The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

July 29, 2009

Savers marrying Spenders is a bad thing?

Filed under: News Review, Personal Finance — Tags: , , — thebalancedspreadsheet @ 2:43 pm

I came across this article yesterday about Savers and Spenders marrying each other.  It is an interesting short read, but this one quote in particular got me thinking:

“The disconnect between what people say they look for in an ideal mate and the characteristics of actual mates to whom they are attracted is unfortunate,” Rick, Small and Finkel wrote, as the different spending habits often result in greater financial conflict in marriage.

While I do believe that many marriages are struggling due to financial conflict, am I the only one who thinks Savers and Spenders marrying each is a good thing?  I mean if two tightwads marry each other, when do they have any fun?  If you have two spenders in the house how are they supposed to build wealth?  Working together as a team forces the saver to spend a little and the spender to rein it in a little.  Maybe it’s just me, but I just do not see this as a horrible thing.

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July 28, 2009

Life Insurance Part III

Filed under: Excel fun, Personal Finance, Real Example, Simulation — Tags: , , , — thebalancedspreadsheet @ 1:09 pm

To finish up my series of life insurance I am going to write about term insurance vs. return of premium life insurance (RoP).  The basic concept of RoP is that if the insurance policy is never used, at the end of the period the premiums that you paid are returned to you.  From my own personal example, I can receive a 30 year RoP policy for $515 a year.  If I keep the policy for the full 30 years and do not die, the total premiums paid of $15,450 (30 x $515) are returned to me after the 30 years.  Obviously because of this feature, RoP is more costly then regular term insurance.  I can get the same 30 year $500,000 policy for only $375 a year.  What if I invested this difference of $140?  Would I come ahead of the $15,450 at the end of the 30 years?  Like in my comparison between term and whole life insurance I assumed a 10% annual rate of return and came up with the following:

 

  Regular v. RoP    
  Premium difference RoP total  
  invested at 10% Premiums Pd  
Year 1  $               140.00  $      515.00  
Year 2  $               308.00  $    1,030.00  
Year 3  $               492.80  $    1,545.00  
Year 4  $               696.08  $    2,060.00  
Year 5  $               919.69  $    2,575.00  
Year 6  $            1,165.66  $    3,090.00  
Year 7  $            1,436.22  $    3,605.00  
Year 8  $            1,733.84  $    4,120.00  
Year 9  $            2,061.23  $    4,635.00  
Year 10  $            2,421.35  $    5,150.00  
Year 11  $            2,817.49  $    5,665.00  
Year 12  $            3,253.24  $    6,180.00  
Year 13  $            3,732.56  $    6,695.00  
Year 14  $            4,259.82  $    7,210.00  
Year 15  $            4,839.80  $    7,725.00  
Year 16  $            5,477.78  $    8,240.00  
Year 17  $            6,179.55  $    8,755.00  
Year 18  $            6,951.51  $    9,270.00  
Year 19  $            7,800.66  $    9,785.00  
Year 20  $            8,734.73  $  10,300.00  
Year 21  $            9,762.20  $  10,815.00  
Year 22  $          10,892.42  $  11,330.00  
Year 23  $          12,135.66  $  11,845.00  
Year 24  $          13,503.23  $  12,360.00  
Year 25  $          15,007.55  $  12,875.00  
Year 26  $          16,662.31  $  13,390.00  
Year 27  $          18,482.54  $  13,905.00  
Year 28  $          20,484.79  $  14,420.00  
Year 29  $          22,687.27  $  14,935.00  
Year 30  $          25,110.00  $  15,450.00  $  9,660.00

 

I come out almost $10,000 ahead by investing the difference myself.  The average rate of return I would need to break even would be about 7.46%.  Also it is important to remember that the premiums are returned only if the death benefit is not paid.  If you died, you would not get the premiums returned, however if you went with regular term and invested the difference, the money would be with your estate when you died. 

