Allocating Your Money Wisely

My dad is a smart man. Not only did he come to this country with little knowledge of English and manage to be valedictorian of his class, but he knew a whole lot about money management without anyone ever teaching him.

I have 3 siblings and all 4 of us had our college tuitions paid. At one point when all of us were attending school at the same time, my parents somehow managed to be paying $145,000 per year in tuition expenses alone. How on earth did they do this?

It started a long time ago. When my dad finished grad school, he followed a job offer to New Jersey in 1975 and bought his first house at the age of 25. More than 30 years later, my parents still live in that same house.

They bought the house in the upper $70,000s. As time went by, incomes went up and they saw all their friends buy newer and bigger homes. As a kid, I admired their friends' homes and felt embarassed about our tiny house. What I did not know was that this was a smart move on my parents' part. They paid off that house VERY fast. After the house was paid off, they had more cash to do whatever they wanted. So they added 3 extensions to the house, bought a few investment properties and provided us with things that were important such as good education, music lessons, sports, etc. At the same time, they contributed money to our college savings accounts, AND opened up retirement accounts and trust funds for us kids.

Now this was a bit excessive but you get my point. You don't need to be making lots of money to do this. The important concept to grasp is to reallocate all your money so that they are used in areas of importance. Too many people have luxury cars but can't afford to pay for their kid's college education. What my parents did was pick a house they could afford (and trust me today no one really buys a house they can actually afford - I know I haven't) and lived in that house all their lives. It didn't matter to them that they couldn't compete with their friends' big fancy houses. What mattered to them was that we all got educated and had no debt. And boy am I glad our parents thought of us.

Another good thing about them living in that same little house all these years was that the value of that house has gone up at a sick rate. They picked a home in one of the most desireable towns (although it was not exactly in the nicest part of town), with one of the best school systems, and close to New York City. That same tiny house is now worth in the $800,000s.

Now, worst case scenario. Had my parents decided in the 90s to move to a bigger, nicer house, they would have gone from a 70K house to maybe a 600K house. Money out the door. This same money is the money that would have been invested into our college funds or retirement accounts. Without that money, we would have had school loans. With the school loans I would be in debt right now.

I really respect the fact that someone can sacrifice their own wants for the benefit of their children. I can only hope that I can do half as much for my kids one day.

The Importance of Good Credit

Well, I finally went to www.experian.com and got my credit report and score for $15.00. It was time for me to check up on my credit (like Mikey said, the last time I checked my credit report there were all these credit card accounts open in my account that weren't even mine!). Well, I finally checked up on it today, and I have a good score: 778. That's rated excellent and above 90% of the population. Yes!! I don't know why but bringing home high credit score is kind of like bringing home an A on a report card.

So why is it important to have good credit? Your credit score determines your ability to borrow money. If you have bad credit, you will get slapped with high interest rates when you want to buy a car, buy a house, etc. And high interest rates mean you're going to be paying a heck of a lot more money for your future house than someone who has good credit.

What is contained in your credit file? Basically all information on your credit cards, bank accounts, any kind of loan, mortgage, salary, where you live, etc. Any activity that you've had on any of these accounts are recorded in your credit file.

Your score can range between 300-900 and most people end up somewhere between 600-700. Here are some factors that affect your credit score:

1. Late payments: Everytime you miss the due date for your bills, it's recorded in your file. Your late (or lack of) payment affects 35 percent of your total score.
2. Maxing out your cards: Like late payments, everytime you max out your card, it gets recorded. This makes up 30% of your score.
3. How long you've had credit: If you've had credit (hopefully good) for 10 years, your considered less of a risk to loan to than someone who has had credit for only 10 months. This accounts for 15% of your total score.
4. The number of credit cards/loans, etc. you have. Everytime you open up a new card (especially over a short period of time) it affects your score. 10% of it.
5. Credit diversity: It's better to have a good mix of credit cards, mortgage, auto loans, etc. This affects 10% of your score.

Here are the 3 credit agencies if you're interested in checking up on your credit:

Experian - www.experian.com
Equifax - www.equifax.com
Trans Union - www.tuc.com

Don't forget: Everytime you apply for a loan, it gets recorded in your credit report. When lenders see that you have lots of inquiries on your report, it'll look bad and result in higher interest rates!

