Final Post

Well, it's been fun gang, but I've come to the conclusion that this will be my final post for this blog.  Why you ask?  Well, I've achieved what I've wanted from this blog and learned a bunch along the way. Here is a brief list of just some of the things I've taken away from running this blog:

1.) Allowed me to better understand a multitude of financial related topics: you know the old saying that if you really want to better understand something, you should teach it to someone else?  That's what exactly happened here with, and I was able to force myself to learn much more in order to better portray this information to my readers.

2.) This post marks 1 year of post.  If my count is correct, than this post is number 156 which would provide for 3 posts a week for one year.  My 1 year goal was more to see if I could have the discipline to do something of this nature for that long.  I have to admit that some posts were better than others, but the important thing to realize is that I did achieve my initial goal.

3.) Running a blog is hard!  Let no one make you think otherwise that it's easy keeping up with a blog.  It is a very intellectually taxing endeavor.

4.) I'm now distracted.  With the onset of my first born children, I no longer feel as motivated to keep up with this blog, and know for certain I will have no time when they come along.

Overall, it's been a great run, and I thank you for reading!  Good luck with your own Illusions!

Last Wonderful Moment of the Day: Getting the chance to write for you.

How can a Bank Make Money on 0.9% Interest

As someone who works in the lending field, I often find it shocking that financial institutions can make any sort of money with interest rates as low as 0.9% (I’m thinking car loans here).  Intuitively, this doesn’t make any sense.  If your interest rate is lower than the inflation rate (usually between 2-3%), how can you make any money off your loan?  Well, banks are smarter than you think.

First, consider how a bank makes money; it takes your checking and savings deposits for essentially free (you get the guarantee that your money is safe), and it loans out your funds to people who need mortgages, car loans, etc.  This is a pretty nice little game of arbitrage here.

The second interesting thing to think about is how a fully amortized loan is structured.  If you have a fixed loan, you pay the same amount each month, however the way a bank structures the payment varies throughout the life of the loan.  Your monthly payment is almost entirely interest the first couple years and almost entirely principal the last couple.  Think about this example:  you take out a $20,000 car loan for 60 months at 0.9%.  In the first year, you will pay $432.86/month, but your total interest portion for the year will be $2,005.20.  If you divide this total interest by the average monthly balance, you have an average interest rate of 10.8% for the first year.  Now say, year two comes along, and you decide to pay off your loan: the bank gets its money back and loans it out again all the while making 10.8% interest the first year.  This is why banks eventually encourage you to prepay your loans.  Inflation will eventually catch up to the payment. 

So, what should you do as someone with a car loan?  Well, there is not much you really can do?  If after 12 months you decide to pay off your loan, you will have essentially paid $21,921.77 in today’s money (assuming a 3% annual discount rate) for the privilege to borrow $20,000.  If you went through the full term of the loan, you would have paid $24,089 in today’s dollars.  Borrowing money has a price to it, so the best advice would be not to get into debt in the first place.  The contrary point is that if you can’t get to your primary source of revenue, because you don’t have a car, then the cost of inaction is far more than the debt load.

Whatever you choose, it’s important to realize what you are getting yourself into and how the bank is going to make money off of you.  You will then be able to make smarter life decisions if you are armed with this knowledge.

Wonderful Moment of the Day: The smell of fresh cut grass makes me believe that summer is finally here.

What’s a Jumbo Mortgage?

Believe it or not, but the economy is actually getting better.  Property values are increasing and mortgages rates are starting to go up.  In fact, home prices in some areas of the country are increasing at such an alarming rate that it is reminiscent to the pre housing crash of 2008.  Nevermind that for now, because I want to focus on an interesting problem for those of you thinking about buying a new house in these newly expense housing districts.

An interesting thing happens to mortgages when they cross the magical threshold of $417,000, they gain the title of Jumbo.  What does this mean?  Well, here are some things to take into consideration if you decide to obtain a jumbo mortgage.

