My Personal Finance Journey

All posts by Jacob A Irwin

Updating My Target Asset Allocation/Investing Strategy

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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For the past three years (since this site was created in fact), I have operated my passive investment strategy around a target overall asset allocation of 25% fixed income and 75% equity investing instruments. Thus far, I have and continue to be very comfortable with this asset allocation, given my age, risk comfort profile, and the number of years I have left working before retirement. 

Using this 25/75% split in overall asset allocation, it boils down to having 5% of my overall assets held in cash. However, during the past year, due to vacation savings, dream and life values savings, and the receipt of a lump-sum inheritance amount (1/4 of which I am keeping in cash for the time being), I have tended to carry around 10% of my overall assets in cash-equivalent accounts. Since I like having this amount of cash on hand being saved for specific purposes, I figure it is time for me to accept the fact that I need to change my target asset allocation percentages to account for this preference.    

In thinking about how to account for this change, I saw two possible options:

  1. Maintain my 75/25% overall asset allocation split between equity and fixed income instruments by increasing my cash target allocation to 10% and decreasing my target bond allocation. 
  2. Maintain my current asset allocation target for bonds, increase my cash target to 10%, and then decrease the amount of equity holdings I have by 5%.
After comparing these two options, I opted to go with #2 because it would introduce a little more stability/safety in to my portfolio compared to #1. In addition, since a lot of my cash savings are earmarked for shorter-term items, such as vacations and property taxes, I felt better about keeping my current bond asset allocation.
Having decided which route I would take, I could then work through the details of updating my precise asset allocation targets. Shown below are the results!   

Overall Asset Allocation

% Equity = 70%
% Cash/fixed income securities = 30%
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Total Portfolio = 100%


Equity Asset Allocation

For the equity portion of my portfolio, my target split is shown below:

% US Domestic Equity = 70% (70% x 0.70 equity = 49% of total portfolio)
% International Equity = 30% (30% x 0.70 equity = 21% of total portfolio)
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Total Equity Portion of Portfolio = 100%

I then break down these broader allocation levels in to subcategories so I can select INDEX mutual funds to give me exposure to these areas, as shown below:


Detailed Allocation Calculations

1. % Cash (money market target 10%)
2. % Non-Inflation Protected Short Term Bond Funds (avoid long term bond funds) (target 12%)
3. % TIPS Bonds (inflation protected bonds -target 8%)
4. % International Equity (Target 10%)
5. % International Emerging Markets (Target 11%)
6. % Domestic Large Cap (Target 7%)
7. % Domestic Small Cap (Target 7%)
8. % Domestic Small Cap Value (Target 13%)
9. % Domestic Large Cap Value (Target 12%)
10.% REIT (Real Estate Investment Trust – target 10%)
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Total Net Worth = 100%


Online Savings Account and Vanguard Index Funds That I Use for My Asset Allocation 

All of these have very low fees, and since they are index mutual funds, you will have higher returns than 70% of investing professionals with active management. You can open an account with Vanguard very easily at http://www.vanguard.com/. There are generally no commissions/fees for buying Vanguard funds through your Vanguard account. All funds require $1000-$3000 of initial principal to buy a particular fund.

1. Cash – Place in DollarSavingsDirect.com high yield savings account.
2. Vanguard Short Term Bond Index (MUTF:VBISX)
3. Vanguard Inflation-Protected Secs (MUTF:VIPSX) – Note: This is an actively managed fund.
4. Vanguard Total Intl Stock Index (MUTF:VGTSX) 
5. Vanguard Emerging Mkts Stock Idx (MUTF:VEIEX)
6. Vanguard Total Stock Mkt Idx (MUTF:VTSMX) 
7. Vanguard Small Cap Index (MUTF:NAESX)
8. Vanguard Small Cap Value Index (MUTF:VISVX)
9. Vanguard Value Index (MUTF:VIVAX)
10.Vanguard REIT Index (MUTF:VGSIX)



Investing New Money when it Comes In –

So, having bought the funds listed above, now what do I when I get my paycheck each month and have new money to invest? This is where dollar-cost averaging and/or rebalancing comes in to play!

Portfolio Rebalancing

Portfolio rebalancing is the process of maintaining the recommended allocation target %’s listed previous in order to maximize return and minimize risk. The rule I follow for when to rebalance is called the 5% rule. For example, the target allocation % for the REIT part of your portfolio is 10%. Following the 5% rule, you would rebalance the portfolio either by selling shares or contributing more money depending on whether the current % of the total portfolio was 15% or 5%, respectively.

As a general rule, I try to avoid selling shares of mutual funds (except in tax-sheltered accounts) frequently in order to perform rebalancing. Instead, when new money comes in, I buy additional shares in other funds if as needed to maintain my targets.

However, a full rebalancing of your portfolio should be 1X to 2X per year, unless your allocations targets are already aligned from keeping it up throughout the year with monthly investments.

Dollar Cost Averaging

Another method of maintaining your portfolio/deciding how much money to invest and when is called dollar cost averaging. 