Below is a table comparing the total money left to your estate if you died using Term vs. RoP:

 

  Term: Death Benefits RoP: Death Benefits  
Age and investments and investments Difference

28

 $          500,140.00  $          500,000.00  $      140.00

29

 $          500,308.00  $          500,000.00  $      308.00

30

 $          500,492.80  $          500,000.00  $      492.80

31

 $          500,696.08  $          500,000.00  $      696.08

32

 $          500,919.69  $          500,000.00  $      919.69

33

 $          501,165.66  $          500,000.00  $    1,165.66

34

 $          501,436.22  $          500,000.00  $    1,436.22

35

 $          501,733.84  $          500,000.00  $    1,733.84

36

 $          502,061.23  $          500,000.00  $    2,061.23

37

 $          502,421.35  $          500,000.00  $    2,421.35

38

 $          502,817.49  $          500,000.00  $    2,817.49

39

 $          503,253.24  $          500,000.00  $    3,253.24

40

 $          503,732.56  $          500,000.00  $    3,732.56

41

 $          504,259.82  $          500,000.00  $    4,259.82

42

 $          504,839.80  $          500,000.00  $    4,839.80

43

 $          505,477.78  $          500,000.00  $    5,477.78

44

 $          506,179.55  $          500,000.00  $    6,179.55

45

 $          506,951.51  $          500,000.00  $    6,951.51

46

 $          507,800.66  $          500,000.00  $    7,800.66

47

 $          508,734.73  $          500,000.00  $    8,734.73

48

 $          509,762.20  $          500,000.00  $    9,762.20

49

 $          510,892.42  $          500,000.00  $  10,892.42

50

 $          512,135.66  $          500,000.00  $  12,135.66

51

 $          513,503.23  $          500,000.00  $  13,503.23

52

 $          515,007.55  $          500,000.00  $  15,007.55

53

 $          516,662.31  $          500,000.00  $  16,662.31

54

 $          518,482.54  $          500,000.00  $  18,482.54

55

 $          520,484.79  $          500,000.00  $  20,484.79

56

 $          522,687.27  $          500,000.00  $  22,687.27

57

 $          525,110.00  $          500,000.00  $  25,110.00

While RoP sounds nice initially, when you dig further in you see that it is just a gimmick to get you to pay more.  My wife and I are very pleased with our decision to get regular 30 year term life insurance.  It is not only the cheapest, but the best return on our investment as well.

Has anyone else out there had any similar experience comparing the types of life insurance to get?  Let me know what you think.

July 27, 2009

Life Insurance Part II: Term v. Whole

Filed under: Excel fun, Personal Finance, Real Example, Simulation, Uncategorized — Tags: , , — thebalancedspreadsheet @ 2:20 pm

As promised in yesterday’s post, I am going explain the financial reasons why we picked the type of life insurance policy that we did.  I highly recommend reading yesterday’s post, but as a reminder we decided to go with the 30 yr level term at $375 a year instead of the Whole life $1575.99 a year policy.

Term vs. Whole- While term is definitely the cheaper of the two, whole is sold on two major selling points.  1.) As long as the annual premiums are paid, the coverage extends your whole life and 2.) Cash value builds into the policy, so should you ever need to cancel the policy you will have some cash available when you cancel.  Whereas with term, you get nothing if you cancel your policy.  Or do you?  What if instead you invested each year the difference between the prices of term vs. whole?  Would you come out ahead?  I did a simulation based on the price difference of $1,200.99 ($1,575.99-$375).   I assumed a 10% rate of return on investing if I did it on my own and a 4% return from the whole life.  It is very hard to determine what kind of interest rate you receive on a whole life policy as it varies by policy as well as there are a lot of other fees tacked on as well.  Here is what I came up with:

