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Archive for December, 2008

The windfall question

December 30th, 2008 at 09:54 am

"What would you do if you had received $10k? Or $100k? Or $1 million?"

Ah, those question never seems to get old do they? How nice it would be to dream. Oh, don't get me wrong though. I'm not complaining. It never gets old for me either.

Unfortunately, I think many overestimate the buying power of their windfalls....

For example, a common response to the windfall question is, "I'd take some and buy a reasonable car." Certainly, it would be wise to not have a car payment, but the expenses doesn't stop there, right? At the very least, you'll still need money to put gas in the tank, oil changes, tire replacements, insurance, tag, inspection, so on and so forth. That too is a part of the total cost of ownership, and wouldn't it be nice to be able to pay that with your windfall as well?

And how much does all that add up to? Well, for the sake of this conversation, let's just assume that it's an average of $200 per month, or $2400 a year. I'm low-balling this by the way, and some could be paying that much on insurance alone.

Now, because this is a frequent, recurring expense, it's going to have to be in some kind of taxable investment in order to generate a monthly income. Let's pretend that you can find an average of 4% somewhere fairly guaranteed.

That means you'll need an investment principal of $60,000 to generate about $200 a month at 4%. Yikes.

Now, I admit, that's a concept in generating the money in perpetuity. While I love the idea of perpetuity, in real life, it's not easy to achieve at all. But if you really care about perpetuity-- which again, would really be nice-- then you'll also want to factor in the historical rate of inflation, which could be another 3%. But to be nice and continue low-balling this figure, I'm going to skip this part.

What we can't get away from is the fact that the interest will also be taxed. Let's again make this easy and low ball the capital gains tax at, oh say, 15%. The capital gains taxes on the interest then is $360, which means the total passive income you have to generate each year is $2760. That increases the investment principal you need to more like $70k total.

Whew! Scary. Are we done yet? Sadly no, because realistically, our car can't last forever right? But it would sure be nice if our car fund also has the power to generate enough money to replace our car as well. And how much would that be?

Let's pretend that you want to buy a $10k car every 10 years, or $1k of extra income each year. To be nice, let's pretend you found a way to minimize your taxes, and feeling especially generous, I won't factor that in. Aren't I a nice low-baller? So, you "only" have to add an additional $25K into your car fund, pushing up the total principal to about $95k.

Now, let's revisit the windfall question again: What would you do if you received a nice windfall of $100k? For me, based on the above, I would simply say, "Well, I'd buy a car." and that's it. Hehe. And it wouldn't be a bad way to go either because cars are a terrible depreciating asset to begin with, and you'll always have a car knowing that you'd never have pay a single dime in car loan interest again.

But now, imagine how much money you'll need to cover the rest of your life's expenses. Just the thought of it is enough to make this man's skin crawl.

I suppose if there is a moral of this story, it would be not to underestimate the amount of money you really need just to survive. I think not realizing this is why so many lottery winners fail in the end. It also illustrates the tremendous power of earned income.


December 29th, 2008 at 08:21 am

I happened to be tinkering with a free illustration program, and made a chart for somewhere else. Anyways, I thought it'd be fun to share it here as well:

And by the way, it's just making a very basic point that it's important to have a stated goal first, because your goals are what determines the best type of saving and investment bucket to use for that goal.

Also, please realize that it's just a simple example, not in any way set in stone or is entirely accurate. For example, I'm not really using a Roth IRA entirely to fund a house, although part of the money can and will probably come from that....


December 28th, 2008 at 08:26 pm

Kind of a poor play on words, but I thought that I'd take some time to take a quick look at the idea of buying a house again.

My thing is that I really, really don't want to pay a whole lot for a house at this time. The idea is to have a "starter home" that meets my needs. Then, maybe some day when I build up enough savings, perhaps then I will afford what I really want.

But first thing's first I say.

Using Zillow, I've narrowed it down to four potential candidates. All of them are cheap condos in the $70k to $80k price range. However, they are near a college campus so they should be able to hold some kind of value.

I then went over to mortgagecalculator.org to get an idea of what I can expect in terms of monthly payments.

Can I just say that, when the total cost of ownership is calculated, it's absolutely frightening? Even on a 70k property, by the time you finish paying, the final cost would be more like 125k! Wow! WOW! I've looked at the numbers before and know what to expect, but it still stuns me every time I see it.

It's also why I THANK MY FAMILY to be able to live rent-free right now. The financial impact of this temporary arrangement is immense, and I do not want to waste it! I'm going to save as much as I can and re-visit my options for increasing my earnings!

Housing bubble victim

December 14th, 2008 at 06:40 pm

Let me warn you up front that this is a parody but that it could be very politically incorrect. Still, it's also too funny not to share.

Here's Hitler and the Housing bubble.

Overtime festivities

December 12th, 2008 at 10:56 am

Have I mentioned how much I love overtime? Only the umpteenth time? Heh.

This week has been nothing but overtime. It's almost sickening, sometimes getting home with just enough time to shower and then go to bed.

But I'm not complaining! In fact, I wish I could work overtime more often.

On a separate note, what do you guys think of this? Here's his rather provocative opening quote, "The wrong way to think: 'spend less than you earn.'"

