My Biggest Financial Struggle

Have you ever had the thought, “Man, it’d be nice to have “X”?  It’s funny how with me, “Man, it’d be nice to have “X” becomes “Man, I have to have “X”!  That thought change happens with me when the benefits of having X enter my mind.  For example, about 10 years ago we were so unorganized that I really wanted a desk to help straighten things up.  It made so much sense that it went from something that would be nice to have to something that we “needed” to have.  How much more organized, and therefore easier, our life would be! These thought changes have cost me so much money over the years.  In fact, it’s something I’m still working through.

Here is another example:  We wanted to switch our dining room with our kids play room because the play room was so big and the dining room was too small to entertain.  If we switched, dinner parties (e.g. – Christmas Eve Dinner, Easter Dinner, etc.) would be so much more comfortable and the kids could still have a playroom.  To make it better, we thought giving them a TV would be even better!  The kids could watch a show on their TV while we watched one on ours.  We just needed a TV.  Instead of using the old tube TV we had in the basement, we bought ourselves a nice 47 inch flat screen and gave the kids the 37 inch from the family room.  A great idea, right?  Maybe, but not a high priority.  I got the idea of a new TV in my head and that was it.  I couldn’t get it out and I had to have it.  Why?   

Right now, with it being so cold out, I really want to insulate our ducts to make the heating (and cooling in the summer) of our house more efficient.  It’s a great idea, right?  Insulate the ductwork and save money!   Why wouldn’t I want to do that?  It’s a good idea that has become something I need to do.  Why?

I’ve realized that when I have a good idea, and it makes sense to do, I make them “need to do’s”!  To quote Jeremy Foley, "What should be done eventually, must be done immediately."  True!  So true!  If the priority fits!  What I have to do is sit back and really think about what is necessary and what is not.  Right now we’re in debt.  Our first order of business needs to be getting out of debt.  I need to learn to quell those thoughts and keep things on track.  Yes, it would be nice to insulate the ducts right now.  It would help us save money by efficiently keeping the house warmer/cooler.  But we’re fine for right now!  It can be done at a later date.  It doesn’t need to be done right now!  I’m going to rephrase the quote from above...

“What should be done eventually, must be done as priorities allow!”   

Time to get priorities straight...and keep em straight!

Get Busy Living or Get Busy Dying

A weird title for a financial blog post. I know.  However, I just finished watching "Shawshank Redemption" and at the end of the movie when Morgan Freeman says “Get busy living, or get busy dying.” strikes a chord with me.  Get busy living or get busy dying.  Put into personal finance terms, get busy fixing your financial situation or get used to being broke and all that goes with it (e.g. – frustration, worry, anxiety).  

It doesn’t matter if you’re just starting out, retired or somewhere in between.  You should be in control of your financial life regardless of age.  It’s never too early and it’s never too late!  If you’re younger, you’ll have an easier time setting good habits and sticking to them.  The older you are the harder it may be; lifestyle, expectations, and old habits could make it difficult for you to make those difficult decisions you’ll be facing. 

The hard choices you’ll face and the decisions you’ll make will ultimately decide your financial future.  Do you have too much car? Will you trade down? Do you have too much house/apartment?  Will you downsize? Do you live like you make more money than you do? Will you cut your lifestyle?  These are the questions you’ll have to ask yourself and the hard choices that will undoubtedly follow.  Will you make that tough decision that will relieve the anxiety causing your sleepless nights?  Will you make that tough decision that will remove the worry from your life?  Will you make that tough decision that ultimately gives you control and not frustration?  You can do this, it is not complicated!  It’s hard but it’s not complicated.

Getting your finances in order is not rocket science!  It takes time but it’s not rocket science!  Take a look through the posts on this blog.  Visit other blogs like GetRichSlowly.org. Read “The Total Money Makeover” by Dave Ramsey.  Feed yourself the information that you’ll need to formulate a plan.  Then execute that plan!  Anyone can make a plan; it takes guts to step out of your comfort zone and execute that plan.  

If you need a reason, it’s the perfect time of year to call it a New Year’s resolution!  I don’t care what you call it; get busy doing something about it! Make the choice!  Get busy living or get busy dying...

Update:

So a few months ago I mentioned that I was gonna take a shot at the market.  Well, I did and I did pretty well.  I made about just over 20% by not fighting the fed.  It was a forgone conclusion that the Fed was going to initiate another QE so I jumped in a few gold stocks and rode them up and jumped out when I had made enough.  I’m on the sidelines now until after the fiscal cliff gets figured out.

Also, our mold is gone!  The basement and attic are clean!  The kitchen has been installed!  The work is done, except for some painting.  Now the fun part, paying off the debt!  We’re not worried because we have a plan.  Thanks to those who dropped notes of support!  They were very much appreciated!

Is It Ever OK To Go Into Debt?

Is it ever OK to go into debt?  I know what I'm about to write is contrary to everything I’ve pretty much ever posted but, as much as it pains me to say, we'll be taking on a substantial amount of debt soon.  I’ve realized that there are emergencies and then there are EMERGENCIES!  We recently learned that we have mold in our home (fortunately, non-toxic mold).  It’s in our basement, our attic and in our kitchen cabinets. While every home has some mold, our house has levels that require remediation.  Do we have enough money in our emergency fund to handle mold remediation and to replace the cabinets in our kitchen?  NOPE!  So what are we supposed to do?  

Fortunately, we recently refinanced our home so our bank had a recent appraisal and all of the documentation needed for us to take out a Home Equity Line of Credit.  Because of our low debt levels and great credit scores, our bank was more than willing to lend us the money, and quickly.   5 business days after applying for the loan we were signing the paper work.  The home equity line will allow us to remediate the mold and repair the attic so the mold will not grow back.