  Term Whole Life  
         Value of    Premium “Cash Value” Difference
Year 1  $       1,200.99  $                –    $     1,200.99
Year 2  $       2,642.18  $       1,249.03  $     1,393.15
Year 3  $       4,227.48  $       2,548.02  $     1,679.46
Year 4  $       5,971.32  $       3,898.97  $     2,072.35
Year 5  $       7,889.54  $       5,303.96  $     2,585.58
Year 6  $       9,999.59  $       6,765.15  $     3,234.44
Year 7  $     12,320.63  $       8,284.78  $     4,035.85
Year 8  $     14,873.79  $       9,865.20  $     5,008.58
Year 9  $     17,682.25  $     11,508.84  $     6,173.41
Year 10  $     20,771.57  $     13,218.22  $     7,553.34
Year 11  $     24,169.82  $     14,995.98  $     9,173.83
Year 12  $     27,907.89  $     16,844.85  $   11,063.03
Year 13  $     32,019.76  $     18,767.68  $   13,252.09
Year 14  $     36,542.83  $     20,767.41  $   15,775.42
Year 15  $     41,518.20  $     22,847.14  $   18,671.06
Year 16  $     46,991.11  $     25,010.05  $   21,981.06
Year 17  $     53,011.31  $     27,259.49  $   25,751.82
Year 18  $     59,633.53  $     29,598.89  $   30,034.63
Year 19  $     66,917.97  $     32,031.88  $   34,886.09
Year 20  $     74,930.86  $     34,562.18  $   40,368.67
Year 21  $     83,745.03  $     37,193.70  $   46,551.33
Year 22  $     93,440.62  $     39,930.48  $   53,510.14
Year 23  $   104,105.78  $     42,776.73  $   61,329.05
Year 24  $   115,837.44  $     45,736.83  $   70,100.62
Year 25  $   128,742.28  $     48,815.33  $   79,926.95
Year 26  $   142,937.59  $     52,016.97  $   90,920.62
Year 27  $   158,552.44  $     55,346.68  $ 103,205.76
Year 28  $   175,728.77  $     58,809.58  $ 116,919.20
Year 29  $   194,622.74  $     62,410.99  $ 132,211.75
Year 30  $   215,406.10  $     66,156.46  $ 149,249.64

As you can see above, by going with term and investing the difference, you will come out way ahead of the cash value whole life insurance.  But what happens when you die?  I ran a projection for the next 50 years of my life (Age 28-Age 78) and here is what I came up with:

Age Term Whole Difference
28  $   501,200.99  $   500,000.00  $        1,200.99
29  $   502,642.18  $   500,000.00  $        2,642.18
30  $   504,227.48  $   500,000.00  $        4,227.48
31  $   505,971.32  $   500,000.00  $        5,971.32
32  $   507,889.54  $   500,000.00  $        7,889.54
33  $   509,999.59  $   500,000.00  $        9,999.59
34  $   512,320.63  $   500,000.00  $      12,320.63
35  $   514,873.79  $   500,000.00  $      14,873.79
36  $   517,682.25  $   500,000.00  $      17,682.25
37  $   520,771.57  $   500,000.00  $      20,771.57
38  $   524,169.82  $   500,000.00  $      24,169.82
39  $   527,907.89  $   500,000.00  $      27,907.89
40  $   532,019.76  $   500,000.00  $      32,019.76
41  $   536,542.83  $   500,000.00  $      36,542.83
42  $   541,518.20  $   500,000.00  $      41,518.20
43  $   546,991.11  $   500,000.00  $      46,991.11
44  $   553,011.31  $   500,000.00  $      53,011.31
45  $   559,633.53  $   500,000.00  $      59,633.53
46  $   566,917.97  $   500,000.00  $      66,917.97
47  $   574,930.86  $   500,000.00  $      74,930.86
48  $   583,745.03  $   500,000.00  $      83,745.03
49  $   593,440.62  $   500,000.00  $      93,440.62
50  $   604,105.78  $   500,000.00  $    104,105.78
51  $   615,837.44  $   500,000.00  $    115,837.44
52  $   628,742.28  $   500,000.00  $    128,742.28
53  $   642,937.59  $   500,000.00  $    142,937.59
54  $   658,552.44  $   500,000.00  $    158,552.44
55  $   675,728.77  $   500,000.00  $    175,728.77
56  $   694,622.74  $   500,000.00  $    194,622.74
57  $   715,406.10  $   500,000.00  $    215,406.10
58  $   242,830.82  $   500,000.00  $   -257,169.18
59  $   273,546.51  $   500,000.00  $   -226,453.49
60  $   307,948.09  $   500,000.00  $   -192,051.91
61  $   346,477.85  $   500,000.00  $   -153,522.15
62  $   389,631.18  $   500,000.00  $   -110,368.82
63  $   437,962.91  $   500,000.00  $     -62,037.09
64  $   492,094.45  $   500,000.00  $       -7,905.55
65  $   552,721.77  $   500,000.00  $      52,721.77
66  $   620,624.37  $   500,000.00  $    120,624.37
67  $   696,675.29  $   500,000.00  $    196,675.29
68  $   781,852.31  $   500,000.00  $    281,852.31
69  $   877,250.58  $   500,000.00  $    377,250.58
70  $   984,096.64  $   500,000.00  $    484,096.64
71  $1,103,764.23  $   500,000.00  $    603,764.23
72  $1,237,791.92  $   500,000.00  $    737,791.92
73  $1,387,902.94  $   500,000.00  $    887,902.94
74  $1,556,027.29  $   500,000.00  $ 1,056,027.29
75  $1,744,326.55  $   500,000.00  $ 1,244,326.55
76  $1,955,221.73  $   500,000.00  $ 1,455,221.73
77  $2,191,424.33  $   500,000.00  $ 1,691,424.33
78  $2,455,971.24  $   500,000.00  $ 1,955,971.24

