing things. The most impressive I think is Heather's college roommate's parents who raised 8 kids on a teachers salary in NC. He had to pull side work to make ends meet, but he did it and his wife was able to be a stay-at-home mom for all of those kids. As a generation, we are quick to idolize those who have a lot instead of those who have sacrificed a lot. I hope I am able to teach my kids to appreciate the latter more than the former.

"Debts are easy to fix but liability is the nightmare"

I was listening to the US Open and saw a commercial I had seen a million times, but I finally picked up on what one statement was made. The little kid says, "Debts are easy to fix but liability is the nightmare." Wow, I guess it makes sense an insurance agency is trying to sell that. But, I know people who spent over 5 years trying to "fix" their debts...amazing. Check it out about 16 seconds into the commercial.

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?

Credit Cards Cost

Here is an article from Michelle Singletary who is a syndicated columnist whose columns are in the N&O frequently. Here is an interesting quote from it:

Peter Tufano, a professor of financial management at Harvard Business School, has found in his research that transaction credit card users -- those who pay their bills off every month and who are not overly indebted -- are more financially literate.

"Their credit card purchases are under control," Tufano said. "But that is not to say that they are spending less."

Greg Davies at Britain's Warwick University found in one study aimed at marketers that customers using credit cards spend more than those paying with cash or checks in purchasing situations that are otherwise identical in every other respect.

In the end, I understand this is generally true. But, if we would use the credit card for just something like gas and no other purchases, is that still true? I still can't buy it being true in that limited use scenario.

Slightly new focus for our church

Our church, Crossroads Fellowship, sent out an email with a slightly new short term focus which mirrors many of my thoughts and how God is leading me. That is, to help people identify the problems they have with managing their finances and put together a plan to get out of debt and on to a journey of complete financial freedom. Here is what the church sent out today:

If you were unable to worship with us this past Sunday, you can read about our journey with God and how He's leading us in 2008 at www.crossroads.org/pdf/Imagine_Journey_2008.pdf. You can follow along as I walk you through this vision document at www.crossroads.org/audio/Chuck_Imagine_2008.wmv.

If you need help getting out of debt and managing your debt flow our Financial Freedom Ministry provides classes, workshops, resources and budget coaching to help people realize financial freedom. You can discover ways to get out of debt, establish a budget and learn about God's view of money. Take the Crossroads Financial Freedom Personal Assessment at www.crossroads.org/pdf/FF_Personal_Assessment.pdf.

On Saturday, May 17, we are offering a special workshop from 8:30 am - 3:00 pm to help you gain insights that will put you on the path towards financial freedom. Topics include Super Savings, Relating with Money, Dumping Debt and Cash Flow. There will be times when you can meet privately with a budget coach as well as prepare your own action plan for getting out of debt and handling finances God's way. Register online. Cost is $25 per couple and lunch and child care will be provided.

Here are some amazing facts from the charts:

• 70% of Americans live paycheck to paycheck.
• 95% of married couples fight over money and it is the leading cause of divorce.
• Americans spent $1.22 for every $1 they earned in 2007.
• 1 in 6 families may have their homes foreclosed on in 2008.
• 62% of Americans will retire with less than $10,000 income per year.
• Average 28 year old has $66,000 in consumer debt (cars, credit cards and student loans).
• 1 in 7 families is dealing with a debt collector.
• Children today are just as likely to see their parent’s file for bankruptcy as they are for divorce.
• The average household has at LEAST $9,000 in credit card debt.

Savings on cars is a great investment vehicle

In Fidelity Investment's quarterly magazine this month, they had an article entitled Rev up Your Retirement Savings. In this article, they declared that the average car loan is $479/mo and lasts 48 months based on information they had gotten from Edmunds. If people kept their car an extra year and invested that $479/mo with a 7% annual return, they would have $199,190 in 35 years. If they kept it two extra years, they would have $331,823 in 35 years. I set out to look closer at these numbers...

First, the data for their average expense of a vehicle comes from this article at msn.com called ABCs for a great car loan. That article says:

In the United States, the average down payment for a car is $2,400, the average amount financed is $24,864 and the average monthly payment is $479, according to Edmunds.com. The most popular loan term is now a payment-stretching six years. If you're "upside down" on your old car loan (you still owe money on it after the trade-in), it's no longer a deal breaker. In these days of easy credit, lenders will roll the old balance into the new. Nor are down payments de rigueur; you can finance up to 100% of the manufacturer's suggested retail price, plus taxes, tags and fees.

So, according to that the average car costs $27,264...but is 6 years and not the 4 years Fidelity uses. So, they already have a hole in their logic. Regardless, I think $27,264 is a bit high and I will use their numbers, $479 for 4 years making the total spent on the car $23,000 including interest.

