The IRS is actually ahead of schedule and will be sending checks or direct depositing the stimulus money pretty soon. Don’t Mess With Taxes has the full schedule available. It will be interesting to see what people actually do with the money. I don’t expect it to do much even if a significant portion of people just spend it on consumer items. I doubt that will happen and good amount of the money will go to paying off debt and day to day expenses. Our check is probably going straight into savings where it will stay for the foreseeable future. Anybody have plans for their rebate check?
Putting my money where my mouth is: opened a Roth IRA
I’ve been blabbing on about finances for a little bit now and up to this point I haven’t been very aggressive about saving for retirement. Saving for retirement is good and dandy, but right now is the most important time for us to put away money (if you are wondering why see this post on compound interest). Both of us have a little money in SIMPLE IRAs, I pay 5% into LACERA (county pension) and get 3% matched going into a 457(b). Not enough to meet our goals, but definitely better than 0%.
For over a year now I’ve been talking about starting a Roth IRA and never did. With April 15th just a few days away, I went ahead and started a Roth IRA at Vanguard. What’s important about April 15th besides taxes being due? It’s the last day to make IRA contributions for 2007. I maxed out my 2007 contributions which leaves me another year to work towards maxing out my 2008 contributions.
My entire investment strategy revolves around starting young and investing for the long term (30 years). I also wanted a strategy that would require very little effort on my part. I knew index funds were the way to go, but there are ton out there and needed to narrow it down. I was also taking asset allocation and fees into consideration.
After some research I found Vanguard’s Target Retirement Funds. They are funds of funds and include indexes of US and international markets along with bonds. The 2045 Retirement Fund has an asset allocation of about 90% stocks and 10% bonds right now and will gradually reverse those numbers as 2045 grows closer. Since I’m starting young I’m comfortable with an aggressive allocation and the automatic reallocation will save me time down the road. The expense ratio is a low .25% which can really impact savings over the long term.
Opening the account was really easy and everything is done online. Funds were transferred straight out of my checking account and I avoided a $20 annual maintenance fee by opting for paperless statements. I also like the fact that Vanguard is client-owned and is there to serve the investor, not outside shareholders. You’ll never see TV ads for Vanguard since that’s money coming out of their investors pockets. With $1.3 trillion in holdings they must be doing something right.
My strategy will probably evolve as our income and tax situation change, but the essential idea is to put away a steady amount over the years in tax advantaged accounts and let compound interest do its job.
There’s a difference between credit and debt
I’ve been getting increasingly annoyed about the mainstream media’s coverage of housing and the economy. Someone coined the term “credit crunch” and it gets regurgitated in every single story that happens to mention the economy. The problem is the lack of credit isn’t the cause of our current economic woes, it is just merely a side effect of a larger issue at hand in our society. The real cause of this recession can be summed up in another cute, alliterative phrase: debt deluge.
At no other point in history have we been in more debt. We just keep piling it on. Loose mortgage practices over the past couple years made it easier for people, who normally wouldn’t qualify to take on more debt, to bury themselves up to their ears. Unsurprisingly, people can’t handle the payments on the debt that they’ve acquired. Instead of blaming homeowners, borrowers, lenders, brokers, banks, realtors and everyone else involved in pumping up the housing bubble, the media points a finger to the lack of credit.
At this point everyone is being dishonest to try and deflect blame and responsibility for the situation our economy finds itself in. Homeowners should have known better about jumping head first into a steaming pile of debt. Lenders knew giving inflated, risky mortgages to people, who only a couple years ago would have been laughed out of the bank, was wrong. The government turned a blind eye to their regulatory role since taxes kept rolling in. Realtors had no qualms about selling houses at prices customers couldn’t afford because they got their cut and washed their hands of the transaction. The media won’t admit their “house flipping” shows helped contribute to the mess.