If you want to improve your credit score, here are some tips to follow:

1. Pay off your debts
2. Decrease the number of credit cards you have - cancel any cards you don't use (I like to keep it down to 2)
3. Pay your bills on time!
4. Look at your credit report and make sure you fix any errors on your report!!! (Last year my score was in the 600s due to things on my report that were mixed up with another person with a similar name)
5. Don't max out your cards!
6. Only apply for credit if you need to (in other words - stay away from department store cards - they are completely unnecessary and will only hurt your score!)
7. If you need to apply for loans or credit cards, space them out. Don't try to apply for 3 credit cards within 4 months. You should wait at least 6-12 months before applying for another card.
   
8. Try not to get too close to your credit limit on your cards.

Credit Score

We had no clue about our credit until it came time to buy our house in 2004. Our real estate agent advised us to run a credit report to clean up our credit so that we could get the best lending rates. Both Mel and I were a bit surprised to find a lot of inaccurate information, including different name aliases, incorrect addresses, and open accounts that we had no clue about. Mel's credit was particulary bad because one of her aliases had horrible credit history, which was really dragging her credit score down. After we cleaned up our credit we were able to secure our mortgage at the best rate at the time.

This year we decided to run our credit reports again to see how we were doing. For the most part mine was clean except for an additional alias which was a misspelling. I was able to account for all but two of the open credit accounts under my name. So I feel safe that no one has stolen my identity and is opening up accounts using my identity. I've landed myself in the 770s, an improvement of 10 points or so since 2004.

Mel is a different story. Once again her credit was being dragged down by an alias. We expected her score to be close to mine but it was nearly 140 points lower!

Running a credit report annually or every two years helps protect you from identity theft, saves you some trouble when you need to secure the best loan(house or car or whatever), and helps you understand your credit and borrowing power.

We used Experian, but any of the big 3 are nearly the same. In fact, the 3 credit agencies announced yesterday that they would be moving to the same scoring system.

Glittering Gold

Gold is once again a hot commodity rising to $546 from $440 a year ago, $345 two years ago, and $260 five years ago... I have started investigating "prospecting" with gold and www.usagold.com has been a great place for me to start. We are definitely not going to sell all our assets and invest in gold but we are thinking about setting up a continuing investment in gold. Check out First Time Gold Investors Help, it is definitely good food for thought.

In my quest to discover more about gold I found two additional sites...

www.kitco.com/market shows the real time quotes for gold in NYC and world wide.

For those of you who want to dabble in trading gold you can open an account at bullion vault, click the banner below to get there. They will even give you free gold to trade with initially to get you comfortable with the site!

Why I want to be the bank

HELOCs are typically interest only loans, which means the monthly payments you make do not count towards principal. Banks want to push you to the limit on your monthly payments because it will ensure that you make few payments on the HELOC, which means more $$$ for them, a LOT more! Let the numbers speak for themselves...

















* Assumes that no principal is paid off on HELOC.

Some additional notes... We have a five year plan for our home. The HELOC rate fluctuates monthly, so these numbers are too small. If we close the HELOC within three years we have to pay an additional $1000. The minimum account charge for the HELOC is $375 if you have no balance...

The initial HELOC payment was $235, it is now almost $300 and continuing to rise because its tied to prime...

Interest only loans aren't always bad and I would consider one if the interest rate wasn't variable and I was very, very, very, very sure that the value of the home would increase in the future.

Don't be tricked By the 0% down

Purchasing a house was a big step in our lives. My brother always cautioned me about buying a house because he felt his home purchase reduced his flexibility in life. It tied him to a particular location and required a decent amount of effort to move on once he was laid off. After owning a home for 1.5 years we most certainly agree. We need to stay here at least two years for tax purposes and even then if we decided to move we might break even. Bottom line, be prepared to stay put for a while and don't expect real estate prices to continue growing at the phenomenal rates that they have been. We love our home and we love the location so we lucked out that we are going to be here for a while.
Ok, with all the finance options floating around there are two options that I want to discuss in detail. In the past 5 years banks have been bending over backwards to provide ways for folks to purchase homes without the standard 20% down payment. There is a tremendous amount of marketing for 0% loans, 5%, 10%, and 15% loans. Basically banks offer you a typical mortgage combined with a Home Equity Line of Credit(HELOC) to handle the down payment. The mortgage is your ARM or 15 year or 30 year or interest only loan. The HELOC is a variable rate loan based on prime plus some percentage based on your credit score.
We opted to go with the 5% down plan because we didn't want to liquidate our stock holdings. Here is what we got:

$235,000 5 year arm at 5% Monthly payment around $1100, $1500 with taxes and other stuff
$50,000 HELOC intially at 5.75% Monthly payment around $235

Does anyone notice what is wrong with this picture? We didn't until after we started making payments... Tomorrow I will talk about the interest only loan and how I abhor the idea...

