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

March 25, 2010

Is it good to get a tax refund?

Filed under: Simulation, Uncategorized — Tags: , , , — thebalancedspreadsheet @ 12:52 pm

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With the deadline to file your 2009 Federal income taxes about three weeks away many people are starting to receive their much-anticipated tax refunds.  According to a recent article in USA Today, the average refund this year will be $3,036.  While it would be nice to receive such a large check in the mail, the questions needs to be asked, is it necessarily a good thing to get that much money back?

Reasons against getting a refund

The reason why it is not such a good thing is the reason why it is called a refund.  When you get a refund that means you overpaid your taxes for the year.  A refund of $1,200 means you overpaid the government an average of $100 a month! It does not mean you did anything special or good, it just means you gave the government too much money.  Worse yet is the fact that you do not get any interest on your overpayments so your refund is essentially a no interest loan to the government!  For those of us who are trying to get out of debt and budget every dollar each month that is not a good plan as it gives us less to plan with.

How to stop getting a refund

If you have consistently been getting a refund each yeah there are ways in which you can stop overpaying and keep your money in your wallet.  The most common is simply contacting HR or payroll at your work and raise the number of dependants you claim on your W-4.  Claiming more dependants will cause less money to be withheld from your paycheck and claiming more dependents on your W-4 then you actually have is not illegal as long as you are paying enough in at the end of the year.  Often claiming just the number of people in your house will not be enough because itemized deductions vary from family to family which basically renders the IRS withholding tables useless.   Typically I claim anywhere from 4-6 dependents even though it is just my wife and I on our taxes.

My opinion

My goal is not have a big refund each year.  I try to estimate my total taxes each year and usually come within a $100 or so.  But owing taxes is not something I want to have either.  By having approximately the correct taxes withheld each month it allows me to budget properly and gives me more money to save, invest, and spend each month.  If instead I just got a big refund I would be more prone to spending it on big items instead of saving or investing it.  So if you are struggling to pay the bills each month yet are getting a refund each year you probably need to put an end to it soon because you could really use your money now instead of later.    While getting a big refund once a year might seem exciting, you are better off financially using your money throughout the year.

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March 20, 2010

Most Important Money Advice a Young Person Can Receive?

Filed under: Personal Finance, Uncategorized — Tags: , , — thebalancedspreadsheet @ 7:45 am

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An interesting question was asked recently on Cash Commons by AskaboutGadgets.com.  The question was “what is the most important money advice that a young person can get?”  I posted a brief answer but after thinking about it some more I think the real answer depends on age of the young person we are talking about. 

Up to 12 years old-I think the most important thing I would stress is the relationship between work and money.  Money is not just “created” it is earned through hard work and discipline.

Teenage years before college-Try and set goals on what you want to do career wise with your life.  If college is your goal figure out how you will pay for it and realize that the most expensive school is not always the best option.

College age-For those who go the college route the best advice I would give is to have a game plan to figure out your career and get the degree that will enable you to do that career.  Do not go to school just to “get a degree” or get the “college experience”.  Rather decide what career you want and what it will take to get you there.

Post-College-As noted in Cash Commons, my advice would be to get out of and stay out of debt.  Your greatest wealth building tool is your income and you can not become wealthy by making payments to a bank or to a credit card company.  As noted in The Millionaire Next Door and Stop Acting Rich and Start Acting Like a Real Millionaire, wealth is created by not spending luxuriously but rather living below ones means.

With that being said anybody else have good financial advice that I missed or forgot?

March 4, 2010

Thank you!

Filed under: Uncategorized — Tags: — thebalancedspreadsheet @ 7:28 pm

Recently while doing some administrative work for the blog, I noticed that The Balanced Spreadsheet statistically is off to a really good start in 2010!  January saw the best month ever in terms of blog views with a 162% increase over December.  This was then followed up by an even better February was a 58% increase in sites views over January!  All I have to say is Thank You very much.  It has been a blast doing this blog for the past 9 months.  I have enjoyed deeply posting news reviews, examples with spreadsheets, and monthly net worth updates as well as series of posts like “The Financial how to . . .” and “My experience in . . .”

