Monday, December 22, 2008

Sticking to Basics Eases Financial Stress

Gregory Karp of the Chicago Times writes an easy to follow article titled "Sticking to Basics Eases Financial Stress." The article makes sense and integrates well with my own developing financial philosophy.

Karp cites a Synovate survey and emphasizes that people who follow three basic rules of money management are less stressed. The rules are:

* Have an emergency cash fund. Of those surveyed who did not have a six-month emergency fund, 90 percent felt stressed. This compares with 78 percent of all people surveyed feeling stressed. Finally, of those with a six-month emergency fund, only 56 percent felt stressed.

* Pay off credit cards in full

* Use a household budget. Similar results were found linking credit cards and household budgets to stress levels.

Karp's article can be found here. The remaining is my opinion...

Many people waste time focusing on exciting money making ventures and focus less on the simple things. Take for instance credit cards, people who carry a non o% APY credit card balance have no business investing in the stock market. Pay off your credit card.

The importance of a household budget varies depending on whether or not you are naturally frugal. I don't use a household budget at all. But, I'm an inherently frugal person. If you're prone to overspending, work on developing a manageable budget that focuses on saving for lifetime goals.

As for investing, focus on securing your future. Is your house or car paid off? If not, a majority of your free cash flow should go towards paying off these items. Are you or your spouse in an upwardly mobile career? If not, some of your free cash flow should be spent on career related education and training to make you competitive for higher wages and / or more satisfying work. Finally, speculative investments should take up no more than 20% of your free cash flow.

I will likely have people disagree with my 2009 household financial goals. In 2009 my household does not plan on contributing to a ROTH IRA. Instead, we are focusing our extra cash flow to pay off one of our three investment properties within the next two years. We feel it is important to pay off our houses during a down economy. Our 6-8 year payoff plan is as follows:

* House 1 (1400 sq ft @ 5.875% 30 yr fixed): $50.6k in mortgage debt with an estimated payoff date in Dec 2010.

* House 2 (1900 sq ft @ 5.5% 15 yr fixed): $91k in mortgage debt with an estimated payoff date no later than Dec 2013.

* House 3 (3100 sq ft @ 5% 15 yr fixed): $151.5k in mortgage debt with an estimated payoff date no later than Dec 2016.

The primary reason for focusing on our mortgage debt is the fact that it's a sure thing and in this economy, good renters are not. The one thing that may complicate our house pay off goals is unforseen maintenance expenses. We remain open to selling any or all of our houses if we get the price we want. Otherwise, we'll continue to carry them and the remaining $293k in mortgage debt associated with them.

Despite my emphasis on paying off our houses, i'm still speculative in other areas. I'm investing all of my blog earnings in peer-to-peer lending site LendingClub.com. So far, i've invested $125 in blog earnings in a 11.43% net interest bearing loan portfolio diversified across five loans. One can establish a LendingClub account through the below ad.


Try it Now! Join Lending Club.


I'm also investing $150 a month across three dividend reinvestment plans (DRIPS): Dow Chemical (DOW), 3M (MMM) and Exxon Mobil (XOM). I started all three of my DRIPS through Directinvesting.com and corresponding agent companies Bank of New York Mellon, Wells Fargo Bank and computershare.com, respectively.

1 comment:

Steve Rabago said...
This comment has been removed by a blog administrator.