Thursday, January 31, 2008

Jan 2008 review

January ended without any problem, well within the budget. Here is how we spend the money in Jan

39.2% - Saving
23.0% - Other saving funds ( fund ofr home, buying a new car, for travel and emergency fund)
22.4% - tax
7.6% - Rent
7.8% - Other expense

Of the close to 40% of savings about 10% was saved for buying stocks in taxable account, rest were investments in HSA and 401Ks. The tax rate of 22.4% might be a bit high, we plan to readjust the W4 around june. I want to make sure by year end i owe the government about $500. About expenses, they come to about 15% of the entire salary, of which rent takes away about half. But really the rent is only average for the area i stay. So all in all a good month for the books. Its a good start, i hope we can maintain the above 60% saving rate all through this year.

Monday, January 21, 2008

Time to buy mutual funds?

As a general rule, I think when the market is down, it is a good time to invest in the index mutual funds. Since these funds track the overall market, buying the fund during recession gives you a chance to invest in the sector the index fund is tracking. Investing in stocks during recession is harder as such decision really depends on the condition of the company more than the condition of the sector. Hence towards the end of this year (by which time i think recession would have had a painful effect), i plan to increase my investment into the index mutual funds.

Sunday, January 20, 2008

Choosing the Right HSA option

Health Savings Accounts (HSAs), created on December 2003, is designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis. With both of our employers offering HSA, we had to work out the math to figure out which option to go with. The details of the plan are as follows:

Employer 1
Deductible (employee/employee+1/employee +2): 1200/2400/3000
Max out of Pocket expense (90% covered after deductable): 2000/4000/5000
Employer contribution (employee/employee+1/employee +2): 700/1400/1800
Immunization and preventative exams are 100% covered

Employer 2
Deductible (employee/family): 1500/3000
Max out of Pocket expense (100% covered after deductable): 1500/3000
Employer contribution: Nil
Immunization and preventative exams are 100% covered

Maximum HSA Contribution for Year 2008: $2900 for individual, $5800 for families

We didn’t spend much on health expense, so using that as the guideline the min expense is kept at 500 and max as the maximum out of pocket expense.

Option one (going with employer 1 alone). The employer 2 does not give any money for not using their health plan, so the savings is basically the amount you save from tax and the contribution from employer 1.
Tax deductible savings = 4400 * .28 = 1232
Employer contribution = 1400
Min spending = 500
Max spending = 4000.
Total savings = 2132 or -1368

Option two (going with employer 2 alone). The employer 1 gives about 36o for a year for not using their health plan, that can be considered as employer contribution.
Tax deductible = 5800 * .28 = 1624
Employer contribution = 360
Min spending = 500
Max spending = 3000
Total savings = 1484 or -1016

Option three(going with employer 1 and employer 2)
Tax deductible = 5100 * .28 = 1428
Employer contribution = 700
Min spending = 500
Max spending = 3500
Total savings = 1628 or -1372

So looks like taking option one is better because of the employer contribution. However if we look at the max expense then option two looks better because the employer's deductible.

Sunday, January 13, 2008

The price of convenience

While making the spinach dip for a party I was hosting, i realized there is always a price to pay for convenience and people don't mind paying that price without any hesitation. Take the example of dips - the ingredients for the dip are available in the same grocery store which sells ready made dips, you can make them quickly and easily and making them is way more cheaper...still people buy ready made dips.

Don't get me wrong, at times, it make sense to pay for "convenience service or things". Say, a one off buy from vending machine when you really really need it bill. So what exactly is "convenience service or things"? Things or services for which you willing to pay extra money when there exists similar alternatives at par or with negligible effort on your part.

The "convenience service or things" in my life that i can think of are

Eating out: I feel this would make it to the top of most people's list. Take outs, eating from fast food, from restaurants are definitely convenience for us. By learning quick to make recipes, we plan to cut down (if possible eliminate) "convenience eat out". However, I must add that we do sometimes go out different restaurants to taste their cooking and we plan to continue doing that on a monthly basis.

