Getting more with less at the grocery store

Like most people surviving in the current economic situation, I have decided that I am going to further tighten the belt of my budget for the sake of my investments.  I have reduced a lot of my re-occurring expenses by switching from DirecTV and AT&T DSL to bundle my TV and Internet with Comcast.  In addition to that, I have reduced my electricity usage and natural gas usage.

I am looking to further reduce the amount of money being spent due to the fact that I have now taken on an investment property.  In my current budget, I have allocated $130/month for groceries.  I am looking to reduce this amount drastically.  I have given myself the goal to live for three weeks off of $50 groceries.  Although I feel like this was an arduous task, this type of pressure requires one to get creative.  Also, using the principles of "P.I.E", I feel that any task is quite manageable.

To proceed with accomplishing this task, I do what I usually do before going to the grocery store, checking the weekly ads.  Fortunately with Kroger, they list all of their "weekly ads" on their website.  After getting an idea of the items with the best value, I make a small list of my needs.  This list is typically comprised of items that I have already decided on cooking for the day/week as well as some staples that I can create a meal from in the pantry.  

As a side note, below are some of the "staples" that I require in my pantry:

• Rice
• Beans
• Corn
• Barbeque Sauce
• Brocolli
• Sweet Peas
• Bread

Now taking on this goal requires that I draw a very distinctive line between what I want and what I will need to accomplish this goal.  It just so happened that this week at Kroger, there was a special on meat at Kroger, so I definitely had to take advantage of this by stocking up on high value items.  Although meat typically has a short shelf life, you can easily extend it by freezing those items immediately and using them at a later date.

During this whole experiment, I am hoping to eat healthier as well as learn to get a bit more creative in the kitchen.  I am also hopeful in learning to discipline myself in my consumption of food and find other things to do beside eat and lounge around my home.

If you have any suggestions on how to stretch your groceries a little bit further than usual, please leave them in the comment section below.

Stay Disciplined!

The Rule of 72

“The keys to patience are acceptance and faith. Accept things as they are, and look realistically at the world around you. Have faith in yourself and in the direction you have chosen.” ~Ralph Marston

Earlier this week, I was asked the question, "Do you know what the rule of 72 is?"  I thought about it and promptly responded back with "of course", followed by my rendition of the answer to that question.  However, the person I discussed this with stated that over 90% of the people, he asked that question, did not know the answer.  This is quite staggering to me due to the fact that this is a very simple idea and it is very valuable to know in terms of investing.  

The definition for the rule of 72 is listed below:

The rule of 72, is a method for estimating an investment's doubling time. The number, 72, is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling.  (Source)

For those who understand formulas, it looks like the following:

(Years to Double) = 72 / Interest Rate

View the following example for further clarification:

HSBCDirect offers you an unlimited length Certificate of Deposit (CD) for 4% Annual Percentage Yield (APY).  If you just deposited $10,000 and wanted to know how long it would take to double into $20,000, you could use the following formula below to calculate it:

72 / 4 = Approximately 18 years to double.

To get a more exact amount of time to use for doubling, you can use the "Future Value" (FV) formula.  

FV = Present Value x ((1 + Interest Rate)^N)

(Where N is the Number of Years)

To calculate the number of years, you can use the following formula (just solving for # of years):

ln(FV/PV) / ln(1+I) = N

(Where PV is Present Value)

Using the numbers from the previous example, you get the following:

ln(20000/10000) / ln(1+.04) = N

17.673 = N

As listed above, the interest rate is represented in terms of the actual decimal number rather than the whole integer value.

As you can see from the two formulas, there is a lot more complexity to get a more exact estimate of time.  However, using the "rule of 72" can give you a quick estimate when weighing your investment options and correctly balance the amount of risk you take with an expected return.

If you have anymore comments or any other shortcuts or rules you know about in regards to investing, please leave them in the comments below.

Stay Disciplined!

