1. 401k

2. Cash Savings Account

3. Roth IRA

4. Individual stocks.

With the house and wedding soaking up an awful lot of my disposable incomes, saving account numbers 3 and 4 are not getting the attention that they deserve.

            I have a Roth IRA with Vanguard and my contribution for 2009 is oh around $50 that I had in a different Vanguard account. Yes this is laughable and I should be doing more to fund that account. So my 2009 contributions were pretty dismal. The limit for Roth IRA’s is 5,000 a year, so I was only 4950 away! What is handy about Roth IRA’s in addition to their awesome tax benefits is that you can send payments in 2010, and apply them to 2009. So that way if I could send just under 10,000 and fully fund both years without penalty. Note: This has to be done before April 15^th of the following year.

            So this year I am going to take my tax return that I just received and apply it to my 2009 contributions. I highly recommend this strategy, and it essentially takes zero work. Unless you spend your tax return before you receive it, it is an easy way to fund your Roth IRA without even really budgeting. No I would be able to fund the entire 5,000 with one tax return, but it does allow for a lot more flexibility.

          Andy, a wrongly convicted man goes to jail in the 1940’s and gets to experience all the wonderful things about prison. He eventually ends up running a scam for the warden, and then escaping thought the use of his rock hammer. His rock ‘hammer’ probably would fit in the palm of your hand, and it takes him 20 years to tunnel thru his wall to freedom. The way he did it was slowly and meticulously. There are very few things that I have be doing for 20 years other then eating and sleeping. I can not imagine being focused on something that intensely for that long.

          Tunneling out of Shawshank is of course my metaphor for paying off my newly acquired mortgage. I owe somewhere in-between 100-200k on my house. This in itself is not remarkable at all, actually it’s probably very low compared to a lot of people. Why this is a big deal to me is the way that I am paying it off.

          I got an excellent mortgage rate (less then 5.5%) and a relatively affordable house. So guess how much I pay down on that mortgage per month?

Around $150.

          No I did not forget a zero, or move a decimal. I pay the same for my house per month that I do for my cable TV! The reason for this has to do with the way mortgages work. If you don’t know I highly suggest you look it up. But the short version goes like this:

          Early in the life of the loan the payments are 80% interest 20% principal. As you pay down the principal the interested earned by the bank per month becomes lower so after a year maybe your 79/21, after two year your 77/23, after three years 74/26. You notice how the amount paid to interests is lower every year 80, 79, 77. 74? That is the “power of compounding” you can see this power demonstrated dramatically in putting extra towards your payment. If you had a 30 year 150k mortgage at 7% simply paying $100 extra per payment pay your house of seven YEARS earlier.

The math on that is

23 years of paying $100 extra: $27000

Saves you 7 years of mortgage payments: $75000

After my first year I am going to pay more on my mortgage, and try to tunnel out of Shawshank just a little faster…

Population: JonBon

            I used to be rich, I used to be the guy with money. I used to be the person who took vacations and maxed out their Roth IRA.  I used to live in a vault like Scrouge McDuck and swim around in all my money.

But I moved.

I moved into the poor house, with most of my fellow Americans. Now you have to understand my definition of poor, and an economists definition of poor are very different. My net worth is still probably very high for my age, and technically I am doing great. I am just way less liquid then I used to be.

            I have accumulated a crazy about of debt in the past 3 months or so. Now most of this is good debt, but its still debt, and I hate debt!!

            House:

 I purchased a home with 10% down. So I have six figures of mortgage debt that I now have to pay back for 30 years at 5.45 percent.  It is a huge adjustment to have tens of thousands sitting in the bank, to tens of thousands sitting in a house. It makes the dollars a little harder to get too. I will get the $8,000 first time home buyers credit, and I will get a place to live, but it’s still hard to go from owing money to no one, to owing the bank well over $100,000! The reason that this debt is good, is becuase it went to purchase an asset that in theory can be sold for more then I paid.

            Appliances:

I spent around two grand on some pretty solid stainless steel appliances. I am happy with what I have; they look nice, and work well. These I financed over a year with 0% interest. I did this before with my enormous TV. It’s a way to keep your cash, and pay for them over time. Just a warning, do not miss a single payment, and never be late. The banks that make these uncollateralized loans (GE Money) are not very nice people. The 0% you get it just a teaser, most people do not pay them off in time, and get hit with huge penalties and interest.

            Jewelry:

I recently got engaged and financed an expensive diamond, as well as purchased a ring to put it in. I probably spent a lot more then I needed too, and got a diamond that is of much higher quality then most. She would have been happier with less, but its what I wanted her to have. I financed the ring with a zero percent interest for 12 months Chase credit card. Again a warning to you, this is a really stupid way to buy things unless you know that you can make the payments.

No, not that kind.

            Today is in fact my birthday, I am turning 26. I thought I would take some time to reflect on my financial and professional ambitions. These are a few goals that I wrote up right after college at the start of my career.  

