Friday, February 26, 2010

Shalom - Seeking True Wealth

Shalom is a Hebrew word pregnant with meaning. It can refer to peace between two entities especially man and God, but also between man and man, and man with self. It has a meaning of well-being, welfare or safety of an individual or a group of individuals.

It has a meaning of wholeness, comes from the Hebrew root shalam which means safe or complete, and by implication, to be friendly or to reciprocate. Shalom in the bible has been translated in many ways including:

- To make amends
- To make good
- To be (or to make) peace
- To Restore
- Peace
- Prosperity
- Wellness
- Wholeness

For example in Jeremiah 29:7 when the Israelites were exiled by Nebuchadnezzar and the Babylonians, Jeremiah tells the Israelites:
"to seek the Shalom of the city to which I have carried you into exile. Pray to the LORD for it, because if it prospers, you too will prosper."

Shalom is translated into peace and prosperity, well-being, good and other similar meanings. Understanding shalom in this manner will help us understand wealth and prosperity. And in understanding wealth and prosperity we can learn to understand justice and goodness and righteousness. And in understanding justice, goodness and righteousness we can understand a little bit about the heart of God. Pretty deep stuff.

Shalom is what was originally intended for man. According to the bible, it was the fall in the Garden of Eden that led to broken shalom between man and God. As a result, everything that we experience today, debt, poverty, oppression, injustice, violence, murder, divorce, broken relationships, etc., is due to that original breaking of shalom with God.

We are indeed reaping the effects of our choices. God did not intend for this suffering, but it was man's choice to choose selfishness, violence, greed, and So even in wealth and economy, we see the injustice of things. Poverty was not the original intent of God, suffering was not God's original intent.


According to the World Bank Development Indicators, 80% of the world lives on $10 a day, 50% live on $2.50, a little over 10% live off of $1 day. More stats about poverty here. This is a systemic issue, but it is also more than that. The underlying system must be seen in context to what has been and what should be. There is a brokenness about life that government alone cannot fix, money alone cannot fix, education alone cannot fix, aid-workers alone cannot fix. So many times, we think the system is the problem, but the system is made by men, made by us... and so we are the problem.

As we mentioned above, when we broke shalom with God, each person, each individual believed in his/her heart that his/her way was better than God's. Instead of caring for one another, we cared for self, instead of forgiving each other we held grudges, instead of honoring one another, we sought to tear each other down, instead of using our wealth for the many, we only thought of what we could accumulate. Even when I look at America and my own consumerism/materialism, we are flawed, selfish, greedy people. We care more about our cars, houses, stocks than people.

When I look at all the people doing good, all the changes happening, people donating to Haiti, etc., I also know that it is temporary unless the Shalom once broken between man and God is restored. True wealth, true prosperity is then forged in the original Shalom that God intended, it is a spiritual reality, it is a physical reality, it is an emotional reality. Unless all three aspects of shalom are restored, unless we have peace with God, peace with our fellow man, and even peace with ourselves, true wealth cannot be achieved.

But we're getting ahead of ourselves. Having a budget, having a plan, finding your calling in life is then drawn up from what our underlying belief of life is... this system I was talking about earlier. Unless your system sees both the dignity and depravity of the human heart, it will fail sooner or later because it does not take into reality the shalom intended by God and the current state of our broken shalom with God... e.g. people are inherently good vs. people are inherently evil. The bible says both. And we are consistently inconsistently both.

Like I said in the previous post of leaving a legacy for your children and your children's children, I hope it is Shalom, the need to bring peace, prosperity, wholeness, well-being, and goodness into all areas of life.

Of course, the bible states that we do have Shalom and it is found through the restoring work of the one who is Shalom, Jesus Christ. And of course, I'll leave that to another post. Anyways, didn't think we would get a bible study from Family Finance, but this in essence is what Family Finance is all about. Cash is not king, but it has been given us for this short amount of time to use for something bigger, something far more glorious. That my friends is true wealth.

