Tuesday, April 24, 2012

Do It Yourself

I flushed the toilet the other morning and the handle came off in my hand.  I thought to myself, “Huh, that’s interesting!”  I knew we needed a new toilet but I didn’t realize it was going to be that morning!  In fact, we needed two.  The toilet in the kid’s/guest bathroom needed to be replaced as well.  I could have made a call to my plumber and said, “Hey, Mike, I need you to install 2 new toilets.”  Mike would have come over and installed 2 new toilets for about $600.  Instead, I decided to save some money and do it myself. 

Now I understand installing a toilet is not the most difficult thing but I’ve never considered myself the handiest person in the world.  So I did what any amateur does, I looked up “How to install a toilet” on YouTube.  After a few ‘how to’ videos and a visit to consumerreports.org to find the best toilet for the money I was on my way to The Home Depot.  It took me about 3 hours but two toilets are now successfully installed in our house.   Total money spent... $328.  Money saved...$272!

About a year ago we needed to replace the door from our garage to our living room.  We had a local company, which we trusted, come in to give us a quote.  We knew the company because they had put in our sliding glass door and we liked their work.  Their quote...$1300!  A friend suggested that he and I do it together.  We made a trip to The Home Depot and priced out doors.  For just over $300 I could put in a fire rated door myself.  In just 4 man hours we had our door installed.  Total money spent...$310.  Money Saved...$990. 

If you’re not handy, like me, how do you become handy?  I suggest starting with a small job: painting, replacing an old thermostat or an electrical outlet.  After you’ve completed some simple jobs tackle a tougher one or help a handy friend take on a bigger job.  

If you decide to go it alone, there are plenty of videos online, books you can borrow at the library or classes that you can attend at The Home Deport or Lowes that will help you through any task.  And if worse comes to worst, and you completely mess things up, call in a professional.  For example, Andrea had a ring fall down the sink drain and I went into the trap to get it.  Taking off the trap was no problem. Ring retrieved and all was well.  Well, not quite.  Our trap was metal pipe, not PVC, which increased my chances of screwing things up.  And I did!  I stripped the threads.  I called my plumber Mike to fix that one.  

Attempting to home improvement projects yourself not only saves you money, a huge incentive, but you also get to learn something new.  I love learning.  I’m constantly asking my friends who do their own home improvements if I can help.  I’ve helped my father-in-law put in hardwood floors, a buddy lay concrete for a fire pit, and another buddy put up a deck.  It’s humbling to realize what you don’t know but it’s exciting to learn something new.

As you gain experience, you’ll be able to take on larger jobs.  I have two friends who have each finished their own basements.  One friend did practically everything: electrical, plumbing, framing, sheet rocking, taping, stair bannister and painting.  He did everything except install the carpet!  Another friend of mine also did most of the work finishing his basement except he paid someone to do the taping and carpeting.  I won’t say what they spent but I can tell you they each saved well over $15,000 finishing their basements themselves.

As you can see, you can save hundreds, even thousands, of dollars by doing home improvement projects yourself.  Not only will you save some cash, you’ll also get to learn something new and maybe even spend some quality time with friends or family (my kids are always watching when I’m attempting to fix something).  Give it a shot.  The worst thing that can happen is you call in the professional to clean up the mess.  

Tuesday, April 17, 2012

Traditional IRA vs. Roth IRA

If you earn taxable income, you’re eligible to open an IRA (Individual Retirement Arrangement, also known as an Individual Retirement Account).  The two types of IRA’s I’m going to discuss here are the Traditional IRA and the Roth IRA.  A Traditional IRA is typically tax-deductible.  When you withdraw at retirement age the money will be taxed at the current rate of ordinary income.  With a Roth IRA, you contribute after-tax dollars so when you withdraw at retirement age, you don’t have to pay taxes on those withdrawals as long as you’ve had the Roth for over 5 years (known as the seasoning period)!!

While there isn’t and income limitation to contribute to a Traditional IRA, there are limits to what you can take as a tax deduction.  According to IRS Publication 590, you can take a deduction for contributions to a Traditional IRA if your modified Adjusted Gross Income (AGI) is:
  • More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er),
  • More than $58,000 but less than $68,000 for a single individual or head of household, or
  • Less than $10,000 for a married individual filing a separate return.
If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $173,000 but less than $183,000. If your modified AGI is $183,000 or more, you cannot take a deduction for contributions to a traditional IRA. 

