Setting and Achieving Financial Goals

For three years I've had a single goal directing my actions: I wanted to get out of debt. Now that my consumer debt is nearly gone, I've spent a lot of time wondering what to do next. I was worried that I'd lose focus, lose direction. That's not going to be the case. I've set three major financial goals for 2008. After I pay off the last of my final loan next Tuesday, I intend to:

  • Max out my retirement plan for 2007 and 2008.
  • Pay taxes.
  • Bolster my savings.

These goals are ambitious, but I think I can achieve them. In fact, I hope to do even more.

Retirement
I got a late start on my retirement savings. The box company has been setting aside a pension for me, but I only began my self-directed retirement savings last year. I managed to make the full contribution to my 2006 Roth IRA. I've contributed $2,000 so far this year, and intend to max out my plan by the middle of December. In 2008, the contribution limits on Roth IRAs increase to $5,000/year — I hope to invest this amount. Continue reading...

More about...Budgeting, Planning

Why you SHOULDN’T prepay your monthly bills

Earlier today I wrote that I like to prepay my monthly bills. I acknowledged that some people might think this was dumb, but that I liked to do it anyhow. It's not often that I share something with which GRS readers vehemently disagree. This is one of those rare cases.

Because there's so much opposition to this idea, and because each of these points is valid, I've combed the comments to compile a list of reasons you should not prepay your monthly bills:

  • When you pay your bills monthly, you're more likely to review your statements to be sure there's nothing amiss. If you prepay your bills, you may not even bother to open the statements.
  • Some companies refuse to accept prepayment, and may even charge a processing fee to issue a refund check.
  • It's up to you to keep track of when the prepayment is up. As I mentioned in the comments on the previous post, I have a co-worker who often forgets when the prepayment period is over (because he doesn't check his statements), and he ends up with late fees.
  • By prepaying, a person may be tempted to spend the money on other things. For example, if you prepay your cable bill, you may be tempted to purchase a pay-per-view show that you otherwise would ignore.
  • What happens if you prepay a bill and suddenly discover you need the money for some other obligation? Or what happens if you are forced to move? Or your house burns down? You've already prepaid, so there's no way to get your money back.
  • By prepaying bills, you create an artificial cost-of-living. Because you're not dealing with monthly cable or phone bills, it's easy to forget that they need to be accounted for.
  • Setting up automatic billpay from your checking account would accomplish the same thing, but you'd get to keep the money in an interest-bearing account before it was needed.
  • And the most popular reason to avoid prepaying your bills: When you do so, you're essentially providing an interest-free loan to the company you've paid.

These are all excellent points. But are these arguments strong enough to make me change my mind? Only one. Before I next prepay my monthly bills, I'm going to do more research into automatic billpay. The last time I checked, my credit union wanted $5/month to do this.

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More about...Planning, Money Mindset

Money hack: Prepay your monthly bills

Note: While I think this is a good idea, it's clear that many readers strongly disagree. Before deciding whether to try this, please read the arguments in opposition.

Earlier this year, on a whim, I did something a little odd: instead of just paying my monthly cable and internet bills, I wrote large checks, pre-paying for several months of service. I didn't have a reason for doing it at the time. I had a momentary surplus of cash, and it seemed like a good way to use it. Maybe I ought to have tucked it into a high-yield savings account, but it seemed just as good to me to pay five or six months ahead on these bills.

As it turns out, I love this. I know I'm not paying any less money than I normally would, but by pre-paying my bills, I feel as if I don't have them. I feel as if I'm getting my cable and internet for free. In fact, I'm probably going to write checks at the end of December to cover each of these bills for all of 2008.

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More about...Planning, Psychology

Beating the high cost of weddings: How we did it, and how you can too

Think you need to spend a fortune to tie the knot? It's just not so. Kris and I got hitched for a couple grand in 1993. In this guest post from JerichoHill, he explains how he kept costs down for his wedding last summer.

Weddings are expensive affairs. Couples often spend tens of thousands of dollars for an event that lasts only a day or two. I know, I know — the memories last a lifetime. But that's the catch-phrase of the industry that's sprung up around this occasion. In economics, this is called conspicuous consumption.

Ramit at I Will Teach You to Be Rich recently wrote an article about the cost of weddings. On average, a wedding costs $28,000. That's more than half what the typical American household earns in an entire year! Continue reading...

More about...Planning

A Brief Overview of Estate Planning Software

It's that spooky haunted time of year — my annual post about estate planning! Last year I shared a brief guide to creating a will. Today I'm going to look at a recent New York Times article by Christine Larson that provides an overview of will preparation software.

Larson writes, "Recently, the increasing sophistication of software and services for estate planning, combined with growing consumer comfort with online financial management, has led to a boom in homegrown estate planning." Here's a list of the products and services she mentions (along with the canned spiel from the corresponding web site or Amazon page):

  • LegalZoom: "Save time and money on common legal matters! Created by top attorneys, LegalZoom helps you create reliable legal documents from your home or office. Simply answer a few questions online and your documents will be prepared within 48 hours. We even review your answers and guarantee your satisfaction."
  • Suze Orman's Will & Trust Kit: "This is an easy-to-use and fast way for you and other members of your household to create your own will, living revocable trust, and all the other must-have documents you need to protect you and your family. It's as easy as 1-2-3—simply personalize, print, and protect."
  • Quicken WillMaker Plus: "Help protect your family and your assets, and save on legal fees! Quicken WillMaker Plus 2008 provides the legal forms you need. So comprehensive, the software assembles your forms from among 40,000 document possibilities—but so easy to use, you'll have them finished in minutes."
  • Living Trusts on the Web: "We only do one thing, Living Trusts, and we do it better than anyone else! Remember, with our program you are getting all of the documents an attorney would prepare for you, with all of the detail an attorney would provide, without paying an attorney fee."