In Dollar Cost Averaging, the idea is that a constant amount of money is invested each month in to your account, and therefore, will buy MORE shares when the market is down and LESS shares when the market is up.

How about you all? What is your overall target asset allocation that you use in your investing strategy? Do you ever think about revising it?

Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/english-in-vancouver/7359571334/sizes/s/in/photostream/

    The Art of Meaningful and Inexpensive Gift Giving

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    Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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    The following post is by MPFJ staff writer Travis. Travis is a customer blogger for CareOne Debt Relief Services, and also appears weekly at Enemy of Debt.  Travis candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband, he provides a unique perspective on balancing debt, finances, and family.

    We were having trouble coordinating a date for a small Christmas family gathering with my wife’s immediate family.  We didn’t even know if it was even going to happen until some previous commitments changed, and suddenly, the weekend before Christmas was open.   It was to be a very small, informal gathering, allowing us to spend time with each other during the Holidays.   Because it had come together so quickly, there hadn’t been any mention of exchanging gifts until literally the day before the event.  This sparked a frenzy of phone calls between all involved requesting gift ideas.   With the limited time remaining, everyone’s answer was the same:

    A gift card to iTunes, favorite clothing store, restaurant, etc.
    We had a great time talking, playing games, and catching up.   My brother-in-law had been out of town for several months attending National Guard officer training, and I had missed our usual back and forth bantering during football season.   Spending time with him and the other family members would have been enough, but we did have gifts to exchange.  We opened our gift cards, acted surprised, and thanked one another. 
    I couldn’t help but think that all we had done is exchange money with each other.
    It was the definition of exchanging gifts just for sake of exchanging gifts, and quite frankly, it turned out to be rather expensive.  Buying a gift card of a meaningful value for several people (6 in this case) adds up.  We did receive almost the exact same value of gift cards in return, but they are to specific stores which is not the same as cash in your checking account. 
    If we’re going to exchange gifts with loved ones, I sincerely believe that a Christmas list is not needed.  The amount of money isn’t important, but there certainly should be creativity and an element of surprise involved.
    Let me explain what I mean.
    I never ask my wife what she wants for Christmas (or anniversary, or birthday).  As her husband, nobody spends more time with her or knows her likes and dislikes better than I do.  It should be easy for me to come up with a meaningful gift for her without asking.  The best part of buying someone a gift is to have them completely unaware of what you are doing.   My normal mode of operation is to consciously listen for her to say phrases similar to, “Oooh, I’d like one of those.” 
    I remember walking through a department store earlier this year when she pointed at an electric throw blanket and asked if I remembered the one that had stopped working a few years prior.  I chuckled and recounted how we would watch the Minnesota Vikings  football game, then she would curl up in a ball under her electric blanket and take a nap.  During a separate shopping trip, she found a memory foam pillow that she had fallen in love with, looked at me and said very irritably, “I sure could use a new pillow.  How old ARE ours anyway?”
    The two things instantly collided in my mind into Christmas present perfection.
    What could be a better present combination for my nap loving wife than a new pillow and an electric throw blanket?  The blanket was something she wanted, and the pillow was something she needed.  However, she had expressed interest in them far enough in advance to the holidays such that she was completely surprised that they were given as gifts. Add some stocking stuffers in the form of a bag of Lindor Milk Chocolate Truffles (favorite treat) and a new paddle brush (my daughter and her have been sharing one) and I had completed Christmas shopping for my wife.
    The grand total for my wife’s gifts was $68. It’s may not have been overly romantic, exciting, or expensive,  but she loved them.  How do I know?
    The entire time I’ve been writing this post, she’s been on the couch with her new pillow and blanket.  Taking a nap.
    How about you? Did you have any gift exchanges that you could have done without this year?  How do you decide what to buy for your significant other and how much did you spend this year?

      ***Photo courtesy of Image courtesy of Danilo Rizzuti / FreeDigitalPhotos.net

      2012 Year-End Review – Current Asset Allocation and Net Worth Growth – July-December 2012

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      Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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      Hello there everyone! Jacob here! The past few months have been quite a whirlwind, fitting in serving as a Teaching Assistant to a Transport Processes class 10-15 hours per week along with my normal Alzheimer’s disease research in graduate school and keeping up with blogging. 

       However, aside from being pretty busy, the past few months have also been very productive! In mid November, our Alzheimer’s disease paper got accepted for publication in the journal, Biomacromolecules. Then, the week before Christmas break, I finished defending my Master’s Thesis and also completed the requested revisions to another manuscript we were submitting to the journal, PLoS One, which has some of the strangest capitalization formatting of any word I type these days! haha

       Anyhow, with 2012 coming to a close, it’s time to review the progress on my net worth, financial, personal, and blogging goals I’ve realized this year and also think about setting new/revised ones for next year! So, without further ado, let’s get started – first with reviewing my net worth growth during the 2nd half of 2012! As always, if you have any questions, please ask via email or commenting below! 