There is an income limitation on whom can contribute to a Roth IRA.  According to IRS Publication 590, you can contribute to a Roth IRA if:
  • Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $173,000. You cannot make a Roth IRA contribution if your modified AGI is $183,000 or more.
  • Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2012 and your modified AGI is at least $110,000. You cannot make a Roth IRA contribution if your modified AGI is $125,000 or more.
  • Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
Contribution Limits
The government sets a limit on how much you can contribute to an IRA. That limit is $5,000 ($6,000 if you are age 50 or older)

When you turn 70 ½, you have to take distributions from your Traditional IRA.  Roth IRA’s, however, have no such requirement.

Which to choose?
Generally speaking, if your tax rate is expected to be greater than or equal to your current tax rate, you should invest using a Roth IRA.  However, if you have more than 5 years until retirement, I would suggest that you open a Roth IRA regardless of the anticipated future tax rate.  The rule of thumb is good a guideline but the nature of government is unpredictable.  Who is to say what tax rates will be 10, 20, or 30 years from now?  I can guarantee this, when you retire and are taking tax free distributions, you won’t remember, or care, what the tax rate is or was.

How to contribute to retirement accounts
If $5,000 is greater than or equal 15% of your income, then you should contribute your 15% to a Roth IRA and call it a day! 
On the other hand, if $5,000 is less than 15% of your income, max out a Roth IRA and then contribute to the remaining percentage to an employer sponsored plan if available (401k, 403b, or 457b). 
If you do not have an employer sponsored plan to contribute to you may want to consider a regular investment account since long term capital gains are currently taxed at 15%.  Remember, to take advantage of that 15% capital gains rate, you will have to hold on to those investments for more than a year. 

One last thing
An IRA is more flexible than an employer sponsored plan because you can invest it in whatever you like (stocks, bonds, mutual funds, real estate, etc).  Many employer sponsored plans are limited in their investment options. 

Tuesday, April 10, 2012

How We Invest

Investing is such a broad subject.  How does one invest?  In what?  When?  I asked all of these questions.  Then my brother suggested I read “The Intelligent Investor” by Benjamin Graham.  This is the quintessential book on investing.  The amazing thing, it was written in 1949 and applies as much today as it did then!  I learned a lot from this book; the most important being that I don’t have the time to invest in individual stocks!  Unless you have time to study balance sheets, management, accounting rules, as well as other market factors, then you shouldn’t be investing in a company.   That’s why mutual funds were invented!

Loosely following the teachings of Benjamin Graham, I’ve invested in index funds. While Graham teaches a portfolio of stocks and bonds, I substitute gold for bonds.  Here is a sample, depending on market conditions, of what my portfolio might look like: 
  • Vanguard Dividend Appreciation Index Fund (30%)
  • Vanguard 500 Index Fund (20%)
  • Vanguard Small-Cap Growth Index Fund (10%)
  • Vanguard Mid-Cap Index Fund (10%)
  • Vanguard International Growth Fund (10%)
  • Precious metals (e.g. gold, silver, etc) (10-20%)
I love dividend funds!  Any company that will pay me a dividend to own their stock, and increase that dividendis a company I like to own!  There is a great stat about dividend stocks:  If you invested $1 in US stocks in 1900 and kept the dividends for yourself, 100 years later that stock would be worth $198.  That’s not too bad for a buck.  However, if you invested that same dollar in US stocks and reinvested your dividends, that stock would be worth over $16,000!  The moral of the story is to invest in dividend paying stocks, and reinvest those dividends!

I invest in the 500 index fund because it follows the S&P 500 (aka – the broader market).  It’s instant diversification! I get to invest in companies that span all sectors (health care, energy, financial, etc). 

Small and mid-cap index funds allow me to gain exposure to smaller to mid-size companies that have the ability to grow quickly.  I can pick out the IBM’s, the McDonald’s, the ExxonMobile’s but I’m not familiar with smaller companies at all.  These funds allow me to invest in those smaller companies.

The International fund allows me to invest in those emerging markets that I’m not aware of as well as those companies in developed countries outside of the US. 

Except for the International fund, these are all index funds; Funds that are put together to match the components of a market index such as the S&P 500, the Dow Jones Industrials, the Dow Jones Utilities, the Russell 2000, etc.  Investopedia explains index funds this way: "Indexing" is a passive form of fund management that has been successful in outperforming most actively managed mutual funds. 

A huge benefit of investing in index funds is that they tend to be the benchmark with which fund managers are judged; whether or not the fund manager was able to beat the S&P, for example.  Another benefit is the low expense ratio of index funds.  Mutual funds cost money to run: the cost of research, the cost of trading, the fund manager’s salary, etc.  Because the index defines what stocks the fund can hold, fees are kept to a minimum. 

