Tag Archives: savings

Post-tax refund savings breakdown

I just finished filing our 2008 tax return using TurboTax Home & Business since I had to report a little freelance income for 2008. (If you’re not reporting freelance income, I suggest using TurboTax Deluxe.) The software costs about $40 on Amazon, but it makes it simple to do your taxes yourself. In my opinion, it’s worth the cost.

Since we got married in 2008, we’re getting a pretty hefty refund. It’s actually about $500 more than I anticipated.

We already decided that we’d be using the bulk of the money for savings. We’re putting 70 percent of our refund directly into our emergency fund. After that deposit, our emergency fund will be 55 percent complete!

It took us about 6 months to save that amount, so I’m hoping with our increased monthly savings amount we’ll be able to complete our emergency fund by the end of this summer (especially if we end up hanging on to some of our summer savings). Then we’ll start saving for our trip to Europe.

About 20% is going into our summer savings account to cover the fact that Tony isn’t paid to teach two months out of the summer. That fund is now complete. (Yay!)

My hope is that we’ll be able to hang on to a substantial chunk of that money and transfer it to our regular savings at the end of the summer. Our plan is to cut our spending as much as possible and try to live on my income alone for two months. However, it’s going to be a substantial pay cut (about 43% of our combined income), so I wanted to pay it safe and save enough to cover the difference. If we get into trouble, the money in our summer savings account will be there to bail us out without dipping into our emergency fund.

We’re using the remaining 10% of our refund to treat ourselves. Back in November, I booked a hotel in Washington DC for the last weekend in February at about $60 a night. The hotel is already paid for, but we decided to use a little of our tax refund to pay for a nice dinner and maybe some entertainment.

Originally we planned to spend no more than our monthly entertainment allowance on the trip ($50), plus the extra gas cost, which we’d pay next month when the credit card bill comes. Since our tax refund was a little more than I expected, we decided to use a little of the money for the trip. We still plan to spend as frugally as possible, though, and whatever we don’t use on the trip will go right back into savings.

Overall, our savings accounts have grown by about 50% as a result of our tax refund. Woo hoo!

If I had saved that money instead of loaning it to the government interest-free, I would have earned about $50 in interest. Sure, that’s extra money that I don’t have now. But when I consider the possible alternative (underpaying and owing a big chunk of money at tax time), it’s worth it to me to forego the interest income for peace of mind.

Whew. It feels good to be all done. :)

Do you know where your money is going?

One thing I’ve learned from the mortgage and lending crisis — you can’t be too familiar with the terms and conditions of your loans, investments, and credit cards.

Now that we’re facing a credit crisis, it’s more important than ever that you’re familiar with the policies of your lenders and investment firms as some institutions are making changes to their policies.

Take some time this month to educate yourself on where your money is really going and whether you’re getting the best deal.

Banking

How much interest are you earning on your savings and checking accounts? What are your options for increasing your interest rate? (Consider moving your savings to ING Direct for a 2.5% interest rate.)
Are you paying monthly fees for your accounts? If so, it’s probably time to switch banks. There are many banks that offer completely fee-free accounts.
How much do you pay for ATM fees and other transactions? You may be surprised to find out how much you’ve been spending on certain transactions.

Credit Cards

Is your account still open? Some credit card lenders have started closing dormant accounts, so if it’s been a while since you used your card, check and make sure it hasn’t been closed due to inactivity.
What is your interest rate? This may have recently changed, so check your statement or call for the most current information.
What is your credit limit? It also may have recently changed, so make sure you know exactly how much it is. A lower credit limit can affect your credit score.

Investments

How much are you paying per transaction? If your fees are high, consider investing in lump sums less frequently to make the most of your fees.
If you’re paying high fees, consider moving your investments to no-load mutual funds through discount brokers or investment firms.
Take some time to check out the prospectus report for your investments. Is it time to change your portfolio?
How much time do you have until retirement? If you’re planning on retiring in 5 years or less, it’s time to move your investments out of the stock market and into low-risk bonds. If you’re young, now is a great time for stock market investments because prices are low and you have plenty of time for the market to rebound from its current state.

Mortgages and other loans

Are you eligible for refinancing or consolidation? If your credit is good, now might be a good time to consider refinancing for a lower interest rate.

It can be a pain to track down this information, but it’s worth it to know where you stand. Not only is it important to know where your money is going, but it’ll give you a chance to determine if you’re getting the best rates, fees, etc. As long as the market continues to fluctuate, I suggest you take stock of your finances every 3 months to make sure nothing has changed.

Don’t spend your tax refund before you get it

I know, I know. I shouldn’t be getting a tax refund, because I should have my deductions set correctly to avoid giving the government an interest free loan. I know. But the fact is, I typically err on the side of caution. I’d rather give the government an interest free loan than owe a huge lump sum of money during tax time.