      As I’ve mentioned before, the goal of this running net worth and asset allocation progress update series is twofold:

      • 1) To share how I (as a fairly normal non-financial professional) approach various financial issues that come at me throughout life so that you can use my learnings to assist you in your financial decision making, and 
      • 2) To make me more accountable in sticking to my various financial goals that I set forth by periodically evaluating my status and making adjustments. 



      Overall, the 2nd half of 2012 went amazingly well from a financial perspective, which is pretty intriguing given how little “active” management I did relating to my finances! I’ve been able to make a lot of progress towards my personal, professional, and financial goals. And, I’ve been able to invest significantly in to reaching my blogging goals with the help of several amazing staff writers on the site the past few months! On top of that, the overall market has been doing pretty well during the past 6 months! 

      With all of the up and down that has occurred, let’s take a look and see how it affected my net worth progress…shall we?


      LIQUID NET WORTH GROWTH (NOT INCLUDING CONDO NOR BLOG/GRADUATE FELLOWSHIP UNPAID INCOME TAX SAVINGS)

      In October of 2011, I had to make a fairly significant change in how I calculate my net worth and asset allocation percentages each month. The change pertained to the cash I consistently save up throughout the year in a high interest online savings account (Dollar Savings Direct) in order to pre-pay self-employed or unpaid (from my graduate research fellowship) income tax to the government in the form of quarterly tax payments. What was happening was that the balance in this tax savings account (which was being counted in to the cash portion of my asset allocation) was becoming too large, and it started to skew my asset allocation calculations. 


      To remedy this, since October of 2011, I’ve started using a system of calculating my liquid net worth, which includes all of my various equity and fixed income holdings but excludes 1) my equity and debt related to my condo and 2) the amount of savings I have accumulated so far during the year earmarked to pay the tax man. I’ve decided that doing the analysis in this fashion helps me remain more objective in making financial decisions without being influenced by assets that are needed for shorter-term living/tax expenses.
      Keeping this important change in mind, let’s continue…

      OVERALL NET WORTH GROWTH

      Important Note: In general, I operate on the belief that I shouldn’t compare, measure, and/or gauge my financial success based on the performance of any market index. In particular, this comparison should and is not used to make changes in my financial planning. Instead, as I mentioned above, I prefer to think of if I am/am not doing well by if I am meeting the specific financial goals I set out for myself. However, I still do think it is interesting to track how the market does, and for that reason, I include the S&P500 performance in my progress updates. 


      From 29-June-2012 (when the last portfolio update was computed – see link below for more information) to the end of December, 2012 the S&P 500 index increased 7.29%. Pretty awesome in my book!

      My Personal Finance Journey – 1st Half of 2012 Portfolio and Net Worth

      During that time period (July-December 2012), my liquid net worth (excluding condo ownership and unpaid tax savings) increased 29%.


      At first glance, this looks pretty amazing. And, I admit that it was pretty shocking to me when I calculated this figure several days ago. However, I cannot take full credit for this growth amount. Approximately 10% of this gain was attributed to a surprise lump sum inheritance from my great grandparents on my dad’s side.

      However, that still leaves an additional 10% gain over and beyond what the market realized during this time. Reflecting on what occurred during the time period and the fact that my overall earnings have not been that different than normal, the only thing I can attribute this to is consistent savings through dollar cost averaging and maintaining a good asset allocation. As you can clearly see in the picture at the top of the post of the S&P500 performance over the past 6 months, the market went down about 8% in November, but has since recovered back up to a nice level. During this time when the equity market was going down, I maintained contributions to my Individual 401k/Roth IRA/Individual Vanguard mutual fund account, almost exclusively buying more equity shares.

      CONDO EQUITY GROWTH

      I now currently have 19.88% home ownership in my condo (up from 18.4% at the beginning of 2012), with this accounting for 18% of my real net worth (so net worth subtracting the condo loan – this is different from the net worth figure discussed above).

       As I continue to learn more and more about advanced personal finance topics, I have become quite sure about one thing – I am not the biggest fan of aggressively building up as much home equity as is possible. I’ll likely discuss this topic in detail in a future post, but the gist is that while I am sure that home ownership is a great idea for personal finance success, I don’t believe that pre-paying a mortgage far beyond what is required is a very good investment. Why is this? Because the money that you pay over and beyond what is required (even though it is saving a little bit on interest, which is tax deductible, so not really that much savings) is not gaining you any type of return whatsoever – it is essentially money stuffed under a mattress.

       Instead, I have been taking the money I have leftover after maxing out my Roth IRA and using it to contribute close to the maximum allowed for my Individual 401k account. More about this in the next few weeks when I discuss my financial goals! 🙂 


      PERMANENT PORTFOLIO PERFORMANCE UPDATE

      In November 2011, I became fascinated/interested enough in Harry Browne’s Permanent Portfolio asset allocation strategy in order to give it a small trial run with my own money (less than 1% of my liquid net worth). As such, I’ve decided (for fun!) to start tracking the performance of my small ETF version of the Permanent Portfolio in order to compare it to how the market is doing. 