Aside from the funds listed above, I think it’s also a good idea to have some money in precious metals such as gold.  Gold helps you hedge against inflation.  If you listen to the podcasts and radio shows I listen to, we could be in for some serious inflation over the next few years.  While an argument could be made that that inflation will stay in check, the fact that gold can help you hedge against inflation cannot.  I used to believe that gold was a horrible investment but considering the money printing policy of governments today, we’re considering adjusting our portfolio so that we have between 10-20% of our money in gold. 

While this investment style works for me, it may not for you.  I don’t know your risk tolerance, your investment style, or your suitability to invest so this is not a personal financial advice.  I’m simply explaining how we invest and that it might be something you’d like to familiarize yourself with.  

How do you invest?

Thursday, April 5, 2012


I’ve been asked a few questions since starting this blog that I’d like to take the time to answer.

The first question I received was, “Why shouldn’t I start with the highest interest rate when paying off my debt?  I’m having a hard time understanding why you’d want to start with the lowest balance, the math doesn’t work.”

Math isn’t the problem!  Behavior is!  If the math worked, people wouldn’t be in debt.  Behavior got them into this mess and a change in their behavior is what is needed to get them out.  To change that behavior, you need an early success.  It gives you confidence that you can fix the mess.  Also, an early win can be built upon; it gives you traction.  So I suggest listing your debts smallest to largest and paying them off in that order. 

 The next question asked was, “Why would I want to pay off my mortgage?  I’d lose the tax write off, wouldn’t I?”

Yes, you would lose that write off!  However, are you willing to trade $10,000 for $2,800?  That is, essentially, what you doing.  The numbers may be a little different depending on your tax bracket but the premise is the same.  For round number purposes, if you earned $100,000, with $10,000 in mortgage interest, you would reduce your taxable income and instead be paying taxes on $90,000.  So you’re paying less in taxes!!  That’s awesome!  Right?  WRONG!  

If you didn’t pay the $10,000 in mortgage interest you would be paying taxes on $100,000.  If you earned $100,000 you’re either in the 25% or 28% tax bracket, depending on your marital status.  If you had to pay 28% on that $10,000, you’d pay an extra $2,800 in taxes.  

I understand that this is a simplified scenario but the principle is the same, you’re trading $10,000 for $2,800!  The math doesn’t work.  Keeping your mortgage for the tax deduction doesn’t make mathematical sense.

The last question I was asked was regarding my opinion of cashcrate.com. 

I think if you have the patience, and a spare email address that you don’t mind getting spammed, then cashcrate.com might be a good place for you to make some extra cash.  I suggest reading www.cashcratesecrets.com if you’re interested in cashcrate.com and the money you can earn.  

Do you have personal finance questions you’d like answered?  Feel free to comment below or to contact me at themoneybeast.blogspot@gmail.com.

Monday, April 2, 2012

Let's Do The Numbers!

If you’re having a hard time seeing the value of getting out of debt; if the numbers seem abstract still, let me try to clarify it with this post.    In the post, Why Be Debt Free?, I detailed the debt of the average American (the average American has a home with a mortgage balance of $240,000, a car with a loan balance of $30,700 (two thirds of American households have 2 cars),  4 credit cards with a combined balance of $10,600, and an education with a student loan balance of $20,000). 

Below I will show you a projection of how much you could earn if you invested the interest in the average American’s debt.  I will also show you how much the average American would have in 30 years if their payments were invested instead of being paid to the banks.

All calculations were made assuming an 8% return and, for ease of calculation, evenly distributing the interest over the course of the loan.

Mortgage            $240,000
Payment              $1,216
Interest paid       $197,776
Term                    30 Years
Interest Rate       4.5%
The value of the interest, in 30 years, would be $823,662

Loan Amount     $30,700
Payment              $536
Interest paid       $1,505
Term                    5 Years
Interest Rate       1.9%
The value of the interest, in 30 years, would be $13,617

Student Loan
Loan Amount     $20,000
Payment              $212
Interest paid       $5,455
Term                    10 Years
Interest Rate       5%
The value of the interest, in 30 years, would be $20,624

Credit Card (Assuming a 2% minimum payment)
Loan Amount     $10,600
Payment              $212
Interest paid       $4,163
Term                    70 months
Interest Rate       11.99%
The value of the interest, in 30 years, would be $37,339

The value, after 30 years, of the interest alone would be $895,242!!! That’s just if you invested the interest you paid!  If you invested the monthly payments you make, you would have over $3,264,000!!!  Can you see the value in getting rid of your debt payments now?!?!?  Would your retirement be comfortable with over $3,000,000?  Would you ever have to worry about money again?  Would you be able to reach your financial dreams?  

When Andrea and I saw these numbers, it was a no brainer for us!  It was time to get out of debt!  I hope you make that decision too!  It’ll be well worth it!