This year, we’d probably be expecting a refund anyway since we got married half way through the year. Because I make twice as much as Tony, we’ll most likely get a tax discount for filing jointly. Which means we’d be getting a little money back anyway.

How much? The fact is, I don’t know. But in the past, I’d have plans for what I was going to buy with that money regardless.

I’ve used my tax refund to buy a new wardrobe, take a vacation, and buy more electronics than I want to think about. Sometimes I was so broke that I had to wait until I received the refund to spend it. Sometimes, though, if I knew it was coming, the spending spree started before I even received the check.

This year, I’m not spending a dime of it. I already know what I’m going to do with the money, and it doesn’t involve a spending spree. It’s going directly into a savings account to help us cover the two months out of the year when Tony won’t receive his teaching salary.

I bristle at some of the tax preparation commercials I’ve been seeing on TV lately. “Need a vacation? Bring your taxes to us, and we’ll get you the tax refund you need to pay for it.”

The fact is, a tax refund isn’t “extra money.” It’s money that you should have been getting in your paycheck all year, which means the same rules apply to your tax refund as your regular income — don’t blow it.

I realize there are situations where a lump sum tax refund might be helpful. For instance, if you’ve been avoiding major car repairs because you don’t have the lump sum to pay them. That’s completely understandable. By all means, use your refund to get your car in working order.

But if you’re considering using your refund for something unnecessary, I urge you to think of that money as regular income. Can you really afford to spend it? Do you have a 6- to 8-month emergency fund in place? Are you debt-free? Are you fully funding your retirement accounts and education savings accounts? If the answer to those questions is yes, then maybe you can afford a big vacation or a new wardrobe right now.

But if you’re like me — with a tiny savings account, way too much debt, and a non-existent retirement account — then you’d probably be better off putting that money to more practical use.

A difficult decision about student loan repayment

Once we became credit card debt free, we had an extra $200 a month available. We decided to put some of that money toward retirement savings every month, so we only have $100 left to work into the budget.

Yesterday, Tony and I looked at our budget, and talked about where we’d like to put the money.

We have a huge amount of student loan debt (about $60,000 all told). My plan has always been to pay off credit card debt first, and then move on to my private student loans. Private loans account for about 1/3 of our student loan debt, but they carry about a 7% average interest rate. We also have about $40,000 in federal student loans with a much lower interest rate (about 4%).

When I think about all of that debt, I feel so overwhelmed. To make it easier on myself, I’m focusing on one loan at a time — for now the private loans (about $22,600).

I plugged some numbers into a loan repayment calculator to figure out some scenarios. The numbers are disappointing.

If we continue paying our current amount ($200 a month), it will take us 10 years to pay off my private loans.
If we put the extra $100 toward student loan debt (my original plan), it will be 8 years before the private loans are paid off.
Even if we could come up with $500 a month to put toward the private loans alone (while continuing to pay the minimum payment on federal loans), it would take about 4 and a half years to pay off just the private loans. Then we’d still have to pay off $40,000 in federal loans.

“Don’t worry,” people tell me. “Your income will go up.”

The problem is, it probably won’t. Right now I work full time, and Tony makes the equivalent of a part-time salary teaching. Sometime after he graduates, we want to have children. At that point, our roles will switch. He’ll bring in a full time salary, while I work part time (hopefully from home). So we’re looking at quite a while before we see a significant increase in our income.

Tony and I had a long talk about our short- and long-term goals. As much as I want to be debt free (and believe me, I really want to be debt free), at this point in our lives with our limited income and the economy a wreck, my gut is telling me that saving is more important.

Once we’re settled somewhere that we know we want to stay long term — and we have an emergency fund in place — our focus will shift. At that point, we’ll be able to put everything we have into debt. But for now, I want to have as much money stashed as possible.

So we made the decision to continue making minimum payments on student loans for the next year and a half while we beef up our savings. After that, we’ll reassess our financial situation. Hopefully we’ll have enough in savings that we can hold off on saving and shift our focus to debt.

I’m disappointed that we can’t do both, but I’m also confident in our decision. When I look at the difference an extra $100 a month will make in our savings, I feel calm and reassured. I don’t feel that same calm when I see the minor change in our debt that would result from paying an extra $100 a month on it for the next 18 months.

I also don’t regret putting $100 toward retirement every month. If we don’t plan for our future, no one else will. Putting $100 away for retirement every month makes me feel incredibly empowered.

The important thing is that we’re doing what works for us. The best part? Liquid savings is, well, liquid. If we change our minds, we can always pull that money out of savings and put it toward student loans.

We’re saving for retirement!

Last week, I questioned when we should start saving for retirement. I got a lot of great advice from readers (thanks!). After talking it through and doing our own research, we’ve made the decision that the sooner we start, the better — even if we can’t afford to make huge contributions at first.

