New Financial Plan

With mortgage rates as low as they have been many people have been refinancing.  The past several years have been consistently low rates.  Lately we have been considering taking a home equity loan to consolidate some other bills.  Some of the things we are considering are:

Tax deductible interest.  Mortgage interest, and home equity loan interest, is tax deductible.  But our mortgage is low enough that even when itemizing the extra deduction compared to the standard is small.  Having an equity loan would make more of the interest we are paying anyway deductible.  The question is how much.

Interest rates.  With rates as low as they are we could get an equity loan lower than one of our car loans and lower than one of our student loans.  That is a pretty easy choice.  But the other student loan has an even lower rate, and the other car loan is pretty much in line with the equity rate we are looking at.

Payment terms and total interest.  Student loans are set out at a 10 year payment schedule.  Our car loans have less than 3 years left.  I’d hate to stretch out the payments too much, especially since longer term loans carry higher rates, and longer terms means higher total interest paid.

Cash flow and flexibility.  The longer the loan term the lower the payment.  It always feels nice to have more room between what you bring in and what you have to pay out.  Either way we could plan out our expenses as much as we need.  The difference is with a home equity loan we can consolidate fixed payments over a term, whereas now we have payments changing over the next couple of years as different loans are paid off.  It’s also easier to pay one loan at one place than several spread across lenders, but with online and automatic payments that’s not an issue for us.

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It looks like tax rebates will be coming by the summer time in hopes of juicing the economy.  Maybe lots of people will go out and spend on trips and treats.  Then we might see a hint of better news, especially if unemployment and the service sector look better with extra spending on top of seasonal job creation.  Any additional spending that does go on will factor in when results come out in the fall.  Hmm, I see stimulus aimed at kicking in heading into elections.

As to how they work the latest information I saw is here. The checks are an advance payment of tax breaks in effect for 2008. But they will be sent out based on your 2007 numbers. Those lucky enough to qualify before but not now will get to keep their checks.  People who are eligible for more money now than they were last year will get the extra money when they file next spring. The changes in eligibility highlighted are change in income and change in children.  If your income comes down or dependant children go up you can get the credit next year when you file.  If your income goes up too much, or children are no longer dependant this year, you can still keep any money sent based on 2007’s filing.

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The Giants surprised a lot of people in beating the Patriots.  Who would have thought that so many experts could be wrong?  As far as picking the winner I’d guess that more people picked the Patriots than picked the Giants.  Of course bets and odds are made based on perception.  Everyone thought the Patriots were very likely to win big, enough so that the spread was 13 points.  I don’t know how well that spread evened out the money bet against it, but the people who make that number are good at it, so I’d guess it balanced things out quite a bit.  So the spread is a handicap that brings more money to bet for the Giants when betting against it, but probably more money betting for the patriots straight up.  After all, if the experts are saying the game will go one way by 13 or more points it is a pretty strong prediction.

What about the markets?  Many experts have made their picks for the year and have predicted market returns.  There are all kinds of forecasts.  There are also predictions for inflation, current measures of inflation, and the opportunity to lock in yields through bonds.  That brings me to my question for you.  What spread are you looking for to invest more in stocks now?  Some people saw the recent declines as enough of a discount to jump in.

The reason for investing in stocks is believing that they will return more than other investments over the time frame you want to invest.  Investing in indexes is supposed to lower the risk involved.  So stock indexes will hopefully return more than bonds.  If your index has decent dividend yields it makes it feel even safer, since that yield makes the spread between stocks and bonds smaller.  In theory that means stocks only have to go up by that spread percentage to break even.  Any returns above that should mean stocks were the better investment.  Then Citigroup slashes it’s dividends.  What is the new yield on the index?  What is the new risk picture on the index?  How much weight does Citigroup have in either of those considerations?  This all goes back to what extra return you expect from stocks for the extra risk you are taking on.

Experts look back over the history they have recorded and pull out averages.  Those numbers influence expectations.  Stocks historically yield 10% over time.  Over longer periods stocks are several percentage points favorites over current bond offerings.  How will you bet on that spread?

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With the market already down a good chunk for the year, and a big drop on Tuesday, it looked like a great buying opportunity.  A common feeling is that when things are cheap it is time to buy more of them.  That is why stores have sales.  It is the reason people suggest buying stocks when everyone else is selling.  There is a bit more to it than that.  Everyone believes the market will go up over the long term, and most people feel the market will move up relatively soon, as several quarters of back to back declines are considered unlikely.

