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

April 27, 2010

Financial issues facing Generation Yers

Filed under: Goals, News Review, Personal Finance — Tags: , , , — thebalancedspreadsheet @ 7:05 pm

While in Tennessee last week I came across a good front page article in USA Today titled “Generation Y’s Steep financial hurdles: Huge Debt, no savings”.  Being a member of the so called “Generation Y” myself the title caught my eye.  The article mainly profiles Frank and Erin Lennon who just got married in October and Kristen Ammerman a senior from Michigan State who is graduating with a degree in journalism.  The article is full of interesting (and also scary) statistics and facts on young people today from the public policy research group Demos.

“Their generation is the first in a century that is unlikely to end up better off financially than their parents, the Demos report said.•Only 58% pay monthly bills on time, a National Foundation for Credit Counseling (NFCC) 2010 survey said.

•Nearly 70% of Gen Y members are not building up a cash cushion, and 43% are amassing too much credit card debt, says a November MetLife poll.

•On average, Gen Yers each have more than three credit cards, and 20% carry a balance of more than $10,000, according to Fidelity Investments.

•Millennials are graduating from college with an average of $23,200 in student debt, according to the most recent data from the Project on Student Debt. That is a 24% increase from 2004.  Even before the recession, nearly half of college students dropped out before earning a degree, the Demos report said.

Add all of that up and the data is kind of depressing.  This really does not come as much of a shock to me.  Talking with friends, family, and coworkers you always wonder how people my age could afford going on nice vacations and buying nice cars.  Well the data suggest they are faking it by going into credit card debt.  Although these quotes below kind of made me chuckle:

  “It was only when [the Lennon’s] were married in October that they became aware of their total credit card and college loan debts.

“The real shock was on our wedding day, when we realized that we were $104,000 in debt,” Frank says.

Surprise!  The thing that shocked me most was not that fact they were $104K in debt, but the fact they just found out about it on their wedding night!  You would think it might have come up some time in the dating or engagement process right?  Ultimately though this quote sums up what most twenty-something’s are feeling today:

  “When you get a little bit of money, what do you do with it?” asks Mikala Shremshock, 27, who works for Veeco Instruments near Philadelphia. 

“Do you pay off your credit cards, put it toward student loans, make an extra payment on your house or car, or put it in your IRA? I don’t have enough to really make a big dent in anything. If you get a bonus, why not just spend it?”

This shows the hopelessness and short-term thinking that so many people have right now which is the “Thank God it is Friday and oh no, it is Monday” mentality of buying stuff whenever you feel like it and paying for it later.  Twenty-something’s have dug themselves a hole, but it is not a hole they can not get out of, nor do I believe that it is absolutely certain they will be worse off than their parents.  What most of us are lacking is clearly defined financial goals and a plan to carry them out.

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April 3, 2010

Refinance Breakeven Spreadsheet

Filed under: Excel fun, Mortgage — Tags: , , , — thebalancedspreadsheet @ 8:55 am

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On the heels of releasing the mortgage amortization schedule, I thought it would be nice to follow that up with a refinance breakeven calculator.  With mortgage interest rates at 40 year lows most people are rushing to refinance before rates rise again.  There are several things to consider before you refinance and this spreadsheet will help determine two of them. 1.) How much interest you will save if you refinance and 2.) How long it will take you to recoup your closing costs.   All you need to do is input 6 numbers:

Refinance Breakeven calculator

1.)    Current Loan balance-In cell B1 input your current loan balance.  Note that this is your current balance not the original amount you paid for the house but rather how much is owed currently.

2.)    Current Interest rate-In cell B2 enter your current interest rate.  Enter as a percentage (IE 5.5% interest rate would be 5.5 not .055)

3.)    Current Payment-In cell B3 enter your current principal and interest payment per month only, not taxes or insurance.

4.)    Refinance Rate-In cell E1 enter your refinanced rate the same way you entered in your current interest rate in cell B2.

5.)    Length of New Loan-In cell E2 enter the length in years of your new loan.  If doing partial years divide the partial year’s months by 12 and enter that number in as a decimal. For example, a 17 years and 3 month amortization you would enter 17.25 (17 years and (3 months/12)).

6.)    Refinance Costs-In cell E4 enter the total refinance cost.

Notes: After entering all six figures cells B16 and E6 will give you your results.  B16 is the total interest savings over the entire length of the refinance and E16 is the number of months it will take until your interest saved is greater than your closing costs.  Also note that all these savings are pre-tax.  Like the mortgage amortization schedule you can plug-in extra principle payments in the ‘Current’ and “Refi’ tabs if you choose to determine how much faster they will help pay off your mortgage.