      While holding the Permanent Portfolio from 29-June-2012 to end of December 2012, the Permanent Portfolio increased in value by 2.75%. During this same time period, the S&P 500 index increased by 7.29%. So, looks like it did not perform better than the general equity market during this time period. However, one really cool thing I’ve noticed about this portfolio is that it is indeed very stable – with it never dropping or gaining more than 1% or so in any given month. So, just as Harry Browne predicted, eh?!

      We’ll continue to keep an eye on this portfolio in 2013 and beyond. Should be interesting to see what happens!

      REVIEW OF CURRENT ASSET ALLOCATION (EXCLUDES CONDO AND TAX SAVINGS)

      • Overall Fixed Income / Equity Allocation
        • Currently, 29% of my net worth is invested in fixed income instruments (cash or bond funds), and 71% is invested in equity.
        • This is 4% off from my targets for these categories of 25% (fixed income) and 75% (equity). So, it is still within my +/- 5% allowable band limits. In 2013, I’ve decided to make a slight modification to my overall asset allocation percentages, so keep an eye out for a post on that soon! 
      • Equity Allocation
        • In the equity portion of my portfolio, 71% is invested in US Domestic Equities with the remaining 29% being held in international equities. 
        • This is perfectly aligned with my equity breakdown targets of 71% and 29%, respectively, for US Domestic and international holdings. So, no action is needed at this time regarding this component of the analysis. 

      While the overall percentages for these categories look fairly good, a detailed look (table/listing below) at the allocation breakdown reveals the real story and provides for better analysis of the current state.

      Remember: In order to maximize the benefits of your asset allocation strategy, a red flag goes off if your current % allocation in a category is greater than +/- 5% off of the target allocation. This is my trigger that I need to rebalance that aspect of my portfolio.

      % Cash (money market target 5%) 11%
      % Non-inflation Protected Bond Funds (target 15%) 14%
      % TIPS Bonds (target 5%) 4%
      % International Equity (Target 11%) 9%
      % International Emerging Markets (Target 11%) 12%
      % Domestic Large Cap (Target 8%) 6%
      % Domestic Small Cap (Target 8%) 9%
      % Domestic Small Cap Value (Target 14%) 14%
      % Domestic Large Cap Value (Target 13%) 12%
      % REIT (target 10%) 9%

      Analyzing my current asset allocation percentages, it appears that my current asset allocation is aligned with my target levels within the +/- 5% band limits with the exception of the cash portion. 

       However, this is fairly expected, given that I decided to keep 1/4 of the lump sum inheritance I received in November in a cash-equivalent account. I’ve been carrying around 10% of my overall net worth in cash for quite a while now, and I feel pretty comfortable with that level. Because of this, I plan to adjust my asset allocation target to 10% cash. Keep an eye out of a post coming soon about my revised investing strategy! 


      MY NEXT MOVES FOR THE January-February 2013 TIME FRAME WILL BE TO DO THE FOLLOWING:

      • Start contributing to my Roth IRA for 2013. The contribution limit for people under 50 years old has been raised to $5,500 for 2013 (up from $5,000 in 2012). So, that is good news! 
        • Even though I could technically contribute several thousand more Dollars to my Individual 401k for 2012 up until April 2013, I think I will hold off, and instead focus on maxing out my Roth IRA for 2013 first.
      • Reconcile all of my blogging business income and expenses and graduate fellowship income for 2012 and start figuring out what I’ll owe for taxes for 2012. 
        • I have paid my regular quarterly tax payments this entire year very consistently. However, apart from the quarterly tax payments I’ve already sent in, I have around $5,000 extra tax savings in a cash account because I figured I would owe more money come tax time than just the quarterly tax payments. 
        • If it turns out that I won’t need most of these extra tax savings, I could simply plop these funds in to my Roth IRA and almost be done contributing to that for 2013. 
      • Use my 1% home value home maintenance fund to fix various small things that are broken around my condo after 2.5 years of use. 
        • These things include a closet door off the hinges, the light-switch in the bathroom not working all the time, and some pipes under the sink that need to be re-caulked. Once I get these things repaired, I will then need to replenish the depleted funds in the home maintenance account. 
      • Lastly, another thing I want to look in to is the possible use of a universal life insurance policy as another way to obtain tax-advantaged long-term savings. 
        • During the three years that I’ve been blogging about personal finance, universal/whole life insurance products are generally regarded as a ripoff/waste of money compared to term life insurance as far as providing a low-cost death benefit. And, to be perfectly honest, I have agreed with this line of reasoning. 
        • However, while reading a book recently, they were mentioning that if you are careful in selecting and setting up the correct universal life insurance policy, you can contribute money after-tax now and are able to withdraw the money tax and penalty free at any time in the future. 
        • In this way, even though a universal life insurance policy may not be the cheapest/most efficient way of getting a death benefit, it might be a superior way to accumulate savings for retirement compared to a 401k.
        • Has anyone researched the possibility of using a universal life insurance policy in this way?