Flexible Spending Accounts vs Health Spending Accounts (Part Two)

“The first wealth is health.” ~Ralph Waldo Emerson

As mentioned in the previous article, there are many different requirements for a person to meet in order to qualify for a Health Spending Account.  One alternative to the Health Savings Account is a Flex Spending Account.  Below is the definition for this type of account:

Flexible Spending Account: one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. (Citation)

Flexible Spending Account (FSA): is a tax-favored program offered by employers that allows their employees to pay for eligible out-of-pocket health care and dependent care expenses with pre-tax dollars. By using pre-tax dollars to pay for eligible health care and dependent care expenses, an FSA gives you an immediate discount on these expenses that equals the taxes you would otherwise pay on that money.  (Citation)

Unlike a Health Spending Account (HSA), the FSA can be used with most health insurance plans provided by the employer.  Typically the employer offers this plan in conjunction with their current health plans and allows the employee to pay for medical expenses not covered by insurance.  Some examples of these types of expenses are listed below:

• Dental
• Vision
• Over-the-Counter Drugs
• First Aid Kits

For a general list of the different expenses that can be covered by an FSA can be found in the Publication 502 citing medical expenses recognized by the government.

Typically, users of an FSA incur the medical expense and then submit documentation to their FSA provider to receive reimbursement for the expense.  However, some providers are beginning to provide FSA debit cards that can be used withdraw FSA funds immediately for a qualifying expense, rather than waiting for reimbursement.

Although it is mostly dependent on the plan on the exact stipulations on whether there is a maximum or minimum that can be contributed to the FSA, the government requires a maximum dollar amount or a maximum percentage of the salary to be specified in the terms of the account.  (Citation)  This is due to the fact that the government allows contribution of pre-tax dollars to the account overall reducing the employees gross income and tax burden.

To assist with calculating how much this provides a benefit to the employee who takes advantage of this plan, refer to the previous article about maximizing deductions.

To provide a complete review of this type of account, one must take in account the negative aspect of a Flexible Spending Account.  FSAs require special planning due to the fact that they are a "use it or lose it account".  What this means is that the if account holder does not use all the funds that are in the account by the end of the coverage period, the money is returned to the employer and the employee loses that contribution.  

The coverage period is typically the calendar year (starting on January 1st and ending on December 31).  However, the government allows for a 2.5 month grace period after the calendar year to further incur anymore expenses that can be used to deduct from the remaining balance on the FSA.

Overall, this account is a good idea for someone who does not qualify for an HSA but still has medical expenses not covered by their employer's health insurance plan.  As long as the employee conservatively plans for their medical expenses, this account will be beneficial in allowing the employee to pay for their expenses as well as provide a tax break.  Please leave your comments below in your thoughts about HSAs, FSAs, or any other savings plans you may know about.

Stay Disciplined!

Flexible Spending Accounts vs Health Spending Accounts (Part One)

“It is health that is real wealth and not pieces of gold and silver.” ~Mahatma Gandhi

One of the big points that was discussed in the previous presidential campaign that was mentioned was the idea of health insurance. One of Obama's platform is to make health care "affordable and accessible to all". (Citiation) Well, I for one, am a proponent of taking care of yourself without relying on the use of any one (or any entity) for that matter.

I believe that one should use all the tools available to be responsible for ones health care and fortunately there was one tool that was made available by the previous administration if you qualify. The "Medicare Prescription Drug, Improvement and Modernization Act" signed by President George W. Bush in December 2003 created the "Health Savings Account". Below is the definition for this account:

A health savings account (HSA), is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). (Link to Definition)

A Health Savings Account (HSA) is a special account owned by an individual used to pay for current and future medical expenses. (Citation)

This particular account is somewhat similar to a tax-sheltered account (such as a 401(k) or IRA) that allows you to contribute pre-tax income to spend on health related expenses. Like the 401(k), there are contribution limits imposed annually. In addition to that, these funds can reside in an investment vehicle such as mutual funds and stocks. Although this sounds like a very good product to take advantage of, there are certain requirements that have to be met before you qualify.