There are two ways to help. First is by sending feedback either in the comment section or by emailing me at white.833ATosuDOTedu. Comments on whether you like the content or not, something I need to do more or less of, or simply want me to do a financial post on a topic are all welcome.  Feedback gives me a chance to find out what my readers think and want.  Second, if you have not already and want to receive the blog via email please enter your email in the tab on the right side of the blog, or if you want to share with Facebook, twitter, or any other social media feel free using the addthis tool bar on the right side of this blog.

Thanks again to all my readers, a lot of good stuff is planned for the spring to keep coming back for updates and new posts.  I greatly appreciate all of you and remember you are the reason I write this blog.

The Balanced Spreadsheet

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.

January 23, 2010

The Financial How to series Part III. How to start and maintain an Emergency Fund

Today in continuing with our January “Financial how to . . . .” series, we will discuss how to start and maintain an emergency fund.  After getting a budget started and knocking out your debt, the next step towards good financial health is the emergency fund

The Importance of an Emergency Fund

From personal experience, I can vouch for how important an emergency fund is.  It will help ease the pain of a sudden layoff by giving you a cushion to cover your monthly expenses until you get re-employed.  It also is a way to pay for unexpected normal life events such as your transmission going out in your car, a big medical emergency, or a broken heater in the dead of winter.

What it is not for

The emergency fund is what it is, a fund for EMERGENCIES!  Sometimes we can get emotional and get caught up in the moment and forget what an emergency is truly.  Normal car maintenance such as getting new tires after they get worn down is not an emergency and can be planned for in normal budgeting.  Home appliances breaking down that can be fixed but instead buying a whole brand new one is not an emergency but rather a want.  There is nothing wrong with buying wants, but wants come out of savings not the emergency fund. 

In addition to not being used for wants, the emergency fund is not used for long-term investing.  This will be discussed more below, but an emergency fund is not something that you take risks with.

How big of a fund do you need?

According to recent statistics from the United States Bureau of Labor, the average American is taking a little over 6 months to find new employment after being let go from their previous employer.  With that major statistic in mind I recommend somewhere between 5-7 months worth of expenses as a good solid emergency fund.  By setting up a budget you can know what your fixed monthly expenses are.  A smaller emergency than 5-7 months does not give you much space or time between some of life’s emergencies.  While on the flip side, an emergency fund up to or greater than one year is excessive to me because the money could be going towards better wealth creation tools such as paying down the mortgage or put in long-term investing. 

Where to keep your funds

As mentioned above the emergency fund is not an investment tool and something that you will be getting rich off of.  First, you are looking to keep your emergency fund somewhere liquid, which means someplace where you can get easy access to your money if needed.   Next, you will then look for something low risk as you do not want to risk losing any principal.  The higher interest rates are tempting but when you really need the money it could be down 20-30% leaving you without an emergency fund.  With all that being said, the best place to put it in is a simple money market account or savings account at a bank.  Right now the yields are pretty low at around 1% but remember this money is for emergencies not investing.  A simple search through either bankrate.com or despositaccounts.com can help you find the best rates available.

What an emergency fund allows

Finally after determining how much of a fund you need and where to place it you can now fully experience what an emergency fund allows.  It will allow you peace of mind at night knowing that you have space from a financial disaster if a financial emergency takes place.  In addition, when these emergencies do occur they will not necessarily be an emergency but rather an inconvenience.  This peace will allow you to concentrate on achieving your greater financial goals.

In conclusion the emergency fund might seem trivial and unnecessary . . . . until you have an emergency that is. : )  Ask anyone who has it in place and they will tell you how it has helped them out.

Next time in part IV of our “Financial How to . . . . . .” series, the topic will be how to start investing.

January 16, 2010

The Financial How to series Part II. How to get out of debt

Today we are going to continue in our “Financial How to . . . . .” series. The goal of this series is to give practical insight on how to get one’s finances in order for 2010. In part I we discussed how to set up a budget and today in part II we will discuss how to get out of debt.

