On our way home from visiting family this weekend we decided to listen to news radio. They were discussing the economy and the stimulus plan being proposed to help ward off a recession.
Many experts are on the fence on whether or not a tax rebate will help prevent a recession. Regardless, it seems the general population is happy about the proposed rebates. They mentioned that some people’s reaction to the rebate news was that they hoped the money would arrive before the super bowl so they could go get a flat screen TV. Funny….yet frightening.
At the risk of over simplifying it, a recession means that overall spending slows down which means fewer jobs are created (or jobs are even eliminated). Fears of a possible recession can become a self fulfilling prophecy because people often cut back on their spending if they think there is a trouble ahead. Less consumer spending means fewer sales coming in for businesses, they begin to downsize, more people can’t find work or they become unemployed, they have even less money to spend, and the cycle begins.
Bush’s proposed tax rebate plan is meant to encourage us to keep spending by giving us a little more money in our pockets. Although I welcome the idea of getting money back I wonder if it will help the economy in any lasting way.
First, it takes time to issue a refund and get it in the hands of the consumers. It may come too late to make an impact when we need it to. I’ve heard that checks could come as soon as June and that it could take 6 months to a year to reach its full effect on the economy. I guess those super bowl parties will have go on without new flat screens. With the way the stock market has been tanking I can’t help but wonder if we need the help now rather than later.
I also think the rebate counts on the majority of people spending that money immediately so it gets pumped right back into the economy. It’s been said that targeting the rebates to the lower and middle classes would help the most because those households are more financially strapped and are more likely to quickly spend the rebate money. It seems to be expected that the majority of the population outside of the upper class won’t be saving this money. I understand why that’s the assumption (it can be harder to save when money is tight) but it still bothers me.
Are people going to look at this money as a windfall to be spent frivously instead of as a way to get prepared for a possible recession? Quite frankly, if I feel a recession is coming I’m more likely to put that cash into my emergency fund or use it to pay off debt. I certainly wouldn’t go buy luxury or non-essential goods with it. It would feel irresponsible to me even if that’s what the money was intended for. Saving for an emergency fund needs to be a priority, especially during an economic down turn when jobs become vulnerable.
Unfortunately, paying off debt or putting that money in savings may not be the best way to boost the economy even if it puts my finances in a better position to handle a recession. Hmmm. Does wanting to save that money make me a bad American? Of course not.
Could it be that what’s best for the economy may not be what’s best for your household?
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I talked briefly in the past about how I was considering playing the arbitrage game for some of our big purchases for the new house. We had the opportunity to get no payments and no interest for one year on two of our big purchases. We are going to take advantage of that and try to earn a few more bucks for ourselves.
We had saved the money for both of these purchases, but instead of paying them off right away, we are going to invest the money for part of the time in a 6 month CD, and for the remainder of the time in a money market or high-yield savings (whichever looks better at the time).
We have approximately $6000 we are going to invest for this.
Now, we’re only doing this because we already have the money and we are not getting things outside of what we had planned for. We have developed the discipline not to go spending this cash when we know we are holding debt. If I didn’t feel disciplined enough I probably wouldn’t be trying this.
We used Bankrate.com to determine where we could get the most money. In this case, Countrywide was the top but required a minimum investment of $10,000. The second best was E-Trade at 5.25% and the minimum was $1000 which we qualified for.
If we were more risk-takers, we might consider investing in the stock market. However, with the possibility of the investment losing money and leaving us with debt that wasn’t really an option. We didn’t feel like taking that risk where others might be more than happy to take that risk.
The yield from the 6 month CD would be $160. Not a huge sum of money, but nothing to scoff at either. That’s a summertime electric bill. You can find calculators for CDs at Bankrate.com too.
The remainder of the time (5 months) we’ll put the money in the E-Trade savings account which is currently paying 4.93% and is compounded daily. There are higher interest rates, but weighing more accounts vs. getting a good (but not the best) rate where I already have an account made us decide to keep the money at E-Trade.