Congrats, you're rich.

What can a budget do for you?

Friday, February 19, 2010

Where should you Invest?

When I think of investing, I think mostly the stock market and real estate. Both of which have hit a snag as of late. Will the real estate market return to it's pre-2005 prices? Will the stock market return to it's pre-2000 or pre 2008-highs?

Eventually, but it might not be 1 year from now or even 10 years from now. In 1989 Japan had a double bubble burst. Both the stock market and the real estate market crashed relatively close in time. (sound familiar?)



As you can see from the chart above, from 1990-2004 the housing prices continued to drop. The bubble continued to burst. What we have in the U.S. is a similar situation but the U.S. government has intervened somewhat including very low interest rates, $8000 first time homebuyer stimulus package, various laws concerning short sale and foreclosures, etc. There is a lot of government intervention that is propping the real estate market up. They may be short term fixes/bandages, but the government is hoping it will be enough to keep the prices at an artificially higher level than if nothing was done.

What would happen if real estate prices did continual to go down? That is the difference between Keynesian economics and Hayek which in many sense came out of the depression era in which there was little to no government intervention.



Falling into a deflationary situation so severe that it would take decades to get out of. On the one sense, that is probably the best solution. We reap what we sow. If we borrow like crazy we have to pay it back and if we can't, we make ourselves slave to our lender.

But we don't get what we deserve. In order to prevent another depression, government intervention was used and in a sense all this government helped push us to boom and bust cycle. Originally these boom and bust cycles were relatively minor, but over time, say 40-50 years these boom and busts have turned into bubbles blowing up and bursting.

So where exactly should we invest? Given real estate and stock conditions, given the random hand of the government and the federal reserve in things, given the strengthing and decline of the dollar, here are a few good investment strategies.

1. Invest in yourself. You are the best investment you have. Get educated, make a plan for yourself, choose a life you want to live and go for it. No matter what happens with the stock market or real estate, you have a choice as to how you live your life. One of my best investments in 2009 was a broken $25 Ipod I bought off Craigslist.org. Since fixing it for less than $20 I am now able to get podcasts, iTunes University, classes in just about any subject I am interested in. That $25 investment is now close to $25k in education for one semester of classes at any Ivy League school.

2. Invest in people. Okay, so people grow apart and die, what good is that investment? The funny thing about life is that we don't really know what life is about. The irony of it is that if you don't know what is going on, then probably everyone else doesn't know what is going on. So in a sense life is like the blind leading the blind. By faith we put our trust in something or someone to teach us and lead us. As children, our parents taught us, when we grow older, we have teachers and professors and mentors throughout life to teach us different things, like what they learned in life, experiences, failures, successes, etc. But whatever the case, how you decide to live is really an act of faith whether we believe our parents, our government, the bible, historical people, etc. When we live a certain way, we affirm that those living before us were either right or wrong. And whatever system you live in, whatever you believe to be true, whatever you believe to be right, you have in a sense, an obligation to share that with the next generation. That's what I mean by investing in people. You are passing on a legacy or inheritance.

The bible says that the beginning of wisdom is the fear of the Lord. Knowledge or wisdom has to come from somewhere. True wealth, I believe, is not laid up in cash or a house or a nice car, but in something less tangible, something far less visible.

3. Gather little by little. On a more practical note, a good investment strategy is making more than you lose. A 0% return is better than a -50% return. Don't chase stocks, don't chase fantasies that you think you can do. In 2009, Powerball had one of those $300 million jackpot or some crazy number like that. Of course everyone and their mothers bought a ticket (okay, probably not my mother), but seeing such a number excited everyone, but it's not real. You probably get struck by lightning a couple times before you win the lottery. So saving little by little means exactly that. Invest your time in doing something you like, get paid for it. Be consistent and save. And I can guarantee you that over time you will have more than you started. (What about inflation? we'll address that later).