What kind of Debt are we talking about?

I simply divide debt into two types; mortgage debt and non-mortgage debt. When talking about getting out of debt I am talking about non-mortgage debt. While ultimately your goal is to become 100% debt free, I am focusing on becoming non-mortgage debt free because that is something that usually can be done in a short time frame between 6 months to a couple of years. Mortgages, however, are usually one’s biggest debt and take usually 7+ years to fully pay off.

That leaves us today with every other kind of debt imaginable from credit cards, car loans, and student loans to IRS and family loans. Second mortgages can be a little tricky though. Typically if the balance is greater then half your income, I would just treat the debt like a first mortgage and put it on the back burner. If it is less then half I would then treat it like any other debt.

Listing your debts

Now that we have established what debts we are talking about it is now time to start the debt reduction process! First thing you will want to do is list your debts from smallest to largest. Next, after doing your budget you should know how much “extra” money you will have each month, after necessities and fixed expenses, to apply to your debt. Then start making the minimum payment on all of your debts and put the extra money from your budget onto the smallest debt. This is called the “Debt snowball” method. Below is an example that illustrates how this is done. In our scenario the person has $22,400 in debt and four different monthly payments. The minimum payments total $531.25 with $750 of extra money for total monthly reduction of $1,281.25.

Why the lowest amount? Would it be better to pay off the higher interest rate debt first?

From a mathematical stand point the debt snowball is usually the costliest way to go. By paying off the smaller loan first you can sometimes allow greater balance with a higher interest rate to accrue more interest. However I have found that the problem with debt is not the interest rate, but rather with personal behavior and by paying your smallest debt first and knocking it out, you will gain momentum and become more aggressive in paying off your debts then you would if you paid off the higher interest rate but kept more debts outstanding. By changing your personal behaviors you will never go back to debt which will more then make up for the extra interest paid.

After you pay off the first debt

Going back to our example, after three months our student loan would be paid off! After paying off the student loan we would then take the $60.00 minimum payment and apply it to our credit card #1 balance. We would then pay $885 a month on credit card #1 ($75 minimum + $60 student loans +$750 in extra money). After paying that debt you would then apply that payment to credit card #2 and son on. Your debt reduction would approximately look like this:

 

In 19 months you would be debt free!

Exception to the Debt Snowball

There is really only one exception to the debt snowball. That is IRS, State, or local income taxes. Always put them atop of the debt snowball. The reason is simple, the IRS has the ability to garnish wages without actually suing you, and the debt does not go away if you ever have to file for bankruptcy. Couple that with high late fees and interest payments and you will want to get them out of your life as soon as possible.

Conclusion

Getting out of debt is not a piece of cake. It is hard work and a lot of sacrifice but the payoff is well worth it! The debt snowball might seem daunting to you at first, but go ahead and try it, and if it does not work you can always go back into debt. J In our made up scenario 19 months is probably a little conservative. During the 19 months we took to pay off the debt, a variety of positive financial events could have happened such as getting a raise, getting a refund back from the IRS, or tightening your budget even more and coming up with extra payments to make on your debt, which would all decrease your time in debt!

Come back soon for Part III in our “Financial How to . . . . . .” series on how to start and use your emergency fund.

January 14, 2010

Follow up to “Financial How to. . . .” series Part I. Updating our own budget

This is a follow up to my post in the “Financial how to . . . . . .” series on creating a budget.  My very first blog post was on how my wife and I created our very first budget.  With the New Year under way my wife and I have decided to look at our budget and see if any adjustments were necessary and we came up with the following budget.

Budget 2010

You may remember that our household budget is based solely on my income.  My wife’s income goes primarily towards retirement and extra mortgage payments.  With that being said, our budget has stayed pretty much the same primarily due to the fact that there is a salary freeze at work and I have not gotten any kind of raise in two years.  We did track our spending throughout the year and made a few adjustments.