        WISH LIST 

        • At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund, whenever more money is needed to increase my domestic large cap asset class holdings. This gives better, broader diversification to the US stock market.

        How about you all? How did you progress with your net worth in July-December 2012? What are your thoughts about the strength of the market right now? 

        Do you think universal life insurance policies are a good option for tax-favored investment growth (see details listed above)?

        Share your experiences by commenting below!

          ***Photo courtesy of http://www.flickr.com/photos/mplemmon/3203403862/lightbox/

          The International Smartphone Phenomena

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          Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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          The following is a guest post. Enjoy!

          Providers have announced that mobile casino gaming in Sweden is booming and that the boom is being driven by increasing sales of smartphones in the country. Currently 51% of Swedish citizens have a smartphone, and 75% of them use their smartphones for Internet access every day.

          The most popular phones in Sweden are the Apple iPhone along with Android phones, such as the Samsung Galaxy. These latest phones have high quality large touch display screens, which makes interacting with websites through the phones’ built in web browsers easy to accomplish; so easy in fact that 84% of mobile Internet users access the web on their phones while engaged in other activities such as watching TV.

          The latest smartphones are also very powerful with very fast processors and graphics accelerators, which mean that even graphically sophisticated mobile casino games can be played. While online gaming using fixed desktop computers has been a popular activity for some time, the ability to access an online casino while on the move has many additional benefits. For instance, gamers can play casino games just about wherever they are and at any time, and they can play for as short or as long a time as they wish.

          All of the usual online games such as Roulette, Baccarat, Blackjack, Texas Hold’Em Poker, Craps, and Video Slot games are available, and they can be played either for fun in demo mode or for real money using secure money transactions. The standard of mobile casino games along with the numbers that are available are continually growing as mobile casino operators respond to increasing customer numbers. The number of Swedish smartphone owners who use their smartphones for playing at mobile casinos is currently around 7.6%, while around 1.2% use a standard mobile phone.

          How about you all? What daily activities do you use your smartphone for?

          Share your experiences by commenting below!

          ***Photo courtesy of http://www.flickr.com/photos/aigle_dore/5952271604/sizes/l/in/photostream/

          Are You Considering the Opportunity Costs?

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          Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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          The following post is by MPFJ staff writer, Kelly Gurnett. Kelly runs the blog, Cordelia Calls It Quits, where she documents her attempts to rid her life of the things that don’t matter and focus more on the things that do. You can also follow her on Twitter and Facebook.


          Of all the things we consider when making a financial decision, there is one factor we often overlook: the opportunity cost. Yet, it’s this factor that most greatly affects the overall course of our lives.


          Say you’re planning on getting a new car. The things you might take into account when debating this expense are:


          • Whether to lease or purchase.

          • Whether to buy new or used.

          • Which brand and model best suits your needs.

          • Which car is the best value for the price.

          • What dealerships are currently running sales.


          These are all immediate, value-based considerations: What will get you the best product, for the best price, to meet your current needs? But, the thing most of us don’t consider is: What will I be forfeiting, or trading off, to make this purchase? What opportunities am I denying myself, right now or in the future, by making this decision?


          It’s this disconnect from our choices and their consequences that gets many of us in to financial holes.

          It Made More Sense When We Were Kids

          When you’re a kid, holding your $10 of saved-up allowance money and standing in front of the shelves at the toy store, it’s all about opportunity cost. 

           We can use our $10 to buy a handful of cheap little toys, or one bigger, cooler toy. We can buy Toy A or Toy B. All we have is the money in our hand, and whatever we decide to buy with it, we’re making the choice that is the toy we want, above all others. We know that we’re giving up having those other toys in order to have this one.


          It gets muddier when you grow up. Loans and credit cards and payments that stretch out over decades make all of our financial decisions seem much less concrete. We can buy all sorts of things without having to think about the trade offs, because the purchases are spread out over long, abstract periods, making the concrete amount of money we’re ultimately spending feel less immediate.


          We can buy a house, two cars, take yearly vacations, and we don’t think of these expenses in terms of choosing A over B. We think of them in terms of how much we can afford to pay out over X number of months.


          But, this thinking distracts us from what we’re really doing: locking ourselves into years of payments that could wind up costing us some very real, and very dear, sacrifices down the line. Every time we make a purchase, we’re (even if unconsciously) choosing that we won’t be able to have other things.


          And the opportunity costs aren’t just other things we could be buying—they’re also the standard of living we’re setting ourselves up for.

          A Real-Life Example (Mine)

          When I was fresh out of college, making my first full-time paycheck and with credit card offers flooding my mailbox, I jumped straight into the consumer-driven lifestyle. I bought a new car. I bought a new, grownup wardrobe. I bought brand-new, trendy furniture for my tiny basement apartment. I went out all the time. I didn’t deny myself a concert, a better computer, or even a caramel macchiato if I wanted it.


          Why should I? I had the money to keep up with my payments. That was all that really mattered, right?