Neither of us receives a company matched retirement plan, so we made the decision to put all of our retirement savings into a Roth IRA for now. We’re in a very low tax bracket now, and tax brackets are only going to go up. With a Roth IRA we can pay very low taxes on the money now, and then withdraw it later tax-free. Someday we may have the opportunity to get company matches, and if that happens we’ll start contributing to a 401K up to the match.

We only have about 3 months worth of expenses in our emergency fund. We didn’t want to raid our savings for an initial investment, so we looked for an investment firm that didn’t require a minimum investment.

Our main priorities are student loan repayment and liquid savings right now, so we can only afford $100 a month toward retirement or $50 for each of our accounts. We’ll increase that amount later as our income increases and our debt decreases.

After looking at several investment companies, we determined that T. Rowe Price is the best fit for us. The initial investment is $1,000 unless you opt for an automatic savings plan of $50 a month. Perfect.

Tony brought up a good point that I hadn’t considered. “Will we be able to stop contributing on the automatic plan if our financial situation changes?” I wasn’t sure if participating in the automatic plan without a minimum investment would require a time commitment for automatic investment.

Before we opened the account, I called customer service with a list of questions. They were very helpful, which only cemented my decision to go with T. Rowe Price. The answer to Tony’s question is yes, we can temporarily stop contributing. If we haven’t made a contribution for several months and our account balance is still under $1,000, they will ask that we bring the total up to $1,000 or close the account. But once our account balance reaches $1,000, we can contribute as much as we want whenever we want.

It will take us about a year and a half to reach $1,000. We decided that we could afford to make room for $100 a month at least until that point.

Because we have so much time until retirement and with stock prices where they are, we decided to invest predominantly in stocks.

T. Rowe Price offers a convenient option for beginning investors. You can select a diversified retirement fund based on the time you have until retirement. If you have a lot of time, the fund is more aggressive with a greater percentage of stocks. As our retirement year draws near, the investment portfolio will gradually become more conservative. The fund we selected is about 90% stocks with a very diverse portfolio and only 10% bonds.

Because we’re beginners, we decided to go with this option. In a few years when we have more knowledge and more money to invest, we can easily move our money to different funds if we choose. For now, this is a safe bet for us.

I’m feeling really good about our decision. Yes, that $100 would be helpful toward debt or liquid savings, but it will get a much greater return in a retirement account for the next 40 years. Starting now will increase our chances of reaching our retirement goals, and more importantly will get us into the habit of investing for retirement.

If you’ve been thinking about doing this for yourself, I strongly urge you to start researching now. I think you’ll be surprised at how easy it really is.

When is the right time to start saving for retirement?

Obviously, the answer is as soon as possible. But it’s hard to know when it’s time to really buckle down when you’re young and in debt.

Tony and I are 24 and 25, and I had hoped to start saving for retirement this year. But the more I look at our finances and goals, the more I hesitate to start now.

As a grad student, Tony obviously doesn’t have access to an employer-based retirement fund. Neither do I in my current job. So any retirement saving we do at this point will be on our own.

We’d like to open a Roth IRA and start saving a little every month, even if it’s just $50 each. We can always increase that amount later. But then I start thinking about our debt and our likely cross country move in less than two years and all of our other goals, and I can’t help but feel like that money would be better spent on debt and liquid savings at this point in our lives.

I know that saving for retirement is essential, especially for my generation. But I feel like 20-somethings in debt should focus more on becoming debt free. Otherwise, we could wind up paying student loan debt until it’s time to send our own kids to college.

Even though our income is relatively low, I almost never feel deprived. This is one area where I really feel the constraint of our low income, though. After our bills are paid and our necessities are covered, there just isn’t enough left over to save for emergencies, save for our future, and pay down debt. If I split up the extra money between the three, I feel like we’re not making any headway on any of them. But if I concentrate my efforts on one or two, then I feel guilty for foregoing the third.

My fear is that it will only get harder, especially since we plan to live on one income. If we can’t find room in the budget for retirement savings now, how we will be able to once we increase our financial responsibilities and have children?

I trust I’m not the only 20-something in this predicament.

When did you start saving for retirement? Is it crazy for me to wait another couple years?

Resolutions for another frugal year

I’m so excited about the year ahead! For the first time, I feel like I’m looking ahead with a clear set of goals and the resolve to actually achieve them.

In the interest of keeping myself honest, here’s what I hope to accomplish in the coming year:

Finish building our 6-month emergency fund. We’re a third of the way there now, but I hope to finish it by the end of the year.

Spend less than our budget. We’re doing a lot better than we used to, but we continue to go over budget by $50-$100 every month. Technically we’re not spending more than we make because we save at least $300 a month, but we’re cutting down our actual net savings by going over budget each month.

Make a dent in our student loan debt. Now that we’re credit card debt free, I want to really crack down on our spending and send every extra penny to our student loans so we can be completely debt free sooner.