So that's three investments I guarantee you will get you great returns. Invest in yourself (Education), Invest in Others (Pass it Along), and Gather little by little (Work Hard and patient saving).

Did I say it was going to be easy?

Leave a legacy.

What can planning do for you?

Wednesday, February 17, 2010

Article Roundup #2

Some good articles I've read lately.

The Case for Slow Money @ Bucks blog NYTimes - Feeling left behind by everyone making a killing? Slow money seeks to avoid big losses rather than chasing the next great investment. Willing to exchange the opportunity to make a killing for the assurance of not getting killed. :)

Our Family Budget has a good article on Ideas to Save Money with a Baby

How much are you saving for retirement? Bible Money Matters has a good article entitled How to Save for Retirement

On a more personal development front, Rich Christian Poor Christian writes on What ever happened to commitment.

Ten Creative ways to teach Children about money and investing... by Moneyning

How to Rise from Poverty by Brip Blap - great forward looking article

Retirement Savings: How much should we save?

What are we saving for? How much should we save for retirement? I've been reading some articles about retirement and how we should plan now.

So before we go into how much you want to save, we first have to ask ourself: What do you want to do with your life?

Answering this question will help answer "How much annual income you want?" and answering that question will help answer "How much should I save for retirement?"

According to this article in Wise Bread the 4% rule should be sufficient to help us ride out any major storms including stock market drops, inflation, lack of social security, etc.

For example if we are spending about $4k/month or about $48k/year currently and would like to maintain this lifestyle we would need to save the annual amount divided by 4%.

$48,000/year / 0.04 = $1.2 million.

Here's what Wise Bread says about your retirement once you reach your goal:

There are too many variables for it to be safe to put any of these things entirely on autopilot. When you figure the inflation adjustment for next year's spending, cross check to see if you're spending more than 4% of your capital. (If the market hasn't kept up with inflation, you probably will be.) If that's true, you'd be well advised to cut your spending a bit--a few bad years, especially early in retirement, can put a portfolio into a hopeless downward spiral if you go on spending without regard to how much money is really there.

If you can earn some money in retirement, even a pretty modest amount, that can take a big weight off the investment portfolio. Well worth trying, even if just for a few years early on.

Tuesday, February 16, 2010

Happy Chinese New Year 2010: Year of the Tiger

Happy Chinese/Lunar New Years!  As the Chinese would say "Gung Hay Fat Choy" loosely translated to "Congrats, you're rich!"

Just recently we've met/talked to people with varying levels of expertise in finance and investing and real estate stuff and that got us thinking... how much should we be investing and what type of return should we be getting?

I come from the "slow and steady" or "gather little by little" philosphy and that requires a larger time frame like 20-30 years in order to reach your goals. I think this is necessary since we do have 2 kids and we plan on seeing their kids and their kids' kids. So 20-30 years isn't THAT long a time frame. We only have to look at my parents as an example. By the time we're 50 or 60 we will be well enough off to start another career, spend more time with family and travel as much as we want.

But as I talk with more people, they don't want to wait until they are 50 or 60. They want to do by 40 or earlier.  So many people try to accelerate their income, investing/gambling in higher returns but also bringing on greater risk.  There are many other investment strategies, flipping real estate, leverage your way to wealth, daytrading, starting your own business and stuff out there that smarter people know more about than I.  So, I'll leave that to the professionals.

We're currently on the: make as much as we can, save as much as we can, and give as much as we can.  We have about 64k in retirement/savings and 32k in unrealized property gains (of which we have already put in over $50k for downpayment and renovations).  We have about $9k in cash for short term use.  That totals to around $105k. 