So now that the mold issue was “paid for” how were we to pay for a new kitchen?  We shopped around for the right kitchen AND the right financing options.  We asked friends and family about their experiences with certain companies and we decided that Lowes was the best option for us.  We would be able to have a new kitchen installed and finance it at a low rate.  We were even able to save close to 20% because we used their financing options.  Little do they know we’ll have this paid off quickly!  Sometime after Thanksgiving, we’ll have a brand new kitchen and our house will be mold free. 

Wow, we’re going to be in debt up to our eyeballs!  How the heck are we supposed get back to being debt free?  Simple, with a plan!  Andrea and I sat down and looked at our budget and started cutting.  We pretty much cut anything that wasn’t necessary.  For example, our whole family took Tae Kwon Do twice a week.  Now, only the boys will take Tae Kwon Do and only once a week at that (we didn’t want to pull them completely out because we feel the martial arts are very important for our kids).  We determined our monthly payments, the exact amount we would have payoff and figured we could pay off this mountain of debt we’ve just gotten ourselves into as pretty quickly, relatively speaking.  In a year and a half, we plan to be exactly where we were before we found out we had mold.  Considering the obstacle in front of us, not too bad.

This has been an overwhelming experience from the beginning when you consider the possible health ramification and our financial philosophy.  We have a nice chunk of change in the bank but not nearly enough to pay for all of the work we need to have done.  After taking it all in, and it took some time, I’ve come to the conclusion that this is a blessing in disguise.  How so you ask?   Well, we got lax; we became comfortable; we became unwilling to cut because, well, we could afford it.  We didn’t have any debt other than the house, so why not take Tae Kwon Do?  Why not re-arrange the house and buy a new TV?  Why not inflate the budget categories a little?  We lost focus!  This situation has helped us refocus our financial life and we’ll be better off, in the long run, for it!  It’s helped me to learn to be flexible.  Yes, it’s good to be debt free, but as I said at the beginning, there are emergencies and then there are EMERGENCIES!  I had to learn to not take it as a personal failure; that I let my family down.  It’s been overwhelming, but we’ll come out stronger on the other side!

So, is it ever ok to go into debt?  Right now, we have no choice. 

College Savings

So you’re saving 15% of your annual income towards retirement.  Now what?  If you have children, now is the time to start saving for their college education.  There are two main options to consider; the 529 and the Coverdell Education Savings Account.  Which one is right for you?  Below is a brief description of each plan along with the major pros and cons.

The Coverdell ESA

According to the IRS,”A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the designated beneficiary of the account.”  That is a long winded way of saying it’s a college savings account. It is named after Senator Paul Coverdell (now deceased) who sponsored the legislation creating the Education Savings Account.

Coverdell ESA Pros and Cons:

Pros:

• The earnings in the account grow tax-free and withdrawals are always tax free as long as they are used for eligible education expenses.
• Available investments in ESA are the same as those for an IRA (almost anything) making the ESA more flexible than a 529.
• The money is not considered an asset of the child when applying for financial aid.
• A new beneficiary can be designated without incurring any tax penalty as long it’s transferred to an eligible family member(which is almost anyone remotely related to you.  Check out the IRS website here for the list).

        Cons:

• Contributions are limited to $2,000 a year for each child. 
• The beneficiary will eventually take control of the money at the age of the majority (18 or 21 depending on the state you live in). 
• Income limits prevent single tax filers earning more than $110,000 and married tax filers earning more than $220,000 from contributing to a Coverdell ESA.  However, a nice little loophole exists.  You can gift the $2,000 to your child who can then open an ESA for themselves.
• The funds must be used by the time the beneficiary is 30 to any tax penalties.

The 529

According to the IRS, a 529 plan is “a plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.” 

There are two types of 529 plans:

                 

Prepaid Tuition:

According to the SEC, “Pre-paid tuition plans generally allow college savers to purchase units or credits at participating college and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements.” Since there is no guarantee where a child will go to school, this strategy can be risky. Also, the fees of these plans can be very high since someone (i.e. – you) has to pay for the risk of rising tuition costs.

                 

Savings Plan:

Simply put, the 529 Savings plan is an investment  account for the purpose of paying eligible expenses.

529 Pros and Cons:

Pros:

• Like the Coverdell ESA, the earnings in the account grow tax-free and withdrawals are always tax free as long as they are used for eligible education expenses.
• Also like the Coverdell ESA, a new beneficiary can be designated without incurring any tax penalty as long it’s transferred to an eligible family member.
• Contribution limits are loosely defined by the IRS in the following way; “Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary.”  This essentially means you can contribute as much as you like but be mindful of the $13,000 gifting rule.
• At no time does control transfer to the beneficiary as it does with in ESA. The account owner maintains control of the money. 
• There are no income restrictions; everyone is eligible to take advantage of a 529 plan.
• The money is not considered an asset of the child when applying for financial aid.
• Most state 529 plans do not have residency requirements.  You are free to shop for the 529 that best suits you. 

Cons:

• The money must be used for college, university, vocational school, or other postsecondary educational institution or you will pay ordinary income tax as well as a 10% tax on the earnings.
• 529 fees can be high.  Checking the fees should definitely be on your checklist prior to choosing a plan.
• Investment options can be limited as compared to the Coverdell ESA and you are only able to move investments once every 12 months.

We are saving for our children’s college educations by saving $2,000 into a Coverdell ESA and then anything above that into a 529.  I like the ability to invest in whatever I choose as great benefit of the ESA while the lack of contribution limits of the 529 allow for college savings above and beyond $2,000.  How are you saving for college?