The most important number is the months to breakeven figure.  As mentioned before when we were considering a refinance, if you do not think you will be in the house after the breakeven point, refinancing will actually cost you more in the long run.

You can find this and other helpful spreadsheets that I have created and shared on the spreadsheet page.  So please come back soon as that page will be continually updated.

March 16, 2010

Equity Acceleration Programs: Not needed to pay off your mortgage sooner

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From time to time, when I get my mortgage statement in the mail, attached is a pamphlet encouraging me to enroll in the Equity Accelerator Program.  It is a service provided by the bank that automatically drafts half of your mortgage payment out of your bank account every two weeks and will help cut down the length of your mortgage.  In theory it sounds good, but is it really worth it?

How it works is very simple.  Every two weeks half a mortgage payment is withdrawn from your account.  So that means that 26 half payments are withdrawn each year.  Those 26 half payments equal 13 full payments, so you are paying the equivalent of an extra payment over a full year.  Over the length of a 30 year mortgage making one additional payment per year will reduce the mortgage anywhere between four and six years and save several thousands of dollars in interest.

While that does sounds nice there are some drawbacks, being mostly the fees associated with the service.  The program offered by my mortgage holder costs $9 a month to use plus a $49 start up fee.  The estimate provided to me by my mortgage holder is that it would take 12 years 9 months to finish paying off the balance if using their program, which would cost $1,426 ($49+$9 times 153 months) in fees.  The good news is that you can pay extra on your mortgage yourself without any fees!  Simply just make an extra mortgage payment a year on your own and the pay down time will be just the same as if you used the bank—less paying them to do it for you.

So while this is a nice service provided by the bank that will get you out of debt faster, the service is simply not worth it to me.  The fees are high for something you can do by yourself.  The $49 start up fee is a lot lower then it used to be though as previous offers included a $400-$500 start up fee!  But by simply being disciplined in creating and sticking to a budget you can pay down your mortgage faster by yourself.  I have a created a mortgage amortization spreadsheet that will track how soon your mortgage will be paid off if you make additional payments at any point in time in your mortgage.  My wife and I are using our own accelerated mortgage plan and are scheduled to have our mortgage paid off in just over 3 years!  Bottom line is that you do not have to pay the bank extra to pay down your mortgage, just do it yourself!

March 14, 2010

Mortgage Amortization schedule

As I promised in the Standard Deduction post, here is another spreadsheet.  This one is a mortgage amortization schedule spreadsheet.  Ever wonder how much sooner your mortgage would get paid off if you paid $50.00 a month extra?  Or how about a $2,000 one time extra payment because of a big tax refund?  You will be able to find out by inputting just numbers into four different cells.

Mortgage Amortization Schedule

1.)    Current Loan balance-In cell F1 input your current loan balance.  Note that this is your current balance not the original amount you paid for the house but rather how much is owed currently.

2.)    Payment-In cell F2 enter your principal and interest payment per month.  This does not include any taxes or insurance that is included in your payment just the principal and interest.

3.)    Interest rate-In cell F3 enter your interest rate.

4.)    Current month-Enter the number of the current month (IE January=1, February=2, March=3, etc).  For example since the current month is March, I would enter the number “3” in the spreadsheet.

5.)    Extra Principal-Enter any extra principal payments made in the month in the “Extra Principal” row for the month(s) that you made the extra payment.

Also remember that this spreadsheet will only work for those who have a fixed rate mortgage.  I hope those of you who are trying to pay off their mortgage early will find this spreadsheet helpful.  Feel free to comment if you have any questions or suggestions and please let me know if you find this helpful.

January 28, 2010

The Financial How to series Part IV. How to start investing for retirement

Part I-How to start a budget

Part II-How to get out of debt

Part III-How to start and maintain an emergency fund

Today we are going to wrap up our “Financial how to . . . . .” series on the topic of how to start investing for retirement.  For some this can be a scary topic as it brings up many questions such as “How much do I need to save now for retirement”, “How much will I need to retire”, and “What types of investments do I put my money into.”  These are all good questions that need to be answered before you start to invest.  With that being said I am going to focus on how to get started and not give any advice on certain funds or stocks as I am far from an expert. 

What is investing?