So, taking the $6160 and investing it for those 5 months at 4.93% interest compounded daily yields $6209 or another $49.
So overall we’ll have over $200 we’ve earned and we’ll still be paying off the debt a full month early. Again, not a huge amount of money, but there is a lot you can do with $200.
Image source *** Fanch The System !!! ***
Earlier this year my husband and I encountered this very question. We had always talked about moving into a new home after we married, one that was “ours”. But could we really afford to take on a higher mortgage payment? After all, we had been living way outside our means and had only just figured out how to make ends meet in our current home.
Sure, on paper we could afford a higher mortgage payment if we subjected our budget to the ol’ slash-and-burn treatment. But could we actually tolerate a tighter budget to reach our dreams of a new home? We didn’t want to assume we could handle it or that “we’ll just make it work”. We needed to know we could handle it before we committed to higher housing costs.
Here are the two ways we gave a new mortgage a “test-run”.
Take it for a spin
Seeing a mortgage payment on paper and actually living with that payment are two different things. In order to be sure you can handle the higher payment it’s important that you try living with it before you commit to it.
First, figure out the difference in cost between your current housing payment and the “new” mortgage payment. Make sure when estimating this new payment that you err on the side of caution and go high.
|New Mortgage Payment (w/ taxes, insurance, etc)||$1400|
|Current Housing Payment||$800|
Set up an automatic transfer to deposit the difference ($600) each month into a high-interest savings account like ING Direct. No dipping into it, it is essentially spent, just like the new mortgage would be. By saving this amount in addition to paying your current housing payment you are now mimicking the effect the new mortgage payment would have on your budget.
This experiment helps you in two ways:
- You experience and learn to adjust to a higher mortgage in “real life” (instead of just on paper)
- You build up savings dedicated for moving/new home ownership costs
In the example above, you would have saved up $3600 (plus the interest) if you stuck to it for 6 months. If you can handle testing out the “new” mortgage for 4-6 months, without running up bills or needing that extra income, you can feel pretty confident about taking on a higher payment. If not, rethink if you can really afford it.
Work that budget
Not only will you need to adjust your budget to allow for the higher mortgage but you will also have to prepare for the other potential costs related to moving into a new home. What household bills can you expect to change? For example, how will your utilities be affected? You will need to look at all your expenses and estimate how the move might increase or decrease certain areas and reallocate your income accordingly. When we went through our budget we identified many areas that would need to be increased after the move.
To find the additional money needed your budget will need to be scrutinized. Where can you trim the fat? The money needed for the new mortgage and related expenses must come from somewhere, and we aren’t talking about relying on your credit cards. Evaluate what is essential or most important to you and work aggressively to cut spending in all other areas. Rework your budget, funneling the money you cut from those areas into the categories that need more cushion.
Remember – you still need to be figuring in debt payments and savings goals into these budgets. You should avoid falling behind on those goals in order to reach this one. If you can’t find the money in your budget without scaling back on your savings or debt payments then really think if it is in your best interest to make this move.
We now feel confident that we have the ability and the discipline to handle the costs of “moving up”. We are no longer simply guessing that we can afford it or going by the assumption that we will be able to “just make it work”. We know we can because we have been living it.
Since we have already been budgeting for our new mortgage, the “lifestyle adjustment” many people experience when they have less disposable income should be minimal for us. At first, not having that money in the budget was difficult but we have worked through the aches and pains and are comfortable now. I’m just glad we dealt with that struggle beforehand instead of after the commitment of the new mortgage.
The best part of all of this is that we have been able to save up a tidy sum in our ING account to purchase items like solar screens and a sprinkler system without having to go into additional debt after the move.
What would YOU do if YOU were debt free?
Right now, Eric and I are debt free except for our mortgage. We managed to pay off our credit card balance and our car loans this year. So debt free for us would mean that we would no longer have our monthly mortgage. Our mortgage takes up about a quarter of our monthly income. So I get to imagine what it would be like to not have to pay a mortgage and have 25% more money left in our bank account every month. Nice.