          Wrong. Thirteen years after I graduated college, I am now less than a year away from making my final payment in the debt management plan I’ve been working through for the past 4 years—all to pay off the debt I racked up when I was young and incredibly careless. In my 13 years of dealing with the opportunity costs of the bad decisions I made, here is what I’ve learned I was trading off, without realizing it:


          • The ability to work at a job I cared for, because the job I hate is the only one that’s been able to let me keep up with my bills.

          • A savings account/retirement fund/emergency fund. I recently read an article on how much savings you should have built up by each age in order to enjoy a fairly comfortable retirement. I’m barely 1/3 of the way towards what I should have had built up at 20, not at 31 where I am now.

          • Peace of mind. Every time someone in my house gets sick…every time our cars need repairs…every time something breaks in our house, it throws me into a panic because I’m already stretched thin meeting our monthly expenses. There is no margin for error. There is no room for the unexpected.

          • Stress. Because our budget is so tight, and I’m so terrified of getting into another bad situation, every financial decision I find myself faced with—whether it’s buying one brand of toilet paper over another or wondering when we can afford to fix a leaky faucet—is a major source of stress. I am frugal, first and foremost, out of a sense of fear. I hope that once my debts are paid off, I can learn to have a healthier relationship with money, but right now, it is a very broken, very tense relationship.


          All this could have been avoided if I’d realized, way back then, that my spending decisions weren’t made in a bubble—they had very real, and long-lasting, consequences for everything I could buy and do and be for the next 13+ years.


          Believe me, it’s a lesson I know now, and won’t ever forget.


          How about you all? Do you consider the opportunity costs of your choices? What would you do differently if you did?

            ***Photo courtesy of http://www.flickr.com/photos/59937401@N07/5930043516/

            Merry Christmas from My Personal Finance Journey!

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            Merry Christmas everyone!

            I’m here in Arkansas at my family’s house where I grew up and am enjoying some good relaxation time by the fireplace and catching up on sleep.

            Anyhow, I just wanted to do a quick post to say thanks for another super year here at My Personal Finance Journey!

            During the past year, we’ve had just around 150,000 new visitors to the My Personal Finance Journey family from 197 countries/territories, and I’m excited to see this keep growing each year!

            January 6th will mark our 3rd anniversary of blogging, so I’m looking forward to sharing the journey with you all in the coming year!

            Thanks again for a great year!

            Jacob

            How about you all? Where are you spending Christmas time and New Years? Do you have any travel plans in mind?

            Dealing With Christmas Gift Overload

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            Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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            The following post is by MPFJ staff writer, Greg Johnson. Greg brings the awesome sauce to personal finance at his blog Club Thrifty, where he encourages people to “Stop spending. Start living.” He is a proud husband, father, and debt crusader who is in the process of becoming debt free.

            Happy Holidays and Merry Christmas!

            If you are like me (or my children), you probably just got a bunch of new gifts for Christmas. If you are also like my family, you try to keep the clutter in your house under control. So, what do you do with all of these new items that you just got for Christmas? Where do you put all of this new stuff? Here are a few tips to help you deal with Christmas gift overload.

            1) Out With the Old…

            One of the best ways to deal with the onslaught of Christmas gifts that many of us receive is to prepare for it ahead of time. If you know that Christmas is coming, or a birthday for that matter, get rid of some of your used items before you bring in the new crop of stuff.

            “That’s great,” you’re saying.” But, it is already too late for me to do that this year. Not only do I still have their old toys, but my kid just got 27 new puzzles. Where can I get rid of these things?” I’m glad you asked!

            2) Return, Return, Return

            Yes, I said it. I am guilty. We return some of our children’s gifts. Don’t worry, though. I’m not that cold-hearted. Although we do bring some of our children’s gifts back to the store, we do not pocket the money ourselves. First of all, we do let them keep many of the gifts that they were given. However, we just can’t deal with a 30 new toys every time a birthday or Christmas rolls around. So, we return them to the store.

            Often times, you can get cash for these items provided that you have a receipt. If not, you can almost always get store credit. Either way, you can use the money in a way that you see fit. The fact is that they don’ t need that many toys to begin with. What they do need is a college education.

            So, once we have decided what items they are allowed to keep, we look at what things we can take back to the store. If we can get a cash refund, we put that money directly into their college 529 accounts. If we are only allowed to get store credit, then we use that credit to buy things we need – like groceries – and reimburse our kids through their college fund.

            If you are unable to find the correct store for the return, you can also try to sell the items on Craigslist. In that instance, we also reimburse our children and usually put the money into their college funds.

            3) Donate Items to a Charity

            So, you can’t find the store and are unable to sell your items on Craigslist. Or, maybe you just have so many that you think other people would appreciate getting them instead. Not to worry. There are lots of charities out there that are looking for either lightly used or new items. You can donate some of your used items to them.

