Just a few quick updates on our finances:

-Went ahead and requested a $15K Balance Transfer from Chase to pay off our HELOC. Of course we will still owe but the interest rate is 0% until December 09. It will be our #1 priority to pay this off with every spare dollar.

-Our refi is proceeding along smoothly. Our closing is scheduled for April 28th. The rate we are getting is 5.0% with no points on a 30-year fixed. We are consolidating a first at 5.375% and a 2nd at 5.99%, and our new payment will be the same as our old first, so I think it is a good defensive move.

-We applied for new term life policies through USAA. Our current policies are with Lincoln National and are about 3 years old (they were 25-year policies when we got them). Lincoln has been in the news lately for applying for TARP money and their ratings are scaring me. Since my wife is pregnant now, I'd rather apply for a new policy now should (god forbid) anything happen during the birth. USAA is a rock-solid A++ rated insurer, and we do all of our banking with them, so it also makes sense to keep life insurance policies with them. Their rates are quite good and we decided to extend out to 30-year policies with the 2nd child coming. This way if we decide to go for a 3rd we will be covered. If not, their rates were the same whether it's 25 or 30 year so longer is better. We haven't gotten final approval yet but we went through the medical screens so it should be in the next week or so.

With that, I am off to get ready for a short camping/hiking trip, two of my favorite cheap things to do!

I got an interesting offer from Penfed credit union this morning: a balance transfer offer with a 2.99% APR fixed for the life of the balance, with a transfer fee of 2.5% capped at $100.

I'm not currently a member of Penfed but I get their newsletters. I am actually considering becoming a member and applying for a credit card just to get this offer. I am hoping to get a credit limit of close to $20K. If so, I will be able to pay off our HELOC. I always like to take secured debt and convert it to unsecured. Plus it takes a floating rate (HELOC is prime minus 0.5%, with a 3.5% floor) and converts it to a fixed rate (2.99%). Even though the HELOC interest is tax-deductible, rates have nowhere to go but up so I see this as a win-win. I'll keep you posted on how the Penfed offer plays out.

In the midst of all the news about Chase cutting credit limits on some of their credit card accounts, I wanted to mention that this month, for no reason at all, Chase increased the credit limit on my Freedom card from $6500 to $9500 (almost a 50% increase). My credit score is excellent, and I use this card for everything (racking up about $2-3K in charges a month, and paying off in full every month). That probably explains the move. From what I have heard, the latest trends seem to be creating a bigger divide between those who have good credit and those who don't. So if you have a low FICO, Chase cuts your limit, if you have a high FICO, they raise it. The only thing I don't get is, since I PIF every month and earn $250 in rewards every 6 months, why would they even want me as a customer? They are losing money on me as it is!

Since we are currently in the process of doing a refi, our new lender sent us a copy of our credit scores. This must be a new thing because I don't recall get this form last time we did a refi a few years ago.

The form lists 3 credit scores for both my wife and I, one from each bureau. The Equifax score is called Beacon 5.0, the Transunion score is called Empirica 950, and the Experian score is called Fair Isaac Score 2. Apparently they all use similar but slightly different algorithms, but all are scored on a range of 300-850.

My scores were 754 (Equifax), 729 (TU), and 755 (Experian), for an average of 746. My wife's were slightly higher at 768, 732, and 762 (average 754). You can see that there is approximately 25-35 points of variation depending on which bureau generates your score.

This also gives me the opportunity to check our real FICOs against the "fake" FICO that Creditkarma.com gives out for free. CK.com says they use the TU credit report to approximate your score. My CK score is 775, and my wife's is 751. Interestingly, my CK score is higher than my wife's by 25 points, although her real scores were higher than mine. Obviously the credit score is not an exact science. That is why it is so scary that a few points either way can make a big difference in your interest rate! After seeing this, I will be sure to take the CreditKarma score with a grain of salt.

Altogether, I am happy with our scores as I think we will be getting a good rate (maybe not great though).

