The Kindle is Testing My Resolve

So, I received a Kindle from Mr. Sam for my last birthday.

Some background, I am an avid reader, I often read one or two books a week. Before our personal finance awakening (2007), I often bought 4 books a month. After we started working on paying down our debt, I resolved to reduce my book spending, and decided I would limit my book purchases to my book-club book and airport book purchases. I filled the book purchase gap by using my local library, which is within walking distance to my home. For about three and a half years, I maintained my resolve, but slowly, I realized I was starting to re-read library books (which I do with my own personal library). Basically, while I had not read every book in my library, I had exhausted what I was interested in reading. I had read every book from every author that I like or had heard about. I had read every available book from the various year end lists (NYT best books of the year, Salon.com best books, The Slate best books, the Booker Prize short list, the Pulitzer Prize short list, etc.) The real problem being that my library, which is small, just doesn't have many of these books.

So last birthday, Mr. Sam bought me a Kindle, which had come down in price to about $150. And, if you are not familiar with the Kindle it is super easy to buy books. Too easy. If I have my Kindle with me, i.e. at book club or traveling, and I'm in a wi-fi hot spot I can simply purchase the book in about 10 seconds with one click ordering. If I'm not in a wi-fi hot spot I can purchase a Kindle book via my iPhone Kindle app. I can instantly gratify my book itch.

Since, I received my Kindle, I'm averaging 3.4 book purchases a month, which average in price at $9.99, so about $34 a month. $34 a month isn't much in the grand scheme of things but it does translate to about $400 a year and that is probably $300 more per year on books than I was spending before I received the Kindle.

So, what to do? I could decide that the $400 I'm spending on Kindle books is money well spent. Money well spent in that it is small amount of money for something I very much enjoy and therefore I should allocate the sum either in our spending plan or it comes from my allowance money.

Alternatively, I could impose a holding pattern on my Kindle purchases. I use "holding patterns" for many of my on-line purchases, including Amazon, but the Kindle is set up for this one click purchasing so I would need to figure out how to select my Kindle books without actually purchasing them.

I'm also considering hitting the library again, I'm sure in the last few months they have some new selections. I could probably obtain at least one book a month from my library which would reduce my Kindle spending by $10 a month or a $100 a year.

Possible Good News on the Real Estate Front

One of our tenants that is due to move out this weekend has asked to stay and asked to sign another lease. We'll see how it shakes out, but it would be better to keep the same tenant for, even another six months, than turn the property.

I'll be keeping my fingers crossed that they decide to stay. I think they have realized that they really cannot find another rental that beats ours, which is a bargain, and in good condition, and we permit a cat.

Follow Up on Pay Down the Mortgage

Following up on my post about paying down the mortgage. Yesterday, I read an article on cnn.money.com which reinforced JKC's position that putting extra money towards our mortgage is, perhaps, not the right move.

According to the article, putting money towards prepaying principal is not the best course of action if (1) you've got other debts (that is a no for us) or (2) you are not maxing out your 401k (also a no) or (3) you don't have 6 months of cash for living expenses (we are close on this one).

The next question, is how long do you plan to stay in your home. We plan to stay at least 20 years so that tips in favor of paying off the mortgage.

Then look at the tax impact, our tax deduction is $4700 the first year and our effective mortgage rate (minus the tax deduction) is 3.2%. So putting money in the stock market, like JKC argued,* is a better bet since the historical return for the the S&P 500 is between 6% and 7% (of course from 1/1/2000 to 12/31/2010 the S&P 500 provided a 2.4% return).

So, I'm still pondering this one.

*I very much enjoy getting feedback from others so I take no offense to JKC's comments or anyone else.

Cash at the Pump

This morning I paid for a tank of gas with cash. I cannot recall the last time I did that, probably 15 years ago.

Gas prices are up in my county, $3.33 per gallon for regular. But, I paid with cash and I received a .10 discount, so filling up I saved a total of $1.50. I don't normally have that kind of cash with me, but since we traveled last weekend I still had travel cash in my purse.

I read recently that many people are aggravated by the cash discounts at gas stations because the prices being advertised are cash. I guess I see their point, it does feel a bit like a bait and switch because you don't know the real price until you get to the pump.

Frugal Fatigue?

On my way out the door this morning, I heard the Today Show anchor previewing a story on folks who are tired of watching their pennies (also known as frugal fatigue). This term has been popping up here and there in the news the last few months and seems to correspond to the positive economic indicators.