So what are our updated financial goals for the Chinese New Year? 
- Paying off our loans ($12k in TSP)
- Pay as much principal off our mortgage as possible ($13k to go below 80% LTV)
- Start saving $40k for investment purposes (starting business, rental property, etc)

My father used to say you can make money with money, and of course I see the logic in that.  Many people leverage/borrow to do their investments and for some that is a great way of doing things.  You have a much better payoff but along with it is greater risk.  It's risky because if your business or investment doesn't pan out you're left with a huge pile of debt and possibly bankruptcy or foreclosure.  If you can start a business you can afford with cash on hand and possibly with little to no debt, you're on much better playing field.  It's also much safer for us as a family since we do have two small girls.

So for us it is by changing our philosophy from "retirement at 40" to "leaving a legacy or inheritance for our children's children".  We need to broaden our horizon, broaden our timeframe. 

See what a budget can do for you!

15 year or 30 year mortgage?

I found this website that thinks on a very similar line with me. One of his latest posts talks about how to reduce your mortgage payments by $100,000. Something I've been thinking about doing.

Let's see if it is really worth it.
We currently have a mortgage of about $200,000 at 5.5% interest for 30 years. That's about $11k in interests for the first few years assuming making regular payments and minimum principal paid off, or about $1100 per month (excluding tax and insurance). 

The 15 year mortgage rate is around 4.5%. That comes out to be about $1500 per month (excluding tax and insurance) or an extra $400 a month. 

Total interest paid in 30 years is: $208k
Total interest paid in 15 years is: $75k
Extra payments @ 400/month in 15 years: $72k

So in actuality you have to put up an extra $400/month or $72k in accelerated principal payments in order to reduce your interest by $133k and mortgage by 15 years.

Scenario 2: Instead of changing our mortgage you save/invest the extra principal payments. 

After 15 years you would have about $139k left on your $200k mortgage.  If we put our $400/month for 15 years in our fancy calculator for future value at interest of 10% we would have $152k.  So what does that mean? 

I would be up about $19k.  That means if you were disciplined in saving and investing that extra $400 per month you would own your house with no mortgage after 15 years with a little bit to spare.

So there you have it... you save over $100k in scenario 1 and you are free and clear after 15 years.

What can a budget do for you?

Tuesday, February 9, 2010

Good Finance Articles

Going to be snowed in for the week, so here are some good articles I have found this week:

Reasons why tax benefits of homeownership is overrated @ Outofyourrut.com

2009 State of the Household Address @ Lenpenzo.com

Cashflow equation @ Steadfast Finances

How much to allocate in to your budget @ Bible Money Matters

Money Lessons from Fools @ Redeeming Riches

55 Reasons to get out of debt @ Money Help for Christians

As you can see, I like numbers. I'm an engineer at heart and all these number crunchers make finances fun ;)

So what can a budget do for you?

How Much Have You Made Over Your Lifetime?

How much have you made over your lifetime?

In college I worked for two summers at the World Bank as a temp doing administrative assistant work making about $10/hour. It came out to be about $2500 each summer.

My first post-college job from 1999 to 2001 I averaged about $46,000 a year. My starting salary was $39k + 7k signing bonus.

From 2002-2003 I worked part time for about $2k teaching (yeah, hard work and bad hours in China).
In 2004-2005, I worked for FDIC when I was working on my masters for about half a year at a salary of $35k.

During the 2005-2006 school year I made $45k as a first year middle school math teacher. After being told I was being laid off at the end of the year as a teacher I put my resume on Careerbuilder.com in early April. One employer found me. I was offered a starting salary of $55,000 to start in May. This put me in a slight predicament since I was still teaching at that time. I couldn't jump ship in my final quarter of teaching, but oh, was I tempted...

So I actually told this employer that I couldn't start until June, but changed that to August since I had some things to take care of during the summer including a short term service project with our church Youth Group and another honeymoon to Hawaii with my wife (our first one we spent a weekend in Baltimore... how romantic). We didn't hear from them all summer. To make matters even more hairy, after the Hawaii trip we found out we were expecting child #1.