In order to be able to contribute to an HSA, the person must be the policy holder of an HSA-eligible high deductible health plan (HDHP). An HDHP is basically a policy that does not cover first dollar expenses (unlike Medicare , Flexible Spending Accounts , etc.) which basically provide benefits as soon as the medical expense is incurred. HDHPs usually have a high deductible (i.e. $1100+ for self coverage, $2200+ family) but a lower premium since they require the policy holder to pay a higher deductible than most other health insurance plans.

For the year of 2008, the maximum contribution to the HSA was $2900 for a person who is single. For 2009, the maximum contribution was increased to $3000 for a person who is single. The money contributed to this account can be withdrawn for any medical related expense. The method of withdrawal is highly dependent on the agreement that the account holder has with the HSA provider. Some HSA providers give their account holders checks or debit cards to use with medical related expenses. Although purchases can be made by these methods, it is good practice to keep documentation of each medical related expense in case the IRS wants to make you prove that the expense qualified for a withdrawal.

Some of the benefits to use a HSA are the following:

• Premiums for HDHP are generally lower.
• HSA provides flexibility to pay some expenses not covered by traditional health insurance such as over the counter drugs, orthodontics and vision.
• Money from the HSAs can be rolled over year after year and available for withdrawal without penalty after age 65.
• Some employers match an employees contribution to the HSA.
  

There are some associated disadvantages with the HSA listed below:

• Non medical related HSA withdrawals are subject to a 10% penalty as well as a standard income tax.
• Qualified medical expenses can only be incurred on the date of or after coverage has started, it is not retroactive.

As you can see, there are advantages to having an HSA. Hopefully you feel a bit more empowered to know your options to take control of your health care coverage if you qualify for this particular product. The next article that will follow up this particular topic will be about "flexible spending accounts" which are easier to qualify for than HSAs.

If you have anymore information about the topic of Health Spending Accounts or want to discuss this issue, please leave that information in the comments below.

Stay Discplined!

Sources
http://www.ustreas.gov/offices/public-affairs/hsa/pdf/all-about-HSAs_072208.pdf
http://en.wikipedia.org/wiki/Health_savings_account

The Ultimate Bargain Shopping

"There must be a reason why some people can afford to live well. They must have worked for it. I only feel angry when I see waste. When I see people throwing away things we could use." ~Mother Teresa

There seems to be a new trend with many Americans that 2nd hand goods are the way to go.  It seems like more people are comfortable with maintaining what they currently have or buying gently used items that others are selling.  With that in mind, I have been looking at the tools available for this purpose.  

Below are these tools:

1. Freecycle
2. Craigslist
3. Goodwill
4. Garage Sales

What other tools do you use for bargain shopping?  Please leave those tools in the comments section below.

Stay Disciplined!

Lessons learned from Investing during a Recession

“Do not brood over your past mistakes and failures as this will only fill your mind with grief, regret and depression. Do not repeat them in the future.” ~Swami Sivananda

With the stock market at unprecedented lows, it gets more appealing every day to invest into the stock market.  There is always the underlying fear of whether or not I will immediately lose more money (that I have already lost) from investing.  After reviewing so many outlooks from different "experts" and "analysts", the general consensus is that it is a great time to buy stock.

Well, is it really a good time to invest?  Well, the stock market is roughly 50% of the level it was at during its peak.  Also, it seems that a lot of bad news has been dispersed over the course of the year, which means good news has to be around the corner right?  Unfortunately, I could not find out what was going to happen tomorrow after looking into my magic crystal ball.  After all, if I was able to do so, my NCAA bracket would be in a lot better shape than it is right now.  

So what is the secret to excelling in the stock market?  Any person who has read an investment book or have watched a financial channels knows that the secret to investing in the stock market is to "buy low and sell high".  Although that is easy to say, what does that really mean?  What do you consider a low price for a stock?  How much money do you consider to be "high"?