-          Jumbo mortgages have higher interest rates than non-jumbo mortgages.  If you think about, mortgage companies are taking a big risk by giving you a whole bunch of money with the hopes of you paying it back over time.  We won’t even discuss the concept of interest rate risk.  With that in mind, if a mortgage financer gives you even more money, you are now considered even more risky, so interest rate increases are inevitable. 

-          The next issue with jumbo mortgages is that they are harder to get.  A $416,999 mortgage is much easier to obtain than a $417,000 mortgage, and because of this arbitrary dollar cut-off, you’ll likely have a much harder time convincing a bank to loan you that high amount of money.  You will need a higher credit score, and most likely a much lower LTV on your home. 

Unfortunately, this classification can really harm people who just happen to live in higher cost of living areas.  Places like DC and NYC often have regular 2-3 bedroom homes well north of this dollar amount, and so those of us looking to own our home will have a rougher go.  With that in mind, do everything you can to get your mortgage below that $417,000 threshold.  The easiest way is to pay a larger down payment up front.

Wonderful Moment of the Day: While being new to this whole baby thing, I’ve found the resources online to be invaluable.  It’s actually made my research very enjoyable.

When to Splurge???

Notice the asymmetric design?

Sometimes you can be too good at saving.  In fact, you start to reach a point where you get so fed up with your saving that you need to spend it on something.  This phenomena called "the splurge" is usually used as a destructive term and can do havoc in your finances if you are not careful.

Before we get into the concept of what's a "good splurge", we should first realize what the point of money is.  By itself, money is essentially useless, but it is purely a means of acquiring something else.  With that in mind, the use of money should have some goal behind it just like saving money should come with some goal.  Recently for me, my car needed new tires; in fact it just barely passed the state inspection because of this issue.  Tires for me are my splurge, and I've always been good at saving so that I can 1.) Retire early, and 2.) buy things that provide safety for my family (like good tires).

For me, a good set of all weather tires can revolutionize your car driving experience.  My personal brand of choice is Nokian, but a high quality Firestone, etc... is probably also good.  Let me tell you, those tires came in handy over the long weekend!  I had a wedding to go to, and it was over 400 miles of solid rain driving.  It even snowed on the wedding day in May!  Thanks to my new Nokian tires, I never had a problem with stability or felt like my family was at all in danger.  Safety is one of my chief concerns, and splurging on quality tires is a "good splurge".

What's important to you, and what is the goal for you to use your hard earned money?

Wonderful Moment of the Day: Happy Memorial Day!

102 Thrifty Ways to Save

In my quest to provide you with personal Finance and smart money-sense guides, I've scoured the Internet looking for some helpful household tips.  This site called "Thrifty Fun" has an interesting article on 102 tried and true ways to save. The list includes a whole slew of simple ways to make your dollar go that extra distance.  Below is a sample of my favorite tips from reach category:

Laundry Room:

- Pre-treat stains as soon as you notice them - why have to throw away your nice work shirt when a little scrubbing can save you big bucks.  Another helpful tip is to keep a "Tide Pen" at work in case you spill there.

Bathrooms:
- Re-use bath towels - You really need to only use about 2 towels per person per week if you are just drying yourself with them.  Just make sure to keep them hung up in a way to fully dry out.

Kitchen and Pantry:
- Learn to cook - It's amazing how much you can save by cooking your own meals versus buying out, not to mention how much healthier it can be.
- Bring leftovers to work for lunch - I do this every day, and not only do I eat better food, it's also way cheaper.

Bedrooms and Living Areas:
- Buy the highest quality sheets, furniture, etc. you can afford.  They will last for years.  In today's IKEA culture, this may not be widely though of.

Entertainment:
- Use your library for books, movies, music, and books on tape.  This is such a great and under-utilized source.

Shopping:
- Make a list for everything you need to purchase.  This will prevent all those impulse buys.

Clothing:
- Put on a sweater when you are cold.  My house is never more that 65 degrees F in the winter.

Holidays:
- Buy items on sale AFTER the holidays.  This requires a little more planning and forethought.

Crafting:
- Save your scraps and combine for interesting projects.  This is a really good option especially if you have kids.