There are three kinds of investment lengths, although as I will discuss later I think only one is truly investing.  There is short-term investing which is less than one year, intermediate investing which is between 1-5 years, while long-term investing is greater than 5 years.  I consider long-term investing the only true investing as the stock market has usually made money over any 5 year period compared to only about 60% of the time over a 3 year period which is more like speculating and as we saw as recently as 2008, investing for only 12 months is essentially gambling. 

Types of Investing

For me there are two kinds of investing, retirement and non-retirement.  Non-retirement includes investments such as a child’s college fund, saving for a down payment on a house, or investing in real estate.  Retirement investing includes vehicles such as 401(K) and IRA’s.  They have special tax advantages to them, but there is a catch as they have penalties for early withdraws, therefore the decision needs to be made ahead of time that any retirement investing is truly for retirement only.  Most of the time when people talk about investing, they are referring to retirement investing which is the main focus of this post.

Common investments

When investing in retirement accounts, there are three common investments: stocks, bonds, and cash.

Stocks are the most common investment as well as the most discussed.  That is because they have the most day-to-day volatility.  Stocks have traditionally offered the greatest reward but also the most risk.  Stocks have been way down after their highs in late 2007.  But in 2009 they have started to make a recovery.  The key to stocks is to diversify by selecting mutual funds that contain many stocks in one fund. 

Bonds have done well recently with the drop in interest rates.  They have less day-to-day change in price than stocks; however they have historically underperformed the return of stocks.

Cash is invested in things such as savings, money market, and certificates of deposit (CD).  They are “safe” investments, as you do not risk losing any principle with the return being a fixed rate.  Investing in cash to me though is an oxymoron because you are parking your money as you might be gaining 4-5% every year but you will lose most of your gain due to 4% inflation so you gain nothing. 

Commodities include things like oil, natural gas, corn, wheat, and precious metals. Commodities are historically very volatile with huge upswings and downswings. 

Things to look for when investing

Whatever you decide to invest in I would recommend you look into the following three things before investing

Diversification You need a balance portfolio and not have all your eggs in one basket no matter how great of a return you are getting.  Diversification protects against losing all of your savings on just one bad investment.  For that reason when I invest in stocks I do not investing in single stocks but rather mutual funds which are made up of various stocks.

Invest in things with long track records You do not want to start investing in something that has only been around for years.  By seeking out funds with at least a 10-15 year track record you can see how returns have been over both good and bad periods and see if they have been able to weather the storm.

Know where you money is going! Invest in things you are comfortable with.  Never put money into something you do not understand as you do not want to be pressured into something that you do not agree with.  Investing in X because “my co-worker said it was a good idea” or because “My brother-in law invests in it” does not mean it is a good idea.

As mentioned in the opening, investing can be trick and overwhelming for a lot of us.  What you need to do though is to take some time and learn about investing.  Finally, building wealth takes time; it is not an overnight process.  But you need to start soon and invest in good solid investments and not some get rich quick scheme.  The key to building a big nest egg is investing now instead of later.  You might be in your 20’s or 30’s and think you have plenty of time which you do, so use your time as an asset and not a liability.  Also if you are in the later years of your life, do not worry, you can still start today.  It is never too late.

That is the conclusion to The Balanced Spreadsheet’s January 2010 “Financial how to . . . . . .” series.  I hope you enjoyed it and we will be back soon with another series in February.

December 23, 2009

Home Evaluation Comparison

Filed under: Excel fun, Mortgage, Personal Finance, Real Example, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 1:57 pm

As a follow up to a post I made earlier in the week on online home evaluations websites that was based on the article  “Value judgments“, I decided to do a group comparison, using the websites listed in the article, on my condo and see how close each one was to one another.  I took the six mentioned, Chase Bank, Cyberhomes, Eppraisal.com, RealEstate.com, Realtor.com, and Zillow.  In addition, I included the average sales price of condos in my development over a 6 month (2 units) and 1 year (4 units) period.  I came out with the following results:

Home Evaluation Comparison

Home Evaluation Comparison

A few things that jumped out at me:  Both the 1 year and 6 month actual sales data were higher then all but two of the websites.  That kind of surprised me as going into it I figured the websites would overvalue the house compared to actual sales data.

The realestate.com number was the middle point in a range.  Unfortunately the range was about $30,000, which is not really helpful when you are talking about a $100,000 home.  Even if I included the high range it still would have been the lowest estimate by far.