During the 30 year term policy you come out well ahead of a whole life policy.  However, after the 30 years are up there is a seven year stretch where the whole life policy would be better if you became deceased, although only five of those years have a deficit of over $100,000.  But as mentioned in the my previous post, my wife and I will not need life insurance in 30 years as long as we stick to and our financial game plan.  Also after the seven year gap, the investments you make with term insurance outgrow the payout of the whole life insurance! 

After looking at these numbers it was quite obvious that term life insurance was the way to go.  I know everybody’s situation is different, but I would run the numbers for your situation and decide what to go with.  I think most situations will end up like mine, with term insurance coming out way ahead.

 Tomorrow I will do another comparison.  This time between 30 year term life vs. 30 year term life with return of premium.

July 24, 2009

Life Insurance Part I

Filed under: Excel fun, Personal Finance — Tags: , — thebalancedspreadsheet @ 11:38 am

Life Insurance is an important step in the financial planning process.  There are many questions to ask when purchasing life insurance, such as how much insurance to get, what kind of insurance to purchase, how long do I need insurance, and most importantly do I even need life insurance?  We will try to tackle those questions today and tomorrow show you the simulations I ran when my wife and I purchased life insurance for me.

Do you need Life Insurance?  It all depends on your situation, but if no one depends on you for financial support then you probably are ok without it.  Also if you are older, the kids have moved out on their own, and you have built wealth, you can probably pass as well.  However, if you are in any other situation, I think life insurance is a MUST for your family in case of death.

How much insurance do I need?  This is the topic of great debate.  It really just depends on what you are going to do with the proceeds.  If you are trying to pay for just the funeral and other misc expenses, a small $25,000-$50,000 policy is fine for you.  Some people just want to cover their mortgage and other debt, while others want the proceeds to cover lost income.  A good rule of thumb when covering lost income is to get insured for about 8 to 10 times your income level.  But not too much more then that, because if you are insured for any more you might be better off dead then alive, and you will have to start sleeping with one eye open. 😉

What kind of insurance do I need? There are two basic kinds of life insurance.  Term and Whole life.  Term insurance is coverage for a specific period of time, usually in 5 year increments, at a fixed annual premium as opposed to whole life where the policy is in effect for your whole life as long as the annual premiums are paid.  Whole life policies also have an investing part in the plan usually known as the cash value.  The cash value is a dollar amount that builds over time and can be redeemed when the policy is cancelled.

How long do I need insurance?  This only applies to term insurance because with whole life you are covered your whole life.  You need coverage as long as someone will depend on your wealth.  We decided to go with a 30 year term.  We are predicting by this time, any children that we will have will be out of the house if we do a good job of parenting 🙂 . This also gives us plenty of time to build wealth so we will be self-insured after the term expires, making life insurance unnecessary. 