Necessities-The only thing that slightly changed was our gas budget.  The grocery budget is small compared to the average US household, but we are fine with it as we do not feel any restrictions when it comes to going to the grocery store.  I am always trying to find ways to decrease our utilities and we might be a little over budgeted but I would rather be over budgeted then under budgeted.  We are always trying to keep our necessities down to a minimum so it was good to see them decrease slightly.  By keeping our necessities where they are, we are able to keep our emergency fund at $10,000 which is between 3 and 6 months worth of expenses.

Fixed-These increased slightly, due to the fact that our taxes will go up due mostly to me switching from a traditional 401(K) at work to a Roth 401(K).  This was offset by a decrease in car and health insurance premiums for the year.  In July we took out a life insurance policy for me, which was an added but necessary and well worth it expense. 

Luxuries-Our lifestyle has pretty much stayed the same since we have gotten married.  The misc category is the one that fluctuates the most from month to month.  Some months we are a tad over budget and others we are real low.  Even though luxuries are our smallest category at 8.45% we naturally had the most discussion over this category.  Sure it would be nice to go to more sporting events and concerts, but at the price of eating out?  Ultimately my wife and I decided that our breakdown was good and fair to the both of us. 

Well after going through a review of our budget, it was nice to see that we are still living within our original budgets as well as our means.  My sticking to our budget it allows us to continue to follow our financial goals and move forward towards financial independence!

Coming up over the weekend will be part II in the “Financial how to . . . . .” series on getting out of debt.

November 20, 2009

November 17, 2009

The Stock Market Rebound of 2009

Filed under: Excel fun, Personal Finance, Real Example, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 8:16 pm

Have any of you been keeping your eye on the stock market recently?  If you are like most people, you stopped keeping track during the last half of 2008 and the first few months of 2009 when everyday on the news they talked on and on about dwindling retirement accounts and how people were withdrawing their money in droves.  Or maybe you stopped looking when you opened up your year end 2008 statement and noticed your 401(K) looked more like a 201(K).  But in case you have not noticed the markets have rebounded some, but the question is how much?  After doing a little research I found out the bottom of the market “appears” to have occurred on March 9th of this year.  I put together a table showing how much the market has recovered since then:

How come the news has not had a lead story covering the over 50% increase in the markets since March 9th?  Granted these gains are after hitting rock bottom lows not seen for over seven years, but what if you had panicked on March 9th and sold all of your stocks and mutual funds?  You would have missed out an over 60% return in your 401(K) and IRAs, while your safe money market account would have gotten < 1%.  In fact I was quite surprised to find that my two 401(K)’s have gotten a 79.5% and 65.3% return since March 9th!

Now I do realize that overall the market is still down about 25% since its peak on Oct 9th, 2007 and that your equities are still down around 20-30% since the start of the recession.  With that being said you sometimes just need to ignore the drama that comes from the news or from Washington and realize that it is not all bad and the recovery is starting.  Just remember that you do not get hurt on a roller coaster if you do not jump off when it is crashing, or when it is rising.  You just have to enjoy the entire ride and know that you will ok in the end.  🙂

November 13, 2009

Benefit Enrollment

Filed under: Real Example, Simulation, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 1:59 pm

My 2010 health benefits enrollment period for my employer ends today at midnight.  It always brings some interesting conversations at work as co-workers are scrambling to figure out if their plans changed in either coverage or in price, and how theses changes affect them.  Thankfully, the only change to our benefits was a help to us as our high deductible on our Health Savings Account (HSA) plan dropped from $5,000 to $3,000!  That was pretty cool to find out that the maximum out of pocket expense we would be responsible for reduced by $2,000.  I personally love the HSA, and am planning a review of it soon.  We dropped our dental coverage down to cover just basic checkups as we do not plan of having any major dental work this year.

As always it is a good idea to check to see how your plans compared to any new ones your employer might add this year.  You might have had the same plan for years, but your current health might dictate a change in coverage.  It is also good to keep on ways to lower the cost of your premiums or get better coverage for the same amount.

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