Overall the average price is inline with the $95,000 I have currently on our balance sheet.  I think every few months it will be good to checkup and do another comparison to see if there has been any movement in the price.  After doing the comparison I feel comfortable with the number and probably will not change it.  Hopefully in the spring when real estate starts to pickup more units will be sold and the value will increase.  Doing the comparison was fun but I would not, and do not, put much stock into the results as a “definite” on what my condo is worth.

December 21, 2009

Are Mortgage Evaluation tools accurate?

Filed under: Mortgage, News Review, Personal Finance — Tags: , , , — thebalancedspreadsheet @ 2:21 pm

Jim Weiker wrote an excellent column on Sunday in my hometown paper The Columbus Dispatch titled “Value judgments”.  The article took a look at online home evaluations websites such as Cyberhomes, RealEstate.com, Zillow, and others and compared their estimates to the actual sales price of recently sold homes in the Columbus, OH area.

The article had some good research as they used 27 recently sold homes and came up with the following results:

“A Web site operated by Chase Bank was the most accurate of the sites examined. The site, http://www.mortgage.chase.com, offered the closest estimate 13 of the 27 times.”

“The least-accurate sites were Zillow and RealEstate.com, an arm of the home loan company LendingTree.”

While these websites can be helpful, they are not the end all, be all and should be used with caution:

“‘It’s a good place to start if you’re trying to figure out the value of your home,’ said spokeswoman Mary Kay Bean. ‘It’s not the same as having an appraiser come in and evaluate the home.'”

The sites don’t know the condition of the home or an owner’s eagerness to sell.
   
They tend to be more reliable in areas of similar new homes, which offer plenty of comparisons, but less trustworthy in old neighborhoods or rural areas where one-of-a-kind homes are more common.

This was a fun article to read as I try and keep an estimate of our homes value each month in our net worth updates.  I have written before that I am constantly trying to find the best way to determine its value and have used these online estimates often.  However there can be big swings from month to month and I have often questioned the estimates given each month and I am not the only who is experiencing it.  Jonathan over at mymoneyblog.com had a great post a few months back asking if internet home valuation tools are worth it.

Like the article states, these sites can be good place to start to get a rough estimate of a homes value, but there are many factors in determining a home’s value and ultimately the best way to get a solid estimate is to get an appraisal done.  Personally I just use these sites as a rough estimate to see the estimated value on my personal residence.  When we start looking for a house in the next year or so I will not be using these sites as a guide in determining what house are for sale below market value or how much to make an initial bid on. 

In the net few days I am going to do a group comparison using all the different sites and see how close I come to the $95,000 that is currently on our balance sheet.  It should be an interesting experiment!

Does anybody else know of any other good home evaluation websites not listed in the article or had any similar experiences using their evaluations?

December 16, 2009

The ROTH 401 (K)

Filed under: Personal Finance, Retirement, Uncategorized — Tags: , , , — thebalancedspreadsheet @ 11:20 am

Last Friday, my employer gave me an early Christmas gift.  They sent out word that starting in 2010 they would be offering a ROTH 401(K) option along with the traditional 401(K) plan! This was very good news as I already contribute to a ROTH IRA and as I have discussed before in comparing traditional and ROTH IRA’s, the tax free growth you get with a ROTH almost always is better then the deferred growth you get with a traditional retirement plan. The differences between a traditional 401(K) and a ROTH 401(K) are very similar to the differences between a traditional and ROTH IRA.

The big difference is still the tax treatment.  Contributions to Traditional 401(K)’s are tax deferred while ROTH 401(K) contributions are made after taxes and have tax free growth.  That means that ROTH 401(K) contributions will result in a higher tax bill in the year you make the contribution compared to a traditional 401(K).  However, under both plans, if the company matches any of the proceeds that amount and its growth is tax deferred.

The one big advantage of the ROTH 401(K) versus the ROTH IRA is the contribution limits.  You can contribute up to $16,500 combined in 401(K)’s in 2009 compared to just $5,000 for IRA’s.  That means you can get up for $11,500 more in tax free growth a year!  There is also no income limit to participate in a ROTH 401(K) while with a ROTH IRA the limit is $105,000 for single filers and $166,000 for married filing jointly.

After crunching the numbers it looks like I will be making the switch from Traditional 401(K) to ROTH 401(K) in 2010.  I will put 9% of my paycheck into the ROTH 401(K).  My employer matches 6%, so that means I will be getting 15% of my net pay into 401(K).  I will stop contributing to my ROTH IRA in 2010.  This will increase my tax bill for 2010 but down the road I will more then make up for it.  The one thing I was worried about in contributing to a ROTH 401(K) was whether or not the tax free contributions would bump me up into the 25% tax bracket in 2010.  However it looks like I will still be in the 15% tax bracket. 