Based on my research, these sorts of software and services are excellent choices for people with uncomplicated needs. In her article, Larson warns that estate planning software isn't for everyone:

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More about...Planning

Early Retirement: Couples Who Made It Happen

I recently mentioned two Liz Pulliam Weston articles in passing. They're good enough to merit closer attention. Both articles profile couples who found the courage to save money when they were young so that they could enjoy the freedom of early retirement. Weston writes:

Think it's impossible to retire in your 40s? I'd like you to meet some ordinary folks who have done it. "Ordinary" may be a misnomer, because retiring after just 20 years or so in the workplace is an extraordinary act, and most took extraordinary measures to get where they are. But they're ordinary in the sense that they were working people with pretty regular jobs. They didn't strike it rich with stock options, inheritances or the lottery.

[...]

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More about...Planning, Retirement

Accelerated mortgage payments (and the GRS amortization calculator)

What if you've reviewed the compromises required to pay your mortgage early and the idea still appeals to you? You might pay a bank to set up a bi-weekly payment plan or a money merge account. But you can do just as well by taking mortgage acceleration into your own hands. Here are three options I've considered:

  • Rather than pay my mortgage, I could deposit my money into a high-yield savings account earning roughly 5% interest. Though this earns the lowest possible rate of return on my money, it gives me the greatest flexibility. I could withdraw the money to pay down the mortgage at any time. Or I could save for other goals.
  • On the other hand, I might make extra payments on my mortgage each month. This would effectively earn me a guaranteed rate of return equal to my mortgage interest rate (6.25%). This would also help me spend less on interest. Doing this, however, ties up my money, making it difficult to access if I decide I want it for something else.
  • My third choice is to invest the money in low-cost index funds. This would, in theory, provide the highest possible rate of return for my money, but as with any stock market investment, there's an element of risk. If my goal is to pay off my mortgage, a bear market is going to make me sweat.

Kris and I will decide what we intend to do by early next year. Initially, I thought we'd make payments directly on the loan, but after previous discussions here at Get Rich Slowly, I'm leaning toward placing the money in a high-yield savings account until we know better what our long-term financial goals are.

Meanwhile, I was curious: How long would it take to pay off my mortgage using the HELOC I already have? Would using the HELOC actually save time over applying payment directly to the mortgage itself? To play with the numbers, I developed a mortgage amortization spreadsheet. (This spreadsheet doesn't account for inflation — that's beyond my Excel acumen.) Continue reading...

More about...Home & Garden, Planning

Shaking the new car itch: A tale of priorities

When I went to the street to get the mail on Saturday, the latest issue of The New Yorker was in the box. Walking up the sidewalk to the house, I idly began to remove the subscription cards. I stopped, though, when I came to a full-page cardstock advertisement. I read the front of the ad. I read the back.

At the kitchen table, I carefully removed the ad from the magazine, carried it upstairs, and sat down at my computer. I typed in the listed URL, and for the next two hours, I was at the mercy of the advertiser. What was this ad for? The 2007 MINI Cooper.

I've mentioned before that I hate my current vehicle — a 2000 Ford Focus. I bought it in a hurry after my 1992 Geo Storm was totaled by a wayward tractor-trailer rig. I've loathed the Focus since day one. Continue reading...

More about...Planning, Transportation

An introduction to the crossover point

Trent at The Simple Dollar recently wrote about the Crossover Point, a notion popularized by the book Your Money or Your Life. The Crossover Point is simply that point in time at which your investment income exceeds your monthly expenses. For most people, this never occurs.

YMoYL is about getting readers to the Crossover Point. The authors want people to achieve Financial Independence, which they define as "having enough — and then some". They ask readers to track income, expenses, and investment income, plotting each of these on a wall chart. The entire book is about finding ways to get the investment income line (low on the graph) to meet (and then cross over) the expenses line.

This is esoteric, I know, but it's important. Reaching the Crossover Point means that, if you wanted, you could stop working for money. You could retire. You could work for self-fulfillment. You could travel the world or write a book. If YMoYL were a novel, this would be the climax of the story: Continue reading...

More about...Planning, Retirement

Questions and answers about Roth IRAs (Updated!)

The series on Roth Individual Retirement Arrangements (Roth IRAs) has covered a number of topics -- what they are, how (and where) to open one, and which investments are best. Now, in the final part, we turn to some of your questions. Remember: I am not a financial adviser. I'm just a regular guy trying to gather information to help you. If you need more specific answers, please consult a CPA or an investment professional.

All of the questions below were submitted by Get Rich Slowly readers via comment or email. If your question isn't here, please drop us a line so we can research an answer and add it to the list. If you are new to Roth IRAs, this article is not the place to begin. Start here, instead.

Man using computer at home

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More about...Planning, Investing, Retirement