Miscellaneous:
- Clean your own carpets with a rented or borrowed machine.  Really, how many times a year do you wash your carpets; once?  Renting a high end carpet washer will do a better job and cost less in the long run.

You can see the types of easy information that can make you into a handy, frugal, and overall better person.

Wonderful Moment of the Day: The sound of rain on your roof at night.

Listing Your Projects

I think it's pretty obvious from my writings that I'm a planner when it comes to life.  Everything doesn't need to be detailed out, but I like to be aware of what's coming down the road.  With that said, I often battle the same urges to procrastinate as anyone.  One of the best ways I've found to combat procrastination is to start with a list.  By seeing the projects named out before you, you will be more inclined to get started and finish your tasks.

With all that in mind, here are my projects for the year:

1.) Realign bricks around flower beds
2.) Re-paint stairs/hallway down to basement - this actually looks scary with dirty finger and hand-prints all over the place.
3.) Paint laundry room windows
4.) Paint side windows of garage
5.) Fix the outlets in the office and living room
6.) Start getting the house ready for babies - This one will be more work than I think I realize

Needless to say, I think these goals are pretty doable and will make things look rather nice around the old household.  If we apply the S.M.A.R.T. system to these goals we can make them more Specific (kind of already did this), Measurable (I can obviously know when they will be completed), Attainable (these are goals that can be done), Relevant (they make sense in my overall life goals), and Time-Bound (I want all these finished by the end of this year).

Now that I've seen these goals and have an action plan, actually completing them won't seem so hard.

What projects do you have for the year?

Wonderful Moment of the Day: Petting my cat while he rolls around in the grass.

Benefits of a Hard Day's Work

It's that time of year again; as the sun stays out longer and the days get warmer, Spring temperatures and the labor that comes with it are in full circle.  Whether it's Spring cleaning, yard work, or construction projects, you're sure to be doing more physical labor in the coming months than you probably did over the winter.  With that in mind, I wanted to examine for a little while the benefits of a hard day's labor.

The first benefit to a hard day's labor is the sense of accomplishment after its all over.  Recently, over the weekend, I spent about 8 hours doing yard work from planting this year's garden to mowing, and laying 24 bags of mulch.  After it was all over, the property looked really nice and I was rather proud of the work I did.  You might not be getting too many sources of accomplishment in your own job or daily routine, so a hard day's labor can be a welcome opportunity to really receive some positive reinforcement.

After your sense of accomplishment, you can be reassured that your results are physical proof of your hard labor.  I like to think about this as if I were a construction worker, the epitome of hard labor.  After all those rough weather days and hard labor, I can look up at the building my team just constructed and feel good knowing that we created something great.  The same thing can be said for a day's labor.  You will see the result, and if done with passion, can be quite proud of it.

Physical labor can also be considered great exercise.  You have to be careful here though that you aren't breaking your back over the labor.  Lifting improperly can put a damper on your future quality of life, but if you're just moving around all day you will definitely get your daily exercise.  That mild soreness you get the day after working hard can almost be pleasurable at times.

Working out on a job doing hard labor can change your perspective on things.  You might hate your cubicle job, but after a day outside doing tough work, you might appreciate not having to do that every day for the rest of your life.  Also, I usually find hard monotonous work soothing since I can let my mind wander and think about anything that's going on in my life.  Your brain needs time to process and analyze things in your life; what better time than when you are mowing.

Finally, I think one of the often overlooked qualities of hard labor is that you will genuinely feel discomfort and that's a good thing.  This may sound strange, but in today's comfort driven lifestyle, we try to ameliorate anything that might cause us a little pain.  By experiencing this pain every once and awhile, we can be reminded of how good we have it and appreciate even more the comfortable times.

I wouldn't want to make a career out of it, but every now and then a little hard work is good for the mind, body, and spirit.  It's a humbling task that can allow you to explore other aspects of your life.  If you're feeling a little lost, why not let your mind wander and do a project?

Wonderful Moment of the Day: Got all my Spring yard projects complete!