Has anybody else had experiences with a ROTH 401(K)?  Did you like it?  Hate it? Or were you indifferent?  Any feedback is appreciated.

October 29, 2009

The Mortgage Interest Myth

Filed under: Goals, Mortgage, Personal Finance — Tags: , , , , , — thebalancedspreadsheet @ 8:33 am

Those of you who have visited The Balanced Spreadsheet for a while now, know that one of our financial goals is to pay off the mortgage as soon as possible.  As I wrote in “To pay or not to pay” some people cite the mortgage interest tax deduction as a reason to not pay down the mortgage.  Today I am going to explain why this reason is a complete myth. 

For our example, let us assume you have a mortgage balance of $200,000 at 6.0%.    That means you will pay $12,000 of interest during the year.  If you itemize your deductions you will be able to deduct the $12,000 off of your income.  If your income for the year was $100,000 you would then pay taxes on $88,000.  This would put you in the 25% federal tax bracket if you are married filing jointly.  This means you would have a tax savings of $3,000 ($12,000 x .25).  So basically you are paying the bank $12,000 so you do not have to pay the IRS $3,000.  That is definitely not a winning game plan.  If you really want the tax deduction just give $12,000 to a charity of your choice, that way you still get the deduction but you do not have to go into debt to get it. 

Bottom line is this:  If you have a mortgage and are able to deduct the interest on your income taxes then do it!  It is a nice benefit to have come tax time.  However there is absolutely no reason to keep the mortgage just for the tax deduction.  Sadly there are some financial and tax advisers, who are other wise good, that will advise you to keep the tax deduction.  If my advisers give me that advice then I am getting a new one.  🙂

October 15, 2009

Traditional IRA v. ROTH IRA

Filed under: Personal Finance, Retirement, Simulation — Tags: , , , , — thebalancedspreadsheet @ 3:01 pm

With the Dow Jones Industrial Average once again breaking past the 10,000 point plateau yesterday, a lot of talk right now is about investing into the market.  Usually people invest in either a 401(K) through their work or an Individual Retirement Account (IRA).  There are two kinds of IRAs, Traditional IRA and ROTH IRA.  I am going to try and give a brief explanation of each and what I recommend to use. 

Similarities

While there are some key differences between the two, there are also some similarities.  First, the maximum contributions are the same.  For 2009 you may contribute up to $5,000 ($6,000 is over 50) into either a Traditional or ROTH IRA.  Also, you can start withdrawing from you IRA with no penalty after you turn 59½.

Differences

There however are some minor differences. You can only fully contribute to a ROTH IRA if you income is less then $105,000 for single filers and $166,000 for married filing jointly.  But there are no income limits for contributions to a Traditional IRA.  But you do have to start making mandatory withdrawals starting at age 70½ with a Traditional IRA, opposed to no mandatory withdrawals with a ROTH IRA. 

The major difference though between Traditional and ROTH IRA is the different tax treatments each receive.  Traditional IRA contributions are pre-tax, meaning that all contributions and growth will be taxed at the time of withdrawals, while ROTH IRA contributions are after tax, meaning contributions are taxed at your income rate at the time you contribute.  But when you make ROTH IRA withdrawals, both the contributions and growth are tax free!

Comparison

For our comparison let’s assume you make $50,000 this year and are less than fifty years of age and contribute the $5,000 maximum.  Under a Traditional IRA you would pay Federal income taxes on $45,000 ($50,000-$5,000), while under a ROTH IRA you would pay federal income taxes on $50,000.  So under a Traditional IRA you would have an immediate tax savings.  But over the long term what would the difference be when you are ready to retire? 

If you put $5,000 each year for 30 years into an IRA averaging a conservative 10% annual rate of return you would have ~ $942,000 at the end of the 30 years!  That means you would have $150,000 worth on contributions (30 x $5,000) and ~ $792,000 of growth!  With a ROTH the $792,000 growth would be 100% tax free, while with a Traditional IRA the entire growth would be taxed on when you make withdrawals from you account.  So while you have to pay the taxes on the ROTH IRA initially up front, tax free growth on a ROTH IRA would be a better long term value at retirement then a Traditional IRA because of the tax implication.

Well that is a short and brief explanation of the difference between Traditional and ROTH IRA’s.   Hopefully this answers any questions you might have before making your 2009 contributions.

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