Well, I finally decided to pull the trigger on a refi. Rates have been steadily dropping at our credit union, and they reached 5.0% on a 30-year last week, so I put in an application. Got the phone call today locking in at 5.0%, with around $2000 in closing costs. We would be consolidating our 1st (at 5.375%) and 2nd (at 5.99%). The 2 payments are currently $1070 and $570, and the new payment would be $1090, so we effectively get rid of the 2nd payment. We would continue to pay the $570 as extra principal, but could stop if times got tough.

The big question mark is the appraisal. Values are all over the place so it will really depend on who does the appraisal and how many data points they get.

Oh, we get one free floatdown (we have a 45-day lock), so I will continue to watch interest rates to see if they go below 5.0%. With the Fed's announcement today, I am betting they will go to at least 4.875, if not lower. Rates on 30-year Treasuries went down .25% today, so I may even get 4.75% if I'm lucky.

Have you ever done a financial fire drill? It's the equivalent of pretending an emergency has hit, and looking at what it does to you budget & savings. Most people don't sit down and do this important test until the fire is already burning. It's important to have a game plan before this happens as it will relieve a lot of the fear and stress that would hit in the event of an emergency.

I did it yesterday with my budgeting spreadsheet and was pretty happy with the results. I tried 3 scenarios; in the first 2 either my wife or I lost our job, without severance. The third scenario (doomsday) I figured we both lost our jobs tomorrow with no severance. I figured we would stop contributing to retirement immediately, so I cut our 401k contributions to 0, and stopped the biweekly Roth contributions. I also eliminated child care costs and savings for travel. I also cut back our overpayment on our HELOC.

In scenario #1, where my wife lost her job, the hit was not that bad (she makes about 50% of what I do, but provides our health insurance). I assumed we would go on COBRA at least short term, paying about $260 every two weeks (double her current premiums). This is probably overly conservative, since COBRA is supposed to be subsidized right now by the US of A. Surprisingly, we would actually not have to dip into the EF at all. We would probably not have to cut out vacations completely, and could still contribute a little to our retirement. So it would not be a catastrophe by a long shot.

Scenario #2 involves my losing my job tomorrow, which would obviously be a huge hit to our income (it would go down by approximately 66%). This is moderated a bit by the fact that we would still have health insurance through my wife's job. In this case we would have to draw approximately $1800-$2000 a month from the EF. Since our EF is about $41K right now, it would last us at least until the end of 2010, or about 22 months. I feel pretty confident that we would not get to this point without me finding some kind of work (even at a drastically lower salary).

Scenario #3 is the doomsday scenario where both my wife and I lose our jobs tomorrow, with no severance. In this case we'd have to draw about $5K a month out of the EF, which means it would only last until November 2009. Obviously not a pretty picture, but still an 8 month cushion for at least one of us to find a job.

Barring a total worst case scenario, I think our household would probably be able to weather most storms that could come our way. I recommend everyone run a FFD with their own household budget, to see how close to the edge you are.

I had some free time today so I went to Kelley Blue Book (

/http://www.kbb.com) and updated the values of our 2 vehicles. I track these values in Quicken because it gives me a sense for how fast vehicles depreciate (hint: very).

Our 2003 Subaru is worth about $10 grand. The original MSRP was $25.5K. So in 5.5 years it has lost just over 50% of its value. A good chunk of that (about $3000) occurred in the last year. New car sales have been so pitiful that it is pushing down the used car market as well.

Our 2nd car is a 98 Subaru station wagon. It's pretty utilitarian but it gets us around when we need it (I work from home so I don't need a daily vehicle). It has around 90K miles on it and its value has dropped to $5100. We paid $6700 for it 2 years ago so that's not too bad. Depreciation slows a lot after the first 5 years, in general.

The good news is that we are getting close to the point where we could just go to liability coverage on the 98 Subaru. Our insurance is really cheap so we are keeping full coverage for now, but another couple of years of depreciation and we might drop it! If we dropped collision and comprehensive on the 98 Subaru, we would save $220 a year on our insurance. If the car was ever stolen or totaled and we were going to file a claim, we would get back the blue book value minus our $1K deductible. Right now, that would be $4100. That works out to an 18-year breakeven period. When it gets down to about 12-15 years we will drop the comprehensive/collision, but for now it makes sense to keep it.