And as providential as it was, in late July I receive a Priority package in the mail. It was a contract offering me a signing bonus for four years totaling almost $40k. So alongside my regular salary, I was offered almost $10k each year for four years. This was confirmation that waiting was the best decision I had made in a while. (Although I was also offered another teaching position, I really wanted to become a better teacher... this was offer was too good to pass up).

So over these past four years my salary has increased from $55k to $75k. Averaging over that time around $67k + $10k bonus.

So over these past 15 years I have made nearly: $386k.

How much have I saved/invested over that time? That's a different story.

Wednesday, February 3, 2010

State of the Household Address (2005-2010 Review)

Between 2005 to early 2007
After we got married, we were rented a single family house for about $1000 + $300 utilities/month. It was a big house so electric, gas, and other stuff was a bit higher. It was also very inefficient since it was just the two of us living there. I was also transitioning from my old teaching position where I was laid off after my first year. I was offered a Federal Government position shortly thereafter and in the midst of this transition we found out we were expecting our first child.

So big changes. Major changes happened between 2006 and 2007. We transitioned from two incomes (my teaching and my wife's substitute teaching position) to a single income (federal government!!). We had our first child in 2007 and then our second in 2009.

Between Mid 2007 to 2008 and beyond
We also made our first big move as a family in 2007. My brother generously let us house sit in 2007-2008 for free while he was away in Iraq. This freed us to give freely and save tremendously especially during this period of time.

As I looked over our finances between 2008 and 2009 our major areas of change was that we became homeowners.

2008 was nearly rent free. So 12 months of free rent at $1500/month we had annual savings of $18000. Along that he also provided utilities so on average we spent $200 for electric, gas, and water. Considerably less as we moved from a single family home to a townhouse. So over 12 months that came out to be $2400.

Because of that we were able to save a bunch for the downpayment of our house and renovations. Thanks!

2008 Rent Savings $18,000
2008 Utilities Savings $2,400
======================
2008 Total $20,400

All other major categories stayed pretty much the same. We spent about the same in food about $6000. Our automobile and gasoline bill was a bit higher in 2008 because of the oil speculation and bubble. This caused gas prices to hit nearly $4/gallon.

So that's it. Our lives changed and our finances changed as well between 2005 to today 2010. We'll see what 2010 will bring..

Thank you all for being part of it.

2010 Savings and Investments Plan

What is our plan for savings this year?

We borrowed $14k from my TSP (government version of the 401k).  So far we have paid off $2k and have $12k remaining.

So our plan for 2010 is to pay back this loan since all this goes to investments.

I am also saving 5% of income in TSP which gets a 4% matching.  So 9% of my income is going into retirement.

TSP Savings: $7k (pretax)
Loan Payment: $14k
Roth IRA: $5k (after tax)
========================
Totalling: $26k this year or $2k a month (note this includes company matching and pretax monies).

We'll see if we can do this.  If we can consistently save 2k per month... at 10% return for 30 years... that's a little bit over $4 million.

Not bad with a little bit of planning.  What can a budget do for you?

Renting vs. Buying

Is it smarter to rent or buy?  There are a lot of different opinions on this.  Let's look at our numbers. (NOTE: These are OUR numbers.  Your's will vary accordingly)

We would probably spend $1500/month on rent.  As for our $200k mortgage, we are currently paying $1100 for rent, of that $850 is interest and $250 is principal, $300 for tax, insurance, and PMI.  We also pay about $55 for HOA, $100/month for maintenance other stuff.  We also pay extra principal payment of $400 to pay down the mortgage.

CATEGORY
Mortgage(s)/Rent
Extra Principal
Taxes
HOA Fees
Utilities (non cable)
Insurance+PMI
Maintenance
------------------
TOTAL:
Owning
$1,100
$400
$160
$55
$200
$150
$100?
---------
$2,165
Renting
$1,500
$0
$0
$0
$200
$50
$0
---------
$1,750

By buying a smaller house we were able to pay pretty much the same amount as if we were renting.  The extra principal payments reduces interest and allows for faster ownership.  So our principal is being reduced by about $650 each month ($250+additional payments $400).  The insurance, tax, maintenance, HOA fees, and interest are stuff we won't get back which adds up to about: $1300 a month or about $16,000 a year compared to $18,000 a year if we rented.

