Finances

So first all, just an update on the camp seat experiment: It worked great!

It got down to well below freezing, it was a bit windy (although very buffered due to the fence), and I managed to keep warm and sleep okay in the hammock. AND now I own a nifty little pad that I can use for all sorts of things.

Secondly, I decided to keep the blog around. I find it convenient to reference and share things.

So I've been doing a bit of thinking lately on personal finances, and I thought I'd share some of the ideas that I've had around saving for the future.

First off, inflation. Annual inflation rate is somewhere around 3% right now. When the $1.00 you put away today is only worth $0.97 tomorrow, it puts a new spin on the idea of saving. By just saving, you're really losing. In fact, you have to beat 3% just to break even. An annual raise of income could compensate for that, but you would actually have to save 3% more, rather than just spend 3% more. I know which side of the fence I'm on. =P

At 3% inflation, the .8% interest I'm earning with my savings account is worthless. Even my bank's money market account is only yielding 1.1%. My Dad pointed out to me the savings bank that he uses, and I was shocked to learn that they are paying 2.75%! EmigrantDirect is a "virtual bank", it's online only. They are FDIC insured up to $100k, and my Dad has used them for years without problems. A little more searching on the net, and I found this site. Apparently there are several online banks, that are paying upwards around 4%! I'll be moving my savings account soon.

Retirement accounts are also something I haven't given much thought to. 401k is a must, nothing beats employer matching. The contributions are tax deductible, and are pre-tax. Which means you have more to work with to gain returns on. Also each individual can contribute $5000 dollars (this year, as it differs by year) to an IRA. Also tax deductible. Deductions can really add up, it was the difference between me paying a few hundred dollars and breaking even this year. Retirement accounts are said to yield around 8% (with the caveat that it *is* still investing, you can still lose).

The last thing is whether to pay off your mortgage or not. The scenario for me was, if given a windfall of cash that would mean paying a good chunck of my principal at once, then doubling my mortgage payments for 5 years to pay off the remainder, should I?

For me, it would have meant that I would be putting every spare penny I had into making this happen, but the prospect of being 100% debt free in 5 years was extremely attractive. I ultimately decided against it. While it would have meant savings tens of thousands of dollars in interest over the long term, I would still be extremely cash poor for the next five years. If your house is your only investment, and you put all of your money into it, you may have tons of equity but you need to sell your house or take out another loan if you want to tap into it. What good is paying off your loan, if you just have to take out another loan if you need that money?

The best bet is to balance cash investments with home equity. Pay off the loan as fast as you can to reduce the interest paid to the mortgage company over the long term, but put as much or more into cash investments along the way. If they are yielding 9% or 10%, that's better than sinking the money into the home loan. That money is still relatively liquid, you can pull it out for emergencies or for home improvements that might actually raise the value of the property.

Mortgage interest is also tax deductible. 6% interest on a mortgage can effectively be looked at as around 4.5% when considering the money you get back on taxes. That's a really cheap loan. Debt is still bad, but when you have limited resources, you have to pick and choose your battles.