Goals

September 2006

Short Term Goals

• Get my 510 accountant certification  01/2008
• Apply to Grad School 12/2008
• Get a governmental professional certification
• Purchase a Home 4/2009

OR

• Have 10,000 invested  1/2008
• Get a 550 on the GMAT  12/2008
• Set up a Roth IRA     10/2007

Long Term Goals

• Earn my MBA     ETC 06/2011?
• Pay off my Home 15 years after I purchase it.     04/2024??
• Earn $100,000 in 1 year
• Start my own business
• Run a marathon
• Be able to speak in Spanish

Eye On the Prize

• Get a truck
• Get a boat
• Buy a pool table.

            So I think I am doing pretty well, I guess I need to set some new short term goals and keep working towards my long term ones. As for the “Eye on the Prize” goals those things would be great, but clearly are just toys, and not assets. They might make me a little happier, but would not help me achieve my long term goals.

Sike, mine’s a little smaller

            I have not posted in a while, but this is a pretty major event in my life. You only get one first house, much like you only get one first car or first high school sweetheart.

            I am not trying to time the market; I really just need a place to live. I had been renting for a while and was a little tired of moving every 6-12 months, parking outside, and being at the mercy of landlords.  So I found a house that I liked,  was priced well for the area and made an offer. The owner of course countered, I agreed to the counter with a few small changes, and we have a contract to purchase.

            The house itself is smaller, and not the prettiest or largest on the block; which is usually a good thing. It has three bedrooms, a garage to tinker in, and a full basement that I will convert into a man-cave as soon as I can afford it.

            Speaking of affording it this is a huge change for me. I was sitting on a huge pile of cash (for me) and I now have to spend practically all of it on the down payment and closing costs. So overnight I went from a huge cushion to practically none. This is definitely an adjustment in thinking and in living. Good thing the government is giving me $8,000 to purchase this home; hopefully I will be able to claim it on my 2008 taxes.

More to come later.

In 2008 I had a number of ambitious financial goals that I wanted to reach. I wanted to:

1. Contribute $5000 to my Roth IRA

2. Contribute $5000 to my 401k

3. Save $4000 in my high yield savings account

4. Save $2000 into my tax free health savings account.

Overall I was 2/4, but making big steps towards my goal. My net worth went up, and I did not make any big financial blunders, so I figure I am a shoe in for 2009 for an unmitigated financial disaster.

Moral of the story: Its hard to save after tax $9000 (Roth plus savings)

            The yearly limit is $5000, if you did not know this, or know what a Roth IRA is close out of your internet explorer and go to Vanguard, or Charles Schwab or Bear Stearns (ok not Bear Stearns heh) and immediately go and open one.

            A Roth IRA in my opinion is the best investment (retirement) vehicle out there. You pay tax on the money that you contribute now, and never pay tax on the earnings when you withdraw from it many many years from now.

            Finding $5000 after tax dollars to drop into an account which you cannot get to for about 30 years is a hard thing to do. That being said, if you did this, and got 8% return for 30 years, you would have $46,586.37. All hail the power of compounding interest!

Moral of the story: Starting to save even a little early helps you exponentially in the long run. 

          Yes the Market is down 5,500 points from its high a year ago. Yes if you owned a whole market stock fund it would have lost close to 40% of its value. And I will give you the best advice you can get, and I’ll give it to you for free:

Do Nothing.

          That’s right do nothing, matter of fact don’t even look at your balance. All you’re going to do is get angry or worse panic. I bought stock a year ago when the DOW was close to 14,000 points, it is now below 9,000.

          Am I worried? Not really at all. I have at least ten, twenty years until I will change from trying to grow my money to just trying to beat inflation. So if you’re me, and have years and years of stock buying left; completely ignore the financial news, and don’t check your account balances.  So now I continue to purchase stocks in my 401k every time I get paid, and my Roth will soon be maxed out for the year.

“Be fearful when others are greedy. Be greedy when others are fearful.”

-Warren Buffet

You got to know when to hold’em

Know when to fold’em

Know when to walk away

Know when to run….

                Well I am holding them, and you must remember my investing horizon is easily twenty years. In fact I am going ‘all in’ Warren Buffet style.

                If you have been sleeping under a rock you would be surprised to know that the market is taking a hit big time, and the world’s savviest investor is buying companies like it is going out of style. Warren

Buffet has dumped billions into American Blue-chips of JP Morgan and General Electric.

                What this says to me is that there are bargains galore in the stock market right now. Over the next month I will be maxing out my Roth IRA, and continuing to buy stocks and bonds in my 401k. Its so hard to watch your hard earned disappear week in week out, but you have to have the cuts to stay in. Markets go in cycles, it WILL come back.

Don’t freak out, but it’s true I love the fact the Dow is at record lows for the year, and you should too.

            I am 25 years old, lousy market performance right now means low prices now. I have a very limited stock portfolio and I am pouring money into it as fast as I can right now. If you’re a young reader and have not signed up for your company’s 401k plan, now would be the PERFECT time to start. Sure you might lose a little money now, but you’re not going to need it for twenty or more years, so let’s invest now while prices and confidence are low. In a few decades from now when you go to withdraw from your robust 401k you so wisely opened in the late 2000’s when the market was in the pooper you can thank me with a check. I just dropped some free cash into my open ended mutual fund, but more on that later.