I like this commentary and agree, strongly, with the parallels between fiscal fitness and physical fitness.

For one group, the recession and economic downturn were like being forced to go on a diet; while they are losing the weight, they are at risk of putting it back on again. The other group accepted the lifestyle change and are looking toward a lifetime of better financial health.

And there are good ways to manage your frugal fatigue, setting up an allowance system, which is what we use, allows one to spend day to day without categorizing or budgeting for each little expense.

Most people think being frugal is about restriction, but really it is about freedom. When you are free from your debt, you have more money to do what you want, travel, vacation, even fancy shoes. When you have money in the bank you have freedom, to a certain extent, from your job, from downsizing, from emergencies. Being frugal is about having a plan, and that plan can certainly include spending on the things that you truly enjoy.

So the question is whether you want to be fit and wealthy? I think most people would answer, yes and yes.

Memories Are Short

After two and a half years of reduced spending and increase savings consumers in 2011 have turned a corner and spending is up and savings rate is down.

In fact, 52% of consumers say the recession has "forever changed" the way they spend and save, according to a recent survey by Citigroup. But that's down from 63% when the same survey was conducted a year ago.

But that means at least 11% are back to their old ways, as the economy improves will you stick to savings or will you return to your spending ways?

For us, I think we are generally entrenched in our personal finance habits. We are in year 5 of working off a spending plan and allowance system and year 5 of not using credit cards and year 4 of a committed yearly savings plan. But, I recognize that the forces of evil, the free spending friends, consumer trends and advertising, are hard to avoid and hard to resist. As those forces go stronger we will have to recommit to focusing on our way of living.

I Love NetWorthIQ

I'm a big fan of NetWorthIQ, probably pretty obvious since I've been a member of that site since early 2007 and I'm one of the most "active" users.

Besides keeping track of our own net worth, I find it very motivating to compare myself to those, in our age bracket, who report net worth numbers on both ends of the spectrum.

While I'm not trying to keep up with the Joneses, I find it helps me focus to see what others have accomplished and how they have accomplished it. There is a Florida networthiq.com profile that exceeds $139 MM. Wowzer!

I'm also impressed with those in my age bracket who are working away at their debts. Many of them, with big debt numbers, seem to be chipping away at big student loans for medical school of law school. I'm not taking comfort in others' pain, but I find that thinking about having $100,000 - $200,000 in student loan at my age to be scary (of course others might find our $600,000 in mortgage debt to be even scarier). And thinking about others' debts strengthens my resolve to stay away from debt and to keep working on our own.

March is Real Estate Month

We have two turn-overs coming in the next few weeks.

First, one of our relatives has been trying on the snow-bird hat by using our smallest (and least expensive) investment property as a short term seasonal rental. Except, he doesn't really pay the rent and we don't ask him to. He did pay us about $1000 for three months of use, while we would normally get at least $2200 in rent for the home (plus we paid the utilities). This is our easiest rental, so Mr. Sam will do some painting (which we did not do when the former tenant moved out) and we'll get it back on the market before March.

Second, our tenants in one of our other rentals are leaving. So, Mr. Sam will be working to get that rental ready, probably will not have it on the market early enough to have it rented for March so we will lose a month of rent.

Love is in the Air

Driving home last night, listening to NPR, I learned that the average American spends $116 on Valentine's day. I thought to myself, well I spent $0 so ha! Of course, thinking more about it, I was focused on the $0 I spent on my husband. I spent $5 on cards and actually expended a total of $85.

I spent $5 on Valentine's Day cards for Gram and Grandpa, my god-daughter and her sister, my niece and my nephew. I also made three $20 charitable donations which included the organization sending Valentine's Day cards to my three closest friends (so really will be allocated as giving not spending). I also sent $10 to my god-daughter and to $10 to her sister in their Valentine's Day cards.

How about you?

Paying Down the Mortgage Question

JKC asked why we were focusing on paying down our primary mortgage (since we've got investment properties we have more than one mortgage, but that is a song for another day).

It is a good question and one that we have gone back and forth on. First, our primary mortgage rate is 4.7%. We refinanced our mortgage in 2009, we were 4 years into a 30 year mortgage so when we refinanced we selected a 25 year mrotgage so we shaved a year off the term. We also paid down the principal by about $4,000 - $5,000 when we refinanced (due to some rules in Fla. and to qualify for the better rates).