Debt is the root of our problem and it will take some serious purging to heal the damage that has been inflicted. Jobs in financial services and construction are going to be hit hard. People are going to lose their homes and ruin their credit history. Home prices will adjust to a point dictated by increased supply and lower demand. Government has to adjust spending or increase taxes. The next time you hear a reporter or politican read “credit crunch” off the teleprompter just replace it with debt deluge.
Check your credit card transactions often
I spend about 2 minutes every week checking on my finances and paying bills. Most of the time I just log into Yodlee MoneyCenter and review my transactions and make sure they are categorized right. Logged into today and found a charge from some stock photography website for $10. Called Citi up and disputed the charge and they immediately credited my account. Without careful inspection that unauthorized charge might have gone unnoticed and I would have been out $10. That $10 could have easily been $100 and if I just looked at my monthly balance I probably wouldn’t have caught the charge. Do any of you review your statements with a fine-toothed comb?
Using Yodlee MoneyCenter to track spending and aid budgeting
For a while I wasn’t really tracking how I spent money. I’d just pay my credit card balance off every month and get cash as I needed it. Before writing checks I’d just make sure I had enough in my account to cover it. All I knew was that I wasn’t spending my entire paycheck so I was doing okay. After getting married our expenses grew and I knew I needed a better way of tracking where our money went.
I tried out Quicken and Money, but they were just a complete pain to use and were overkill for what I needed. I looked for simpler software and online solutions but they all required you to manually download or enter transactions. I looked around the Web some more and discovered “account aggregation” services that grab data from your various financial accounts and stick it all in one place. A lot of banks like BoA and Citi have this as part of their online services now and other sites like Mint.com offer identical services. Turns out all those sites are just branded interfaces for a back end service provided by the company Yodlee.
The same MoneyCenter aggregation service that powers the sites of a lot of banks and financial service providers is available directly from Yodlee for free. In fact, their application is better than the others because you get new features first rather than waiting around for the bank to implement them. If you are nervous about entering your login information for your bank account and credit cards just remember that this is the same service banks around the world use which says a lot.
The aggregation premise is pretty simple: you enter information for various accounts, Yodlee grabs transaction and balance information, saves it, categorizes it and then lets you run reports against it. You can see some of this in action in their demo. Overall it does a pretty darn good job at categorizing stuff like gas, groceries and restaurants, but if anything gets through you can categorize it yourself or setup categorization rules for things like car payments. You can split transactions too; if we buy alcohol or gifts I split those transactions since they are usually lumped in with other things.
Eventually all this is on autopilot and I just have to periodically check categorization to make sure stuff is in the right bucket. After building up a few months of data I can do some pretty meaningful analysis of where our money goes. Some people are budget fanatics and others could care less, but I fall in between. My budget numbers are really just the average of what we normally spend in a category. I’ll save budgeting for a later discussion, but the important thing here is being able to track spending.
The primary thing MoneyCenter lets you do is keep yourself accountable. The MoneyCenter homepage is a view of all your accounts and their current balances; having your credit card balance sitting right next to the available funds in your checking account can be very sobering. On the other hand, having your savings and investments accounts listed can be very encouraging and motivate you to sock away more for the future. Even if you don’t bother categorizing everything, these summarized numbers can be a big help.
By categorizing everything a very useful pool of data will start to accumulate. Let’s say you want to start saving more which presents two options: make more money or spend less of what you make. One of those is easier said than done. Yodlee makes it easy to view your total spending by category and then make informed decisions. More than anything the data helps answer general questions like what percentage of my income am I spending on housing, transportation and insurance (I was a little surprised about the amount going just to these items).
Every time I talk about finances I’m not expecting people to take it as gospel or go implement my idea immediately. I’m just sharing my experience and the information I’ve gathered through research and practice. After a year long failure with Quicken I’ve been incredibly happy with Yodlee MoneyCenter. My time spent dealing with finances has gone down while the awareness of my financial situation has gone up. Just this week Sarah asked how much money we had and I was able to immediately tell her an accurate number. Anyone figure out a system that works well for them?