Well, it's official. We saw the sonogram last week, and we are having another baby! We had a hard time getting pregnant the first time, but this time it only took about 2 months, so we must be getting better at it! Obviously, this is a huge change for our lives in general, but it has specific effects on several areas of our finances:

Taxes
With an additional exemption and child tax credit, my estimate is that our federal tax bill will go down by $1900, and our state taxes by $250.

In 2008, we were just on the cusp of the 15% federal tax bracket, which is a good place to be. With the additional $3650 exemption, we can now reduce pre-tax 403b savings by $3650 and still be on the cusp of the 15% bracket. We will increase our Roth savings by $3650 to keep the same savings percentage. So some of the tax savings will be reduced by cutting back on the 403b contributions. The rest of the tax savings will go towards our increased expenses.

Day care
My wife works part time, so our daycare needs are reduced already. My mother will be watching the kids once a week. We have a nanny for the other 2 days. We will probably give her a significant raise due to the increased workload. This will increase our daycare costs from around $800 a month to about $1000.

Maternity leave
We were not expecting to get pregnant so quickly, so we will come up a bit short on leave. My wife earns 6.5 hrs every two weeks of general leave (sick, vacation & personal). Right now she has saved up about 84 hrs. If #2 is on time, she will have about 171 hrs by the time she has to take her leave. Her short term disability will cover 6 weeks at 60% pay. The rest comes out of paid leave, and then unpaid leave when she runs out. We are calculating that we will only need to take 2 weeks of unpaid leave, so this is a fairly minor hit to our budget.

Expenses
We will definitely see some increases in our weekly expenses (diapers, clothing, food). My wife plans to breastfeed again so we won't need formula. Except for the diapers, we are expecting these expenses to increase pretty gradually so we will adjust to them when we notice a big difference in our budget. Probably we will see some cost savings in other places since I think it will be harder to go out.

Overall, the effect on our budget will not be nearly as drastic as when we had our first child. However, I know my sleeping budget is going to see some serious cuts!

A comment to my recent post reviewing the ESPlanner software guided me to a finance professor named Sherman Hanna, who created a consumption smoothing spreadsheet, called LCS. The commenter was curious how this (free) LCS spreadsheet compared to the fairly expensive ESPlanner software ($149 for the basic, $199 for the premium with Monte Carlo simulation).

I did a basic test using my family as a test case. My family consists of myself (33), my wife (32), and my daughter (2), with another child expected in the next year. I started with $70K in retirement savings and approximately $120K/$100K in pre/after tax earnings. I assumed we paid for both childrens' college in full, at a price of $20K per year per child (today's dollars). I tried to put the same inputs into both software, although it's not always possible (ESPlanner wants pretax income, and LCS after-tax; ESPlanner calculates Social Security for you based on your earnings, and LCS wants you to input expected SSI, for example). I assumed early retirement at age 60, and taking SSI at age 70, with 75% of the projected benefit. The results? A huge variation between the programs. Here are my observations.

Inputs into LCS were much simpler. The program only needed a few basic numbers to give you a initial estimate. I'd venture that the estimate is only as good as the numbers you put in though. Digging deeper you find that most of LCS assumptions can be changed manually, which allows as much or as little detail as one would want. ESPlanner requires a thorough breakdown of most aspects of your finances. ESPlanner, while somewhat rough around the edges, is several orders of magnitude more streamlined in its interface. With LCS, you pretty much need to know Excel inside and out.

Outputs from LCS are pretty rough as well. Printing a pre-defined print-area will give you some basic summary info in both table and graph form. ESPlanner's output is better, starting with a formatted PDF summary document, along with supporting spreadsheets (ESPlanner uses Excel as the engine to do its calculations).