I know that as a personal finance/frugality blogger I should dutifully respond that I’d save it. But to be honest, I’m not sure if that is the case. Don’t get me wrong. I would likely put MOST of it in savings, but definitely not ALL of it.
The first thing I’d do is get our emergency fund up to a full 6 months salary. I’d get that fully funded so we are ready for anything that comes along.
After that goal was met, I would put 75% into savings/investments, 5% to cushion the budget a little more, and the remaining 20% would be used to enrich our lives.
That 20% would not be for things, mind you, but for experiences.
I miss going to cooking classes. A new class schedule came in the mail yesterday and I was excited that one of my favorite chefs was hosting a few classes in November. Then I realized that we don’t have the money for these professional classes now that we are close to moving so I threw the flyer away. The sadness was fleeting, thankfully, but I do want to be able to go to a class or two again one of these days.
I know my response to this meme might be colored by my cooking class withdrawal and the fact that we have been in “saving overdrive” for the upcoming move. But I do think that extra 20% could help us remember to “live a little” which is something we haven’t been doing much of recently. Perhaps we could take a few classes together, go out to a nice dinner once a month, and go to the foodie events we enjoy.
After the dust settles from this move I might have take another look at our budget and see if I can spare a dime towards this “enrichment” project.
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If you’ve been reading much on this blog, or pretty much any personal finance blog, book, forum, or magazine, you probably know the importance of an emergency fund. Everyone should have an emergency fund. The “Why” is easy – you need to have some money to fall back on in case of an emergency. This keeps you from going into debt to fund your emergency, and provides a safe cushion for rough times.
Any amount of money is good to start. The question then becomes how much is enough? I’ve seen a lot of different answers for this, but most people seem to suggest between 3 and 6 months living expenses. Why that much? If you lose your job it might take you 3-6 months to find a new one. If you can avoid debt, you’ll be much better off in the long run.
At first, we started looking at our living expenses and calculated a number that seemed much larger than what we thought it would be. We based everything on our current budget.
The key for us was to think of the expenses we would have if I lost my job. For most folks, this will be a lower number than what your normal budget might be (depending on how frugally you live now). If I lost my job, we’d be going into emergency mode and cutting out as much as we could from our budget. If it wasn’t essential, it would probably have to go. What’s essential could vary significantly from person to person. Here are some of the things we considered:
- Food costs – We’d definitely be eating much more frugally. We eat pretty frugally now, but we could definitely be stingier with our food budget. I’m certainly willing to eat a peanut butter sandwich for dinner when times are rough, but when they aren’t, I’d prefer some fresh food.
- Phone – I’d cut down on our cell phone plan right away. I wouldn’t need the data plan if I was out of work. I would need the cell phone as I did my job hunting so I could always be accessible. I might get rid of the landline phone altogether.
- Cable – this one goes right out. I certainly shouldn’t spend my time in front of the TV when I should be out looking for a job.
- Internet access – I’d keep this for sure. This is most likely how I’d be looking for those jobs.
- Cars – definitely would have to watch how much we drove. Consolidate trips so we could spend less money on gas.
- TiVo, Netflix, and Soda – Gone, gone, and gone.
- Electricity – Hello open windows! Goodbye air conditioning! Well, it’s gonna depend on the time of year, but you get the drift.
- Water, Gas, and other utilities – minimal changes resulting in minimal savings.
Taking those things into account (among others), we figured out what our real cost of living for a month would be. It was quite a bit lower. This gave us a more realistic view of the numbers we’d need to hit in order to have 3-6 months of living expenses set aside. This was a much more achievable goal.
Our short-term goal is to save up 3 months of living expenses. That is 3 months of cash assets in a high yield savings account (or maybe a Vanguard money market fund) based on a reduced lifestyle. The longer term goal is 6 months. We’re still a ways off of having 3 months, and it will take until after we move before we can start building that up again.
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