Learn more at my job and grow my skill set. Someday when we have children, I’d like to work from home, so it’s important that I learn as much as I can now to build my credentials and qualifications.

Enjoy the present, and try to stop looking ahead to the next big thing. This is a constant work in progress for me. Planning ahead is essential to reaching long term goals, but sometimes my constant planning makes me lose sight of the present. I need to find a balance between appreciating what’s now and planning for the future.

What are your resolutions for the new year?

Guest post from a new investor looking for advice

This is a guest post from one of my most frequent commenters, Bobbi. She doesn’t have her own blog, but I hope she’ll considering starting one now! There’s no better time than the new year!

I’m also going through a similar dilemma with my year-end bonus, so I can definitely relate. Please weigh in and help Bobbi make a decision about what to do with this money and how to start saving for retirement now.

First, I would like to say that I feel truly blessed to have a job in these hard times, much less to have received a “year end” bonus from my employer. Thank you Bob! Second, thank you to “Living Well on Less” for letting me guest post. This is my first. :)

A little background: I am a mid-40 something woman with a grown daughter. I don’t spend more than I earn (anymore), and I work for a small business that has been in business for 10+ years. The business is doing pretty well in spite of this crazy economy (we are very versatile in what we do). However, I do not have a 401k or retirement at all so I am trying to build my own. I have no mortgage, so I am able to save every month.

My dilemma is what should I do with my bonus ($2,000) and I am hoping your readers can give me some advice. :) I am not an investor right now, but one of my goals for 2009 is to learn more. Right now I need to do something simple. These are the choices I am considering:

ING savings account – 2.75%
FNBO savings – 3.252%
My Credit Union ‘daily interest’ account – 1.29% (daily)
24 mo CU CD – 4.69% (12/09 maturity date)
IRA – Roth or standard – ?
I have a credit card @ 0% interest until March with a balance of $1500.
Car loan around $19,000

I don’t know much about Roth IRAs and I’m not even sure I can open one with this amount. I am leaning toward taking half and paying on the credit card and putting the other half in some sort of savings. I would love to hear what your readers would do or if they can give me more information on the IRAs.

Thank you and happy holidays to all!

I recommended that she pay off that credit card debt and start the new year with a clean slate! What do you think she should do? And can anyone give her some advice on the best way to save for retirement when you’re getting a bit of a late start?

Tempted by the end-of-year bonus

I wasn’t expecting to receive a bonus from my employer this year. We’re in a recession, after all. So imagine my surprise when I received a bonus of about a week and a half’s pay. That’s quite a lot of money considering how little we spend.

I find that extra money is a lot easier to control when it’s expected. For instance, we know we’ll receive a tax refund this year. We’ve been anticipating it all year, and we already know where it’s going (savings).

However, when someone hands you a check out of nowhere, it can be tempting to blow it. After all, I was doing fine 5 minutes ago before I received the money. It’s not like I’ll miss it if I just spend it, right?

I have a feeling that no matter how committed I am to frugality, I’ll always have these moments of temptation. In that moment of weakness after I looked at the amount on the check, I started thinking about new furniture, a new TV, and a thousand little, inexpensive things I could use this money to buy. It would be a lot of fun to just blow this money. But then it would be gone, I wouldn’t be any closer to reaching my goals, and I’d regret it.

I quickly reminded myself that we’re in debt, and we’re nowhere near reaching our financial goals. Blowing money on things we don’t need is a good way to keep ourselves from reaching those goals.

So what is the practical side of me considering using the money on? Here are some thoughts I’ve had:

Summer fund

Two months of the year, Tony doesn’t receive a paycheck for teaching. He’ll find a part time job, but chances are it won’t pay as much as his monthly stipend. Last year we adjusted our budget and tightened things up to accommodate for our lower income. I’m considering throwing my bonus into a savings account to help us a little during those summer months of lower income.

Emergency fund

Our emergency fund is about 1/3 of the amount we want. This money could help us beef it up a little.

Debt

This is the least appealing option. After all, my bonus is dwarfed by our $60,000 in student loan debt. However, every little bit does help.

Retirement?

This is a tough one. Tony and I are 24 and 25, and neither of us has a retirement account. We’ve wanted to open a Roth IRA for some time, but it has taken a back seat to debt and savings. I’m considering using this bonus to jumpstart our retirement saving. While I don’t think it’s enough to open an account (I think I need at least $3,000 for that, but I’m not sure), it could at least get us started until we have enough saved to transfer it to a Roth IRA.

While I really want to get started on retirement saving, I’m hesitant since we are considering moving in a year and a half. We really need all of our savings to be liquid so we can use some of it for the move if that’s what we decide to do. So I’m leaning toward putting off retirement savings for another two years until we’re settled down somewhere.

I could use some advice. What would you do?