Basically, the author believes that we should focus on earning more rather than spending less, because there's always a limit on spending less.

But to me, it's like debating that one arm is more important than the other arm. Why? Aren't they BOTH important? Shouldn't we all do BOTH? Earn more AND Spend less?

To me, it's almost as comical as the popular Miller beer commercial, where people argue over which is more prominent, "Tastes Great" or "Less Filling". Only, these blog authors are actually serious. Personally, I don't see why such hair-splitting is even necessary.

I don't know, what do you guys think of it?

Could you survive?

December 10th, 2008 at 06:03 am

I saw this fun checklist elsewhere, and decided to copy and paste it here to share. So, what do you think? Could you "survive"?

Could you survive in middle class?
1. I know how to get my children into Little League, piano lessons, etc.
2. I know how to set a table properly.
3. I know which stores carry the clothing brands my family wears.
4. My children know the best name brands in clothing.
5. I know how to order in a nice restaurant.
6. I know how to use a credit card, checking account and savings account, and I understand an annuity. I understand term life insurance, disability insurance and 20/80 medical insurance as well as house, flood and replacement insurances.
7. I talk to my children about going to college.
8. I know how to get one of the best interest rates on my new car loan.
9. I understand the difference among the principal, interest, and escrow statements on my house payment.
10. I know how to help my children with their homework and do not hesitate to call the school if I need additional information.
11. I know how to decorate the house for the different holidays.
12. I know how to get a library card.
13. I know how to use most of the tools in the garage.
14. I repair items in my house almost immediately when they break, or know a repair service and call it.

Could you survive in poverty?
1. I know which churches and sections of town have the best rummage sales.
2. I know which rummage sales have "bag sales" and when.
3. I know which grocery stores' garbage bins can be accessed for thrown away food.
4. I know how to get someone out of jail.
5. I know how to fight and defend myself physically.
6. I know how to get a gun, even if I have a police record.
7. I know how to keep my clothes from being stolen at the Laundromat.
8. I know what problems to look for in a used car.
9. I know how to live without a checking account.
10. I know how to live without electricity and a phone.
11. I know how to use a knife as scissors.
12. I can entertain a group of friends with my personality and my stories.
13. I know what to do when I don't have money to pay the bills.
14. I know how to move in half a day.
15. I know how to get and use food stamps or an electronic card for benefits.
16. I know where the free medical clinics are.
17. I am very good at trading and bartering
18. I can get by without a car.

Could you survive in wealth?
1. I can read a menu in French, English and another language.
2. I have several favorite restaurants in different countries of the world.
3. During the holidays, I know how to hire a decorator to identify the appropriate themes and items with which to decorate the house.
4. I know who my preferred financial advisor, legal service, designer, domestic employment service, and hairdresser are.
5. I have at least two residences that are staffed and maintained.
6. I know how to ensure confidentiality and loyalty from my domestic staff.
7. I have at least two or three "screens" that keep people whom I do to wish to see away from me.
8. I fly in my own plane or the company plane.
9. I know how to enroll my children in the preferred private schools
10. I know how to host the parties that "key" people attend.
11. I am on the boards of at least two charities.
12. I know the hidden rules of the Junior League.
13. I support or buy the work of a particular artist.
14. I know how to read a corporate financial statement and analyze my own financial statements.

Year end eval

December 5th, 2008 at 11:02 am

Although the end of the year is not here yet, by now, I have a pretty good idea of where things are at. And I'm pleased to say that the year turned out better than I had hoped!

Originally, I'd be happy if I could just max out 401(k) and Roth IRA, and if I'm really lucky, I'd also be able to beef up my emergency fund.

Well, both are already maxed out, and if all goes well, my emergency fund should hit the full 12 month level by the end of this year! Yes!

I actually kept a lot of liquid on hand because I thought I was going to have to pay a bunch of legal fees (due to issues that I didn't think could be resolved amicably with my ex). But since that didn't happen, that money is able to stay as a part of my emergency fund.

Anyways, next year is a similar set of goals, but because the emergency fund should be full soon, my next goal is to expand towards a car replacement fund. We'll see how that goes.

For next year, I might also open up a separate Roth IRA, probably with Vanguard and their index funds.... Honestly, the amount of "play money" I have for stock trading right now is enough, and though I've had a miraculous year, I really don't want to risk any more of it.

Oh yeah, and 401(k) contribution is going to go up next year by another $1k, so I have to adjust my contributions, which will affect my budget a little bit. But otherwise, I think that's basically it.

Unrelated side note: Some employees are throwing out more plants. I thought long and hard about saving them, but... these ones are harder for me to maintain. Sooo... sadly, I've decided to let it go.

Rescued plants

December 2nd, 2008 at 06:46 am

There was another set of pothos that an employee wanted to throw away. It was indeed in very sad shape, but at least one pot was still alive and well, and the rest was clinging on to its dear life.

So, when I found out about it, I asked if I can take it home with me. I don't know, the idea of throwing away even plant life without trying to save them just didn't sit well with me.

I had to fill out paperwork just to remove "office property", even if it was slated for the dump. But it's worth it.

I don't have a picture of it right now, but I spent last night pruning and watering it. Hopefully, it'll have a speedy recovery.

But hey, free house plants!