            There are national charities like Toys for Tots and local groups as well. Perhaps a local group is collecting donations for victims of a hurricane or other natural disaster. This is the route that we recently chose. When we were asked if we had any items that we could donate to victims of a tornado near our home town, we were thrilled to be able to help. Before Christmas, we cleared out a bunch of our lightly used items in anticipation of what was to come. Now that we have had an early Christmas with one side of our family, we are going to provide them with some additional items that we do not have room for in our house. As a bonus, you can also use this as a teaching moment for your young children about the importance of giving and helping those in need.

            4) Start a Regifting Closet

            So, you’ve returned some of the gifts and donated others, but you still have too much stuff. One of the easiest ways to get rid of some these new items is to regift them. The key to the regift is to not open all of the packaging with each gift. Then, you simply store them until the next time you need a gift in a hurry. Did you forget about your nieces birthday? No problem. Simply head on up to the regift closet and find something before you head to the party!

            We have a special little tote that we use to put unopened items in so that we can regift those items at a later date. Find a little nook in your home to store these items. Keep them out of sight so that you don’t feel anxious about all of the stuff that you now have.

            As you can see, there are a lot of different ways you can clean out your Christmas clutter. Many of these options can be used to help others, while at the same time helping you to stay sane after the holidays. And, really, what feels better than helping other people at Christmas time?

            How about you all? What are your tips for dealing with Christmas gift overload? 

            Please share your tips and tricks in the comments below!

              ***Photo courtesy of http://www.flickr.com/photos/george_eastman_house/3122866103/sizes/o/in/photostream/

              Why a Homemaker Should Have Life Insurance – And Plenty of it!

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              The following is a post by MPFJ staff writer, Kevin Mercadante, who is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

              We normally think of life insurance as a means to replace lost wages. For that reason, the largest amount of life insurance taken out on a family member will typically be on the life of the highest wager. There may be a $500,000 policy on the primary wage earner, and lesser amounts on other members of the household.

              Life insurance coverage may drop dramatically for a homemaker. It’s often assumed that since the homemaker has no income to replace, that far less insurance is needed. While a homemaker may not need as much life insurance as the primary wage earner, the need can be much higher than you think.

              Should the homemaker die, a number of large expenses will be set motion. This will be especially true if there are children to be cared for.

              For final expenses

              The most obvious cost that will need to be covered is final expenses. This is a figure that can be easily estimated in advance, and usually falls somewhere between $10,000 and $20,000. That’s a modest amount as life insurance goes, but it’s only the beginning.

              Unpaid medical bills

              The cost of health care is exploding, and it’s not too hard to imagine treatment in the terminal phase of life running into several hundred thousand dollars. If only 10% or 20% of that amount is uncovered by your health insurance for whatever reason, you could be looking at a medical liability in excess of $100,000, in addition to final arrangements.

              That’s the kind of liability that can cripple a family financially and would come on the heels of the loss of the homemaker. This factor alone makes a strong case for keeping a life insurance policy on the homemaker at least in the low six figure range.

              Childcare

              This could be the largest potential liability for the surviving family, especially if they are very young children involved.

              Depending upon where you live, the cost of getting full-time childcare for just two children can range anywhere between $1,000 a month and well over $2,000 a month. Taking the midpoint ($1,500 per month), that’s $18,000 per year.

              If you have two children, say ages four and two, you’ll probably need full-time childcare for at least eight years. It childcare will cost $18,000 per year, you’ll need at least $144,000 to cover the cost for the full eight years.

              Even if your children are a little bit older, let’s say 12 and 10, they’ll probably at least need someone to look in on them in case of emergencies. That won’t cost nearly as much as full-time childcare for younger children, but it is still an expense that will need to be considered.

              Paying others to do the jobs the homemaker does

              Being a single parent is a tough job. It’s even harder when you also work full-time. If the homemaker should die, dozens of jobs will need to be done around the home that the primary wage earner will not have time for. Some of these jobs will have to be done by others, that will mean still more expenses.

              A cleaning service may need to be used to clean house. Someone may also have to be paid to do the grocery shopping. If the primary wager has a particularly busy work schedule, and the children are very young, a laundry service may be needed as well.

              All of these services will need to be paid for, and they can add several thousand dollars per year to the household budget. That can make a strong case for adding another $50,000-$100,000 to the homemaker’s life insurance policy.

              In order to make adequate provision for the death of a homemaker, a life insurance policy of at least $350,000-$400,000 would be necessary. That gets very close to the $500,000 that might be used to ensure the life of the primary wage earner.

              Life insurance for a primary wage earner is mostly about replacing lost wages. Life insurance for a homemaker is mostly about covering expenses that will develop as a result of the loss of the homemaker. This can be just as high as the need to replace income.

              If you or your spouse is a homemaker, review your life insurance policy to make sure your family has adequate protection.

              How about you all? Do you think a stay-at-home parent should have life insurance? Why or why not?

              Share your experiences by commenting below!