Decision-After deciding that we needed about 30 years of coverage for me, we then decided that on $500,000 worth of coverage would be adequate for now.  After running some online quotes at Zander Insurance and Life Insurance.com we came up with the following quotes:

 

Type

Annual Price

Per month

Whole

$1,575.99

$131.33

Term life 30 yr

$375.00

$31.25

Return of Premium 30 yr **

$515.00

$42.92

**Return of premium is a term policy that returns all premiums if at the end of the term the policy is not redeemed.

We ended up going with the regular 30 year term at $375 annual premium.  Tomorrow we will go why that was the best deal financially in the long term and not just because of the price.

July 17, 2009

June Cash Breakdown

Filed under: Personal Finance, Real Example, Uncategorized — thebalancedspreadsheet @ 5:33 pm

I like to breakdown our cash as of June.  I feel that it is important to give your savings a name, because if you do not you will end up spending it on something that is not in your goals.

 

June '09 Cash Breakdown

June '09 Cash Breakdown

Emergency Fund-While pretty much every financial advisor recommends that you have some kind of emergency fund to cover unexpected health costs, job loss, or other emergencies, it varies to how much you should keep.  I like to measure our emergency fund in the total months expenses saved in the bank.  Our emergency fund is currently at $10,000, which is about five months worth of expenses.  My wife and I are currently comfortable at that number and there is no plan to up the amount any.

Working Funds-This is related to the ESPP program.  Because $1,667 is always taken out of my paycheck every month, I like to keep an amount in savings to cover this “loss” of savings.  The total of ESPP dollars and the Working Funds should always equal $5,000.  Since ESPP was $5,000 at the end of the month the working funds is zero.

Travel/Car/IRA-This is kind of a split category, as we have a few things my wife and I are planning to do with this money.  We put 15% of our income towards retirement and we are debating whether or not to just go ahead and max out a ROTH IRA for $5,000 now due to the fact that we think the market is going to be recovering soon or just do 15% a month of her pay.  We would also like to try and go to Spain for our one year anniversary in May.  I know that is still 10 months away but never too early to start planning and saving nowJ.  In addition, even though our cars are in good condition and we do not plan on buying a car for a few years at least, we are saving now to pay for our car in cash since we do not believe in debt. 

So there you have it.  Periodically I will keep you guys updated on the cash breakdown and see where we stand with our savings goals.

July 14, 2009

Employee Stock Purchase Program Review

Filed under: Excel fun, Personal Finance, Real Example — Tags: — thebalancedspreadsheet @ 5:48 pm

 

 

Well as promised, I am posting today about my employer’s Employee Stock Purchase Program (ESPP). Since June 30th, was the last day of the quarter, I want to post a brief synopsis of how the process works.
ESPP Review

ESPP Review

 

 

Before the Quarter ends: Every month $1,667 is taken out of my pay check and is placed into an account with BNY Mellon. The money sits in the account; no interest is accrued, until the last day of the quarter. By then $5,001 is in the account. (Note: since the maximum contribution limit is $20,000 annually, the 4th quarter amount is only $4,997.)

Last business day of the Quarter: Stock is purchased with the $5,001 at 90% (10% discount) of the closing price. This quarter the closing price was $11.66, so the discount rate was $10.494 ($11.66 x .9). I therefore purchased 476.558 shares of stock for the quarter.

Three to five business days after the quarter ends: This is the tricky part. The stock purchased doesn’t post to my account until about 3-5 days after the end of the quarter. Until it posts I am usually checking the market to make sure that stock hasn’t tanked 25% or more, and in these days that might not be far off from the truth. J Naturally there is some fluctuation in the “dead period” when the stock. Sometimes you get lucky and you get a nice capital gain, but other times you the tank drops .20 and you take a capital loss. So far I have not been helped or hurt too bad.