I think that a lot of people realized from the previous years that it is really easy to lose money in the stock market.  Especially with new investors, who invested in the peak of the stock market, we are really discouraged about how quickly money disappeared.  However, most seasoned stock investors realize that there are many opportunities to invest wisely and make some money in the process.

Although I have not officially studied investing or received any formal training on the subject, I have learned some lessons from the previous market.  Below are some of the lessons learned:

1. Buy Low
• Although this may seem like an obvious point, it is surprising how hard it is to actually buy a stock at a low point.
• From my personal experience, one usually buys a stock on the way down, however, it is after the initial dip from a previous high which may not be the lowest point of the stock.
• Reviewing the stock's 52-week low and even daily low is helpful when determining a "low" price to purchase a stock.
2. Sell High
• Once again, another obvious point that many cannot seem to get right
• One would like to sell a stock for a profit over the price that was originally paid, however most hold on to a stock trying to break even from the original stock price plus the commission for the buy.
• Very rarely does a stock give you a massive return in a short time, however over time, the potential for that stock to give you those types of returns are possible.
3. Stock prices are based on emotions, not always on facts
• Unfortunately, the average stock investor is typically "along for the ride".
• There are many big time investors (investment bankers, hedge funds, mutual funds, etc) that sway the price of a stock.  The average consumer does not really affect the price of the stock by buying and selling.
• Just because a stock has good news, does not necessarily mean that it will go up.  The same goes for the converse of that, bad news does not necessarily mean that the stock price will go down.
4. It is impossible to time the lowest price of a stock
• Timing a stock is almost near impossible.  It is a better idea to purchase a stock at a price that you are comfortable with.  Honestly, when a stock is being purchased, it is literally buying a piece of paper that you are assigning a value to.
5. Do not watch your stock everyday
• Watching a stock everyday will cause you to be stressed out.
• It is best to set a limit or a stop limit order to purchase a or sell a stock.

I know these points are not necessarily the most profound and can even seem like common sense, however it took me a year of investing and losing a lot of money to fully understand these principles.  Hopefully, this will help you to understand the market a little better and will prevent you from making some of the same mistakes I have made.

If you have any other life lessons you would like to share about investing, please leave them in the comments below.  Stay Disciplined!

Understanding the Good Faith Estimate

During the home buying process, one of the most important steps is to determine how to actually pay for the home.  In my opinion, the average person does not have enough money to buy a home outright (even with the deeply discounted prices in the current housing market).  In most cases, a loan is required in order to purchase a home.  

As most seasoned bargain hunters know, it is important to shop around to get the best possible price/terms for whatever product one is trying to purchase.  This same principle should be applied to obtain the best possible loan.  To make it easier for this process, banks that offer you the loan are required by the Federal Real Estate Settlement Procedures Act to provide a Good Faith Estimate within three days of receiving the loan application.

Good Faith Estimate:  An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.  (Reference)

Below is a list of the different items along with an explanation of each item included in this estimate:

800 ITEMS PAYABLE IN CONNECTION WITH LOAN:

• 801 - Loan Origination Fee

This fee is a charge for originating or creating the loan

• 802 - Loan Discount

This is an upfront charge paid to the lender to get a lower mortgage rate – the same as “buying the rate down”

• 803 - Appraisal Fee

This is the cost of the independent appraisal. It is usually paid by the buyer.

• 804 - Credit Report

This is the cost of the credit report

• 805 - Lender's Inspection Fee

This is the lender’s cost of inspecting a property – some may double check the appraisal provided by an independent appraiser

• 808 - Mortgage Broker Fee

This is the upfront charge that a mortgage broker charges. Brokers can also earn a “rebate” from the lender which is not listed here

• 809 - Tax Related Service Fee

Lender fee, usually small, for handling tax related matters

• 810 - Processing Fee

This is the charge for processing the loan – collecting your application, running credit, collecting pay stubs, bank statements, ordering appraisal, title, etc.

• 811 - Underwriting Fee

This is the cost of the loan underwriter (approver)

• 812 - Wire Transfer Fee

This is the cost of wiring the money around, which is usually done by escrow.