February Cash Flow Overview

So I did an analysis on how much we spent in the month of February. We have to keep in mind a few things though. February is a short month. This means expenses are less than usual yet we still get 2 paychecks during this month so this shouldn't be an accurate portrayal of our money for the rest of the year. I'm not sure if March will be very accurate either since we will be getting 3 paychecks in March! Speaking of 3 paychecks, for those of you who have a monthly budget based on 2 paychecks per month (like Mikey and I do), during the month of March, it's a good idea to live off 2 paychecks just like every other month and sock away your 3rd paycheck.

Anyway, here's what February looked like:

Now, there's nothing we can do about our mortgage. Our mistake was purchasing a house that was more than what we needed. I absolutely love our house but it really takes a chunk out of our paychecks that we could otherwise be using to invest and make more money with. Our next biggest expense is Gifts. Well, February was a big month for us. It was Mikey's birthday AND it was Valentine's day. So we had to buy each other gifts and ok, maybe getting Mikey a new gaming PC was a bit extravagant but he was going to eventually get it anyway! The areas where we really can trim the fat are Entertainment/Shopping and Dining out. That will be our goal for March.

Right now, we are spending more than we are saving/investing. This visual kinda hurts but it's actually not too bad because a big chunk of our expenses are going into our mortgage.

Goals for March:
1) Cut dining out to below $500
2) Cut entertainment/shopping to below $300
3) Put something into the Brokerage account.

Let's see if we can keep our goals!

-Mel

Time Vs Money

Have you ever stopped to think about the meaning in the saying "Time is money."? Let's take a look at two real life examples:

Person A.
"I live in NJ and work in th city(NYC). I get up at 6am everyday, leave my house at 7am, drive to the bus stop, and arrive at my office around 9am. I take off an hour for lunch and usually leave work around 5:45-6:30pm reaching home around 7:30-8PM. I eat dinner, then watch TV or browse the internet until bed time(11-11:30PM). My compensation: near 6 figures..."

Person B.
"I live about 7-10 mins from work. I get up around 8am everyday, leave my house around 8:30am, and arrive at my office around 9am. If I do not have a early afternoon meeting I go home for lunch for about an hour-hour 15mins. I leave work between 5:00-5:30PM and at home 15 mins after that time. I make dinner, eat and from 7-11pm I have free time. I go to the gym or rock climbing, or I go to Barnes & Noble, watch TV, read, etc. My compensation: in the 80s..."

If you had the option to choose between these two, which one would you choose? In this example we are really talking about 4-5 hours spent in commute time. Is it worth the extra 10-15k?

Let's look at another case.

Person C.
"I use to have a 9-5 job. It was near my work and I was able to go home for lunch on most days. I even got out early on some occasions. I was able to work out every day or go to Yoga classes. BUT, the compensation was very unsatisfactory. At my current job I make 1.3X what I use to make! Finally, I feel like I have some financial freedom. Work pays for all my meals which saves me even more money! However, I work 15-18 hour days and most weekends. I almost never get to the gym and Yoga and friends are fading fast..."

1.3X the pay, but more than double the work hours and work on weekends? Hrmnn... in terms of pure math I could understand 2X the pay for double the work. For all those considering a career path that consumes 100% of your time, please remember to calculate the number of hours you work divided by your salary to figure out how much an hour of your time is worth. For some folks, it isnt much more than minimum wage....

-Mikey

The Beginning

Mikey and I decided to start this blog so that we can capture and share the everyday decisions we make that effect our financial situation. We're looking for financial freedom. Why is that important? Because we're not interested in spending our lives running in the rat race and we hope that everyone can learn from our blog.

Here's a little background info on us:

We're newlyweds with a combined salary of $135,000. We are both in our mid to late twenties. We have no school loans or credit card debt but we do have a $235,000 mortgage and a $50,000 HELOC. We bought a house 1.5 years ago for $300,000 and it is worth around $360,000 now. We also share an investment property that costs $164,000 and the tenants pay $770 a month. I put in 10% of my salary into 401k and Mikey puts in 8%. He also puts in 10% into the Employee Stock Purchase Plan and I put in nothing.

Our goal is for our networth to make it to millionaire status by 45. We have our reasons for this. We're very focused on giving back to the community and helping others. That's what money will do for us. We don't need a million bucks to be happy. But I'm sure many others could use a piece of it.

That's all I have to say for now. I'm sure Mikey will have more to say soon.

-Mel