After stock posts to account: I have the option of selling it whenever I choose too. Since I do not believe in single stocks I go ahead and sell as soon as possible. Whenever a sell is put through it always goes the sell price is always the opening price of the stock on the next business day. The stock was first posted to my account on July 6th. I did not put in a request to sell until July 7th and the stock sold on July 8th at $11.79. Not too bad but if I had pulled the trigger sooner I would have sold on July 7th for $11.99. Oh well. I received $5,618.62 from the sale. After taking out my initial investment of $5,001, I netted $617.62 a nice 12.35% before tax return on investment.

Taxes, fees, etc-Unfortunately there are taxes and fees due for selling the stock. The stock gain is broken into two pieces. The discount gain and the capital gain. The discount gain is the closing stock price at time of purchase less the discount price multiplied by the number of shares bought. (($11.66-$10.494)*476.558)=$555.67. The discount gain is taxed at my ordinary income rate. The capital gain is the closing stock price at time of sale less the closing price at the time of purchase multiplied by the number of shares sold. (($11.79-$11.66)*476.558)=$61.95. The capital gain is taxed at my ordinary income rate since it was from an asset owned less then one year. There are also fees with selling the stock. Those amounted to $48.57.

Five to seven days after stock is sold: $5,570.05 or the proceeds after fees from the sale is then deposited into my bank account. Taxes are taken out by my employer in the next pay check. The process then starts over and $1,667 is added each month to my account. So essentially I bank the gains and reinvest the same $5,000 every month. The annual percentage yield (apy) is usually around 45% which is pretty sweet for pretty much doing nothing. So check and see if your employer has something similar. But be careful because all companies’ plans are different and are not all the same. Some have periods where you can not sell and might be forced to keep the stock for longer periods of time.

Anybody else participate in your employers ESPP? How has your experience been? Feel free to comment.

July 2, 2009

Net Worth June ’09

Filed under: Personal Finance — Tags: — thebalancedspreadsheet @ 6:57 pm
Net Worth June '09

Net Worth June '09

This is the first of monthly net worth updates. I’ve been keeping track of my personal net worth since June ’08, so I finally have a years worth of data now to compare it with. Eventually I would like to post a graph of my net worth from June ’08 to current to see our progress. Also since my marriage in May, my wife and I have combined our finances so this is the second month that the net worth has our money together. Before that time the net worth was just mine. Some FYI on the amounts above:

Cash-We have cash broken down into a few categories. First we have a $10,000 emergency fund. The cash is set aside for emergencies such as job loss or big medical problems. This represent between 4-6 months worth of expenses if needed. The rest of the cash is a mix of working funds available for upcoming expenses and other savings for vacations and cars. I hope to have a breakdown of the cash soon in the following weeks. Cash decreased sharply this month due to a big pay down on the mortgage discussed below.

Employee Stock Purchase Program (ESPP)-This is an option that my current employer runs. The program allows you to contribute up to $20,000 a year. Company stock is purchased at a 10% discount on the last day of every quarter and can be resold immediately if desired. I always contribute the max every month of $1,667 ($20,000/12) and always sell as soon as the stock is purchased. This basically allows me to reinvest the same $5,000 every quarter and make a quick and easy $555 every three months. This translate to a $2,200 gain every year or an approximately 45% return. I will write about this more in detail soon. This is the last month of the quarter, so I should be getting this cash sometime in the middle of July.

House-In this market, trying to figure how much your real estate is worth is a shot in the dark. I have done the best I can by comparing other condominiums sales in my subdivision. I haven’t changed the value since January.

Retirement-This is made up of 401(K)’s that my wife and I both have from current and former employees. They are down now, but I have a long term perspective and know that they will come back.

Pension-This is a cash balance pension provided by my current employer. They contribute a set percentage of my salary each moth. I just became vested in the plan in May and I am free to roll this money over to an IRA when I leave the company.

Mortgage-The Mortgage was paid down this month to get below 80% of LTV to get rid of PMI. The original terms of the mortgage were 30 years at 6.1%. We have talked about refinancing with the super low rates but have not done so due to not knowing how much longer we will be in our condo.

I plan on doing this monthly so if you have a question or comment please leave it below in the comment section.

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