900 ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE

• 901 - Interest for days X $ per day

This is your prepaid interest for your mortgage loan.

• 902 - Mortgage Insurance Premium

This is the prepaid mortgage insurance premium, if you have one. This is the insurance premium some lenders charge for loans with little equity.

• 903 - Hazard Insurance Premium

This is your home’s hazard insurance being prepaid.

• 905 - VA Funding Fee

This is the Veterans Administration funding fee, which is something you will not incur unless you go through a VA program.

1000 RESERVES DEPOSITED WITH LENDER

• 1001 - Hazard Insurance Premiums # months @ $ per month

This is any prepayment of your future hazard insurance expense

• 1002 - Mortgage Ins. Premium Reserves months @ $ per month

This is any prepayment of your future mortgage insurance expense

• 1003 - School Tax months @ $ per month

This is any prepayment of your future school tax expense

• 1004 - Taxes and Assessment Reserves months @ $ per month

This is any prepayment of your future tax expenses, such as property taxes

• 1005 - Flood Insurance Reserves months @ $ per month months

This is any prepayment of your future flood insurance expense

1100 TITLE CHARGES

• 1101 - Closing or Escrow Fee

This is the cost of escrow. This is the service of a neutral party that actually handles the money between all the different parties in a real estate transaction, including: the lender, the buyer, the seller, the agents, notary, etc. This is often done by the “Title Company” – a related entity in the same office that provides title insurance

• 1105 - Document Preparation Fee

This is the charge for preparing the loan documents. Lenders often email the loan documents to the escrow company, which in turn prints them out and reviews them before signing

• 1106 - Notary Fees

This is the cost of the notary. This is to have all of the legal documents surrounding this transaction notarized

• 1107 - Attorney Fees

Any legal charges

• 1108 - Title Insurance

This is the cost of insuring the title of the property. If there is a question about title (who really owned the property), after the transaction is done then this insurance protects the lender from future problems

1200 GOVERNMENT RECORDING & TRANSFER CHARGES

• 1201 - Recording Fees

This is the cost of updating relevant government records

• 1202 - City/County Tax/Stamps

Unavoidable government charge

• 1203 - State Tax/Stamps

Unavoidable government charge

1300 ADDITIONAL SETTLEMENT CHARGES

• 1302 - Pest Inspection

This is the cost of the pest inspector. Their purpose is to document the state of the property that the lender is making the loan on.

Information above taken directly from the following wikipedia article.

All information above was republished under the terms of the GNU Free Documentation License.

The list above contains general items that most Good Faith Estimates contain, however, some items are particular to the lender who is providing the loan.  Below are a things to watch that can vary from loan to loan:

1. Loan Discount
• Some mortgage brokers may try to offer you a very interest low rate for the purchase of your home, however, they will offer you this rate by placing the cost to reduce the interest rate directly into your closing costs.
• This is beneficial to you if you have your closing posts being paid by the seller, else this cost will come directly out of your pockets as you will be paying for this up front rather than over the life of the loan.
2. Seller contribution for closing costs
• A mortgage broker may recommend for the buyer to roll up the closing costs into the price of the loan and have the seller pay for the closing costs.  The caveats to this is to know that the seller is only allowed to pay up to 3% closing costs for a conventional primary residence FHA home loan.  The maximum a seller can contribute for an FHA investor loan is 2%.
3. Loan Application Fee
• The loan application fee is typically required up front by the mortgage broker in order to process the loan.  This item is usually listed on the Good Faith Estimate however the buyer should receive a credit for this charge during closing since it is paid up front.

To get an idea of what a Good Faith Estimate typically looks like, go to the following example.

I have always expressed the importance of educating yourself and planning for obtaining your goals.  Now I am hoping that this article has equipped you a little better to understand the beginning steps for the loan acquisition process to purchase a home.  If you have any comments, send an email to jtorian@pamplonafinance.com or leave them in the comments below.

Stay Disciplined!