                ***Photo courtesy of http://www.flickr.com/photos/betsssssy/5053519564/

                Don’t Stop Believin’ When You’re Bored: The World Is Full of New Ideas

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                The following is a post by MPFJ staff writer, SK. SK writes about the reasons we get into debt, changing the patterns that get us into debt, and examines small business ownership and real estate investing at her blog, American Debt Project.


                “The cure for boredom is curiosity. There is no cure for curiosity.” –Dorothy Parker
                In every aspect of our lives, we will at one point hit that dreaded wall of boredom. Boredom seeps into our job, our finances, and our most cherished relationships. Boredom enters like a poisonous gas, spreading across the fields of your life and making everything seem just a little bit duller. 

                2012 was an amazing year for me in terms of getting things done. I started a new job, moved to a new place to save money, and put in place plans to begin some consulting in the new year that could eventually exceed my salary in my day job. I finally pre-qualified for a mortgage, and I have started looking at properties with the possibility to make a real offer, and real estate ownership is one of my biggest financial goals. So, what happens now? As soon as it feels like everything is on track, I find myself completely bored.

                But, the good news is that I have a curious mind that won’t let me stay bored for too long. I thought about what comes next for a person who has a job they enjoy and finances that aren’t out of control. I remembered that our world is vast, the ability and potential of man is unlimited and there are people who are building and creating every single day. I want to learn about that and be a part of that. Here are a few amazing places I head to when the threat of boredom starts to buzz louder in my brain.

                Blogs of Venture Capital firms

                Venture capital has to be the coolest job in the world. Deciding what new companies and ideas to invest large amounts of money into, while meeting with the founders, scientists and crazy dreamers? NEA is one great example as well as the personal blog of Paul Kedrosky. You’ll learn about incredible technology (like 23andMe’s personal genetics kit), new trends (for-profit education), and just soak up knowledge from very sharp people.

                AngelList

                AngelList connects investors to startups but also highlights recent successes. Just a few minutes on here and you’ll discover so many new ideas and companies that it always gets my own creative ideas moving again. You can also apply to become an investor and try your hand at angel investing.

                Coursera and MOOCs

                I admit I haven’t finished a Coursera course yet. It’s tough to stay on schedule, but the courses offer free content from the world’s best universities, and this new concept in education is called a MOOC (massive, open, online course), and recent courses have seen over 80,000 people enroll. That alone inspires me and gets me excited about where we are going in this world.

                Craigslist

                I dare you to stay bored while considering all the possibilities in your backyard. Whether it’s browsing craigslist free for some amazing find, gigs for a quick job to do, or business to score cheap business equipment, I always use Craigslist to get the pulse of the neighborhood, including ones I don’t live in.

                It’s easy to get bored and think that nothing “exciting” is happening. The funner challenge is proving that that is totally bogus.

                How about you all? What are your favorite ways to combat boredom?

                Share your experiences by commenting below! 

                Using A Debt Consolidation Plan To Pay Off Debt

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                Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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                The following is a guest post. Enjoy! 

                MyPersonalFinanceJourney.com has written a lot about credit card debt and how to effectively save for emergencies and pay off your debts efficiently. For some people, however, you might already be past the point of even knowing where to start with tackling your overwhelming debt load.

                Debt issues trigger strong emotional responses in all of us, and feelings of guilt, helplessness, worthlessness, frustration, anger, and betrayal are all normal. For this reason, it might be difficult to admit you need outside help, but working with a professional to help you get out of debt could be the best decision you ever make.

                What Are Your Options?

                If you’ve never dealt with this type of debt load before, you might assume that bankruptcy is your only option. The idea of wiping the slate clean appeals to us when we’re at our most frustrated (who wouldn’t want a do-over at some point in their lives?).

                The truth is that bankruptcy should only ever be considered as a very last resort. The long-term effects on your financial situation could set your dreams of a solid foundation going into retirement back years and years.

                You might be able to find counseling to help you organize your debts, talk to your creditors, and come up with a payback plan, but it can be difficult to find someone who will stay with you as you go through the entire process.

                How Does A Debt Consolidation Loan Work?

                Part of the reason you’re struggling with debt is that there are just too many different bills to deal with. Every few days, it’s a credit card bill, a car payment, insurance, a medical bill, or a utility bill. It’s so easy to get behind and have one check bounce, creating a domino effect of missed payments.

                With a debt consolidation loan, you borrow the amount you owe on all of your debts and pay everything off at once. You’re left with a single loan, which is much easier to budget for and remember.

                On top of the single payment, you may also end up with a lower interest rate. Some debts you have (credit cards especially) have outrageous interest rates, and your debt consolidation loan could potentially end up being cheaper.

                The real key to this type of loan is having a lower monthly payment. If you were constantly struggling before, you’ll now be able to determine a monthly payment that fits your budget and income. You’ll stop living right on the edge and now have the opportunity to build up a small emergency fund and get back on track.

                A small word of warning: lowering your monthly payment sounds great, but you should also remember that any reduction in payments means it will take that much longer to get out of debt.

                ***Photo courtesy of http://www.flickr.com/photos/ranna/2838594490/sizes/l/in/photostream/

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