By my calculations, at 4.8% this $479 payment for 48 months would let you buy $20,485 worth of a car. If I take that as your initial savings when you have a car loan and as not your initial savings when you don't have a car loan, than I can run some different numbers. SO, if you had $20,485 and got this 4 year loan at 4.8% interest but in the fifth year put all $479/mo ($5,748) towards your savings and got a 7% return, then you roughly would have $342,500 after 35 years. If you keep the car an extra year and put another $5,748 towards your savings with 7% return, you would have $430,500 roughly. If you paid off the car with your initial savings and bought a new car every 5 years, saving the rest, you would have $228,200 at the end of 35 years. That initial lump sum grows more quickly with compound interest than you can keep up. With buying a new car every 6 years debt free, you end up with $322,600 and every 7 years you end up with $390,000. All of this can be seen on the chart above.

Does this mean going debt free does not make sense when you run the numbers? Absolutely not. Because what is not shown, is the risk. Would you take a loan out at 4.8% per year to put it in mutual funds? Probably not...but thats essentially what you are doing. Because I had the spreadsheet made, I was able to play around in numerous what if sort of scenarios. What if interest rates on car loans go up or what if we hit a bad point in the economy where stocks go flat? That can't happen, could it? Of course it could and it is happening right now. In these cases, the no debt models win every time.

Feel free to email me if you want the spreadsheet to play around for it yourself...

The envelope system - Mvelopes.com

As I was reading through this Sunday's New and Observer, I stumbled upon a reference to Mvelopes in the Wall Street Journal Sunday section by Amy Hoak under an article entitled "Web Sites to Keep You on Budget." Interestingly enough, this is the method Heather and I were featured in the New and Observer for using. Amazingly enough, most of my colleagues and friends had no clue what the envelope system was and I heard more jokes than anything. In fact, my cube walls were covered in envelopes when I returned to work.

But, Amy in her article this morning didn't feel the need to expand on what the envelope system was...so I think it must be fairly cut and dry. She said, "[Mvelopes.com] is based on the envelope method of budgeting, which allocated funds by expense category."

Heather and I use Mvelopes and really enjoy it. We found it off of the Crown Ministries website. I think they have a one month trial, but its quite amazing. Even if, like Heather and I, you use a Credit Card for most of your purchases (hopefully with cash back or rewards)...you can easily allocate those expenses to the individual envelopes. I highly recommend checking it out.

Saving, Budgeting, and Marriage...

Heather and I were interviewed by Sue Stock from the N&O, our local newspaper here in Raleigh NC, about how we manage money as a fairly young married couple. The article is here at the N&O including a picture of us with our daughter Anna under More Photos on the right. The experience was great, Sue was nice as well as the photographer, Chris Seward, who spent 45 minutes at our house ot get some various photos of us.

Most of the interview we talked about our system of budgeting, called the envelope system. We didn't develop this system but were taught it by people related to the Crown Financial Ministries organization. Our church, Crossroads Fellowship, teaches part of the Crown curriculum as well as information from other popular financial freedom ministries and personalities like Dave Ramsey. As part of enforcing our envelope system, which I will describe in more detail in a second, we use Crown's Money Matters software which they now call Money Map software. They also have an online budgeting software package called Mvelopes which also budgets with an envelope system.

The first key concept in our system comes down to the order in which you handle your money. When we first receive money, Heather divides it into the envelopes immediately. First, we give back to God a portion of the income He has blessed us with in our tithes. Next, we save a portion of our income in a variety of ways, general savings, emergency savings, college savings, college investments, new car savings, general investments, and other such categories. This keeps savings as a priority in our lives and moves the money away from where we are likely to spend it on a whim. Next, the money gets allocated to the various other account "envelopes" we have. This includes things like our utility bills which can be static or dynamic as well as our grocery and gasoline envelopes which we can use throughout the month. There are other envelopes that gather money to be spent later in the year, like travel envelopes, gift envelopes, or our personal envelopes which Heather and I can use personally at our own discretion.

When the month is over, some envelopes may still have a balance and others may not. Things like our grocery and electric bill envelope both often may have balances. However, whereas the grocery bill envelope probably doesn't need a month to month balance carryover, the electric bill does so that there is more money available in a hot summer. The leftover money in the grocery bill may be carried over to spend on a fancy meal the next month or be pushed into general savings for usage elsewhere as needed.

Overall, this system has worked nicely for us. But, a budget system alone doesn't help people stay on budget. It also requires discipline which is the personal struggle for me. Heather is very disciplined but I am not. So, one of the useful tricks which is available with the envelope system is to not make it virtual in the areas where you are having problems staying on budget. For example, if you cannot stay on track with eating out because it just goes on your credit card, we would suggest you move to cash in an envelope to pay for all of your eating out. Its easy to tell if you have enough money when you just have cash in an envelope.

Thats all for now...I may write some more later...