Buying groceries from the same store: We used to buy groceries from the nearest shop while there are shops within 5 minutes drive where things are cheaper and of better quality. Buying groceries from multiple shops was something i learned from my ex-roommate. My roommate who would scour about three neighboring grocery stores to buy the things because each store offers saving on some things but not all the things. Until then, I never realized how much I was paying for the convenience of buying everything from the same store.

Borrowing books/dvds from the library instead of from say blockbuster would be another. Though i must add, borrowing from library means a lot more of a wait time for dvds/book (especially for items in demand). But is there a need for watch that particular movie or read that particular book at that very moment or can it wait?

Driving to work: We are not always so sensible about our choices though. This is a big red flag for me. I could take the bus to work, the bus pass is paid for by employer, the bus stops right in front of my apt/work and the trip is only about 10 minutes. But i still prefer the convenience of my own car. I am sure we have all given into the temptation of taking the easy way out in various points in our life.

I am sure there are more convenience things/services that could be reduced or eliminated. Many people (including me) find it hard to find a way on cutting back on expenses without dampening their lifestyle. I am sure reducing the price we pay for the convenience of things will help a long way in maintaining the lifestyle at lower cost. a win win situation indeed.

Wednesday, January 09, 2008

Is international the new synonym for growth?

Today I received my free subscription copy of US News. The cover story is titled- "Is the Party Over?" The magazine is making a case that the growth in US stocks is over. At least the two decades of the "boom" phase...While not scientific, and by far not indicative of any sort of trend, looking at the rate of return of my mutual funds, the ones based on international markets outshone the domestic market by over 10% this past year. Further I keep hearing a growing voice to invest in international markets from financial pundits... ironic since the international market used to be considered a greater return at the cost of higher risk. Maybe being a product of the BRIC world myself, I always viewed the international market gave a better growth rate at lower risk. Good to know that the mainstream is slowly buying into that idea too.

Monday, January 07, 2008

shopping at costco

Today we went to costco, our monthly shopping ritual. Costco is one place where you can spend money thinking that you are saving !. How ironic if you ask me. The concept is real simple, when things are priced less (by increasing the quantity) people tend to buy more. That plus the placement of products ensures that the checkout lines are always full. So our costco shopping strategy is to go with a shopping list and ensure that we stick to the list. Once at costco we tend to move quickly through the first set of display items (big ticket items that can result in impluse buy). and for a family of two, our average costco bill is kept below $100. What about your strategies for shopping at wholesale stores?

Sunday, January 06, 2008

Year 2008: the Year of recession

Year 2008 is the year of the Rat according to the Chinese calender. If you ask me , i would say its the year of recession. While i would be happy to be wrong, i feel this year would be the "official" start of recession, at least for the western developed world (mainly US and UK). I am more curious to know how the developed world's recession will affect the emerging world. The emerging world (essentially brazil, russia, china and india) are coming to age and this recession should tell us how much of their economy is tied to the world / US economy and how much is based on their internal growth.

The reason why US in particular will enter recession is simple - Unbridled spending coupled with unwise business decisions will result in a crash - A big one. So this year, the ongoing financial crisis will accelerate into a meltdown. The possible after effects of this recession would include

1. The value of dollar would go down, but i think still dollar would be the key currency (because there is not currency or group of currencies to take up the position of dollar)

2. The world economy would be more detached from US economy

3. The rise of the emerging markets

Fun times :)

Saturday, January 05, 2008

Timing the funding of Roth IRA

Our Roth IRA money is invested in two vanguard mutual funds (one international and another large cap). Its about two years since we started roth IRA accounts with vanguard. Over this period i have noticed that the time of the year when mutual fund is funded matters. Personally, i feel funding mutual funds between December mid (after mutual fund pays the dividend) to Jan mid would be the best. The market in general seems to be down around Christmas eve (tax loss selling?) and also most mutual funds pay the dividend before christmas eve is paid. These two factors seems to lower the value of the fund during that period, allowing you to invest during the lowest point inf value to gain the best appreciation of your money.

There seems to be two pointers against this thinking
1. While timing the funding of mutual fund is not exactly timing the market, the value of the fund is closely tied to the market. So if you take a long term view (more than a decade view), the time of the year when you fund the mutual fund should not matter at all.

2. Since this is a roth IRA, dodging the mutual fund distribution cycle should not matter