I also assume those are true.  I agree that indexes are the way to go, that over time they will go up, and that large dips are buying opportunities.  If I had enough free money to play with I would trade on big market moves.  The trick is having enough money with enough flexibility to make up for transaction and account fees while keeping the right risk strategy.  Unfortunately I am not in position yet to have money for that type of investment.

I believe that you should time financial moves when you can.  If you itemize taxes it can make sense to pay taxes early, or to delay income.  It can pay to sell losing investments to offset gains.  When buying or selling a house you hope to find a relative bargain when buying, to get a high price when selling, and to meet the criteria for tax exemption of profits.  When buying and selling investments you also have to look at the prices when buying and selling, along with distributions, gains, and taxes.  Those are all types of timing, although for slightly different reasons.  With investments you have to invest according to your goals.  My goal is aggressive allocation, timed deposits, and frequent evaluation with adjustments as needed.

My investment strategy is all about retirement.  The retirement funds I hold use a two day delay to discourage timing.  They also have restrictions on moving back into a fund within so many days of selling it, and many funds now charge fees for selling within so many days of purchasing.  I know the limits and fees I have to work with.  For those reasons this week was not a buying opportunity for me.  Without those restrictions, if I had free money to invest, I would have looked at buying some index ETFs on Tuesday morning and been watching for a bounce back.  Even yesterday, if you had money to invest in the morning, could have been a very quick gain of a couple percent.

Since I know the limits and delays in my retirement accounts I put my investments in last week.  You could say I missed this bottom by a day or two, but I wasn’t trying to find the bottom.  I am investing according to my plans.  Being relatively early in my investing plan I am able to be aggressive.  I invest throughout the year and fully fund IRA accounts.  But I do not simply throw money in as it becomes available, or at set points each month.  Instead I buy when the price seems right.  I thought about investing throughout October, November, and December.  I decided to wait then.  With the nice discount January had already brought it was good enough for me.  Very soon the market could move down again and go for a full correction.  In that case I will do everything I can to come up with money to invest more while it’s down.

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Wow.  Global stocks plunging.  More bad news in the financial sector.  And the Federal Reserve with a surprise 3/4 point cut to hold off some of the pain.  There is some other news mixed in too, with oil backing down a bit and a stimulus plan creeping closer to reality.  If only the stimulus plan was a reasonable one and truly quick, like now, instead of another political game that waits through more pain.

Assuming some tax rebate comes in soon I have different plans for it now.  We were waiting for the market to show it’s real direction before finishing off our 2007 Roth contributions.  It looks like it’s about time to buy on another big dip in the market.  The money we have for our 2008 contributions might be put to use too.  This is a decent size pullback, I believe 10% YTD.  We will still be dollar cost averaging our contributions by not dumping it all in now, but will also be timing them to invest on the dips in the market.  Even with the volatility of the past several years this month has been a harsh one.

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I recently updated my “budget” sheet for 2007.  Yeah, I do budgeting a bit backwards.  Normal budgeting is a good idea if you need to know where your money will go ahead of time, if you want to limit certain spending over a fixed time period, or if you want to distribute money in a specific way over different categories.  Some people don’t like the idea of budget and feel better calling it a spending plan.  Names and descriptions aren’t that important to me.  I like to keep things simple and understand what I am doing and why.  I do not want to trick myself or anyone else by using gimmicks or cutesy names.

My “budget” sheet is part of a combination document tracking most of our finances.  The budget piece is broken down into spending categories that are totaled monthly.  Some expenses such as loan payments, utility bills, and food expenses are pretty consistent.  Other categories fluctuate throughout the year.  Other things tracked in the document are where money was spent, how things were paid, and what the end of month balances are.  The spending is broken down into types of stores, for example home & hardware is a category.  The payment methods tracks things like credit card use, bank use, ATM withdrawals, automatic payments, and checks.  The end of month balances are set up as a net worth type calculation so that all assets and liabilities are recorded each month to give an idea of our situation and progress.

When I started putting my finance tracking document together it was a lot more detailed in the budgeting section.  The problem was that with our attitude and discipline there wasn’t much value in doing the forward budgeting.  We were already watching our spending and making progress.  It was taking up too much time for the tiny bit of guidance it might be giving us.  In the beginning I was going in every week to update numbers and track our progress.  It started slipping to every other week, and then to the end of each month, but there was no drop off in our success even though I was putting less into it.  Next I began consolidating categories to make it simpler to add things up each month.

What I take out of what I do is understanding our spending.  We know what we bring in and what we spend.  Normally it doesn’t change much, so my quick checks are enough.  If something unexpected came up we go back to understand what happened and adjust to compensate for it if needed.

Do you think I’m missing something the way I do it?

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