Had we bought a bigger and more expensive house, we would have paid more in interest payments and it would have cost much more to buy than rent.  But in our case we are actually saving almost $300 a month because we are buying instead of renting, after counting in tax writeoff and stuff..

So the advantages of buying our house:

We are paying down the principal by about $650 a month.
We can deduct $10500 in interest payments from our income probably saving us $1500 in income tax (at 15% tax rate)
We have assets in our name.

Disadvantages of buying the house:

It has huge upfront costs.  We paid $21k down payment and $30k for renovations.  That's like giving up 50% of everything we own for this house.
If anything goes wrong, it's up to us to fix.
It's in our name... so if we can't pay, it will be our credit that is shot.

Note: This is not the same for everyone.  It depends on the cost of the house, HOA/Condo fees, insurance, PMI, etc.  Cost of real estate and rental property in your area.  You do the calculations for yourself and see which one is better.

Tuesday, February 2, 2010

How to Create a Simple Budget

I started using Mint.com in late 2007 ... It was one of those websites that gathered information from your bank accounts, brokerage accounts, retirement accounts, credit card accounts, and now even includes car, mortgage, and whatever other assets you own.

SO is it Mint.com safe?  Can one site really be trusted to hold all these personal accounts?  Well to be honest, I'm not sure, but they say that they are, so I'll trust them.  There are hundreds of other resources that you can use to budget, like quicken, MS Money, etc. but I went for the one that's free.  There are similar sites like wesabe.com, ynab.com etc.  But Mint has served our purposes so far. (just be careful giving out sensitive information)

So how do we budget?  Fairly simply... Well, what we have done so far was use Mint.com to analyze the areas we spend the most in and then plan for them.

Find Major Categories
Our biggest areas of expense happens to be:

  • House
  • Giving
  • Food
  • Automobile
  • Utilities
  • Misc/Other

We have a seventh category for savings so you can plan how much you want to save each year.

Plan per month
So that is pretty much all we did for our budget.  We have seven categories and plan for each month how much we want to spend.  For example in 2009 we spent almost 4,000 in car related expense.  We divide this by 12 months and get about $330.  We thought $330 was kinda high, so in 2010 we budgeted $240 per month for auto related expenses. 

Stick to the plan
I think this is the hardest part.  How do you stick to the plan?  There is always unexpected stuff and you cannot predict the future.  My suggestion is if you can do it on your own, then great, if not, find other people to go in with you.  Your community is always there to help you when you can do stuff by yourself, just look at Alcoholics anony, Biggest Loser, and pretty much all those people on Suzy Orman, Dave Ramsey show, people in general are weak in keeping goals... so definitely have people around you to keep you on track... that's what we're doing. 

Simple right?  I think if Congress and everyone in America is able to budget better we'd be out of this deficit thing and start paying down our debt.  So here's my little bit of education for everyone. 

Last tip:
Spend less than you make.

What can a budget do for you?

Monthly Expense Report: 2010 January




After looking over our January spending we did fairly well in most categories.  Our food, automobile, and utilities came down significantly from December.  I think it was the lull after all the holidays and the big snow storm that prevented us from doing much damage. 

We are also going to implement an envelope system to reduce credit card spending.  A weekly allowance will be given to us and whatever is left over at the end of the month can be used at our discretion. 

Our Home expense was extremely high this month due to some discretionary spending at Ikea (about $300) as well as some accelerated principal payment into the mortgage (an extra $1000 in order to get to the magic 80% to get rid of PMI). 

Here is a look at our Dec 2009 just for comparison sake.



So What Can a Budget Do For You?