At present our balance is $278,776 and we have 23 and half years left. We plan to stay in our home until we retire.

In 2011, we are paying an extra $415 a month in principal prepayment. Doing so, assuming we continue at this pace, will shave 7 years off our mortgage and will save us almost $60,000 in interest.

But, really we would like to get to the point where we are paying an extra $500 (or more) per pay period or an extra $1000 (or more) per month so we could pay off our mortgage in 10-12 years, which would save us almost $100,000 in interest.

Why do we want to kill the mortgage? We would really love to be debt free. But, we also want to build our retirement/vacation home and we'd likely be trading mortgage debt on our primary home for mortgage debt on our retirement home. Another plus for paying off our home, we would be able to lower our insurance costs (insurance in Florida is expensive!).

So, I expect JKC's question is whether it makes financial sense to throw extra money towards the mortgage when we could be investing that money. It is a complicated question and the answer is not crystal clear (in fact, although we've thought about this issue, we really don't have a good answer). Regarding investing, we are not neglecting our investments in favor of the mortgage, we are maxing out our 401k(s) and IRA(s) each year (or coming close) which is $43,000 in investments. Last year we also invested $5,000 in a regular trading account.

But, instead of putting $415 towards the mortgage each month, we could invest that money in equities or other investments and probably could get a return exceeding 4.7%. We could also add that $415 to our emergency fund each month, but the return we get on paying down our mortgage exceeds the return we are receiving via ING (about 1% these days).

So, I guess my answer to JKC is that we are paying down our mortgage as part of our savings plan for our retirement/vacation home. At present, we are not neglecting our investments in favor of the mortgage, but to the extent we increased our principal prepayment to $1000 a month we would need to analyze the opportunity costs of paying down principal vs. investing. Paying off our mortgage would also save us money in insurance costs.

2011 Goals - February report

(1) Max out 401k(s) - $3,048 (9%)(goal is $33,000)
(2) Max out IRA(s) - $4,000 (40%)(goal is $10,000)
(3) Add to e/r fund - $1200 (12%)(goal is $10,000)
(4) Pay down mortgage - $415 (8%)(goal is $5,000)
(5) House projects - $0 (goal is $5,000)

Total - $8,663 (14%)

Still tweaking the 401k contributions for Mr. Sam, he'd rather contribute more in the first part of the year and then lower it the second half of the year. Since I do the budgeting, I'd rather set it up so the amount is steady over the course of the year.

Mine, Yours, Ours

I've been enjoying this Slate series on how couples manage their finances. There are three methods described in this series: common potters, sometimes sharers and independent operators.

Mr. Sam and I have been, and still are, sometimes sharers since 2004 (when we bought a house together) although our methods have changed over time.

In 2004, we established a joint checking account, what we call our house account, and we each deposited a proportional share into the house account to cover our joint expenses (mortgage, insurance, utilities, etc.). So, the first step was determining how much our joint expenses were. That took a few months to figure out since some expenses fluctuate. Then we each contributed "equal shares" which meant that since I earned more I contributed more. Early on I contributed 2/3 to the house account and he contributed 1/3. I paid all the joint bills out of the house account and we each were responsible for our own individual bills and expenses. The Slate series makes this method seem really complicated and the couples who use this method have a million conversations/debates over what is a joint expense. We didn't struggle with that issue, if the expense related to our home it was a joint expense and came out of our joint account. Also, over time we got into the habit of trading expenses as well, I'd pick up the dry cleaning and pay for it out of my money, Mr. Sam would do the grocery shopping and pay for it out of his money, etc.

After marriage, in 2007 I decided that we ought to pay down all of our unsecured debt (Yay Dave Ramsey) and we undertook an overhaul of our finances. Putting aside the debt issue (another topic) the first step was to create a spending plan (our version of the budget).

Then we decided that since we were now married there would be no "my" money or "your" money anymore and I was, generally, ready to move to the "common potter" method. But, since we had gotten married later in life and we were each used to having our own money and spending it as we wanted we stuck with a modified sometimes sharer method (I'd call it a 90% sharer method).

The 90% sharer method provided that we each deposited all income into our house account. I paid all the bills, joint or individual, serviced the debt (until we paid it off a year later), transferred monies to savings, etc. Then we each received the same amount of money, our "allowance", for day to day spending. We can each spend our allowance as we see fit with no checking in with the other.

This system, with a bit of tweaking each year, has worked well for us since 2007.