However, the biggest difference between the two is the handling and definition of "consumption". ESPlanner defines household consumption as gross after tax spending minus housing expenditures (mortgage, tax, maintenance, insurance). Housing expenses are entered in detail fashion (including loan info and schedule). Then ESPlanner calculates a household factor which is based on the number of adults and children. It assumes some economies of shared living. So 2 adults can live together as cheaply as 1.6 singles (by default). Children are handled in a similar fashion. It divides the household consumption by the household factor to give the "consumption per adult". Then it attempts to smooth the consumption per adult over the family's lifetime. The whole approach seems reasonable to me, and the economies of shared living data is based on studies that have been done.

On the other hand, the LCS approach is somewhat different. The LCS formula uses a complicated ratio of household size, likelihood of death, and "thriftiness factor" to approximate the change in spending from one year to the next. All expenses are lumped together, including housing, and no allowance is made for paying off loans. This causes spending to change relatively slowly from year to year, even if the household changes size drastically. This approach does not seem as intuitive or reasonable to me as the ESPlanner method.

The two programs produce drastically different spending plans in our case. Here is a chart detailing the 2 different savings plans.
Here is a chart detailing the 2 different spending plans.

ESPlanner recommends saving only $9000 this year (including all retirement contributions), with savings generally growing up to about $20K just before college, whereupon savings basically stops, resuming gradually as each child graduates, and peaking at $55K just before retirement. This produces a living standard per adult of $35880 in today's dollars up to age 100. Remember that ESPlanner does not include housing costs in consumption. Including housing, total household spending is in the range of $90-95K pre-college, and around $65K afterward (the "Empty Nest" phase).

LCS recommends saving $20K this year, increasing to $32K in 2 years, and then gradually decreasing to around $20K by the time the kids reach college. Household spending (including housing) starts at $80K and basically rises continuously throughout life, reaching a peak of $105K at age 75, and then gradually declining to $66K at age 100.

Since these plans are very very different, they obviously cannot be both be right. For me, it comes down to whether you think spending follows the ESPlanner model (non-housing spending is strongly correlated with household size) or the LCS model (overall spending grows throughout life and changes very slowly with household changes). Also, ESPlanner's treatment of housing expenses as separate from consumption seem more logical to me. Your housing expenses would not change much if a child moved out, but your food and entertainment costs would likely see big drops. LCS seems to make only a small allowance for this. Also, the fact that ESPlanner allows for loans to be paid off is a big plus for me. In LCS, it is probably possible to enter housing costs manually as line item expenses which could be drastically reduced when a loan is paid off, but I have not tried this as of yet.

The big price tag for ESPlanner will likely discourage many but I believe the accuracy of its planning tools makes more sense for detail-oriented planners. On the other hand, LCS freeware nature, combined with a more conservative spending model, will probably suit many just fine.

LCS can be downloaded from

http://hec.osu.edu/people/shanna/lcsprogram.htm, and an explanation is available at http://hec.osu.edu/people/shanna/lcs/overview.htm.

ESPlanner is available for purchase at http://www.esplanner.com.

I recently purchased ESPlanner from www.esplanner.com. The software is a financial planning package developed by Laurence Kotlikoff, Professor of Economics at Boston University, and Dr. Jagadeesh Gokhale, Senior Fellow at the Cato Institute. Having played around with it for about a week, I figured I would post my initial thoughts.

First, the idea of the software is "consumption smoothing". In other words, the goal of the software is to attempt to generate a level standard of living throughout the user's life. It does this by varying the amount saved or dissaved year-by-year. I think this is a great concept, because it is a more holistic approach, taking into account changes in household size (children being born and moving out), housing costs (buying or selling a home), large one-time purchases (vehicles, vacation homes, etc), and one-time windfalls (inheritances), as well as a host of configurable events, or ongoing or recurring situations. The software creates a detailed plan on how much to save or dissave (spend down savings) each year in order to maintain a smooth living standard per adult. ESPlanner takes into account economies of scale, so a 2-person household can live as cheaply as 1.7 single-person households. Likewise, as household members are added, there are similar economies of scale. It is very computationally intensive and generates a lot of data in spreadsheet form, along with a consolidated PDF summary report.

Now to the negatives. The design of the software is quite spartan. The interface reminds me of freeware, which is not a compliment. I noticed a number of small bugs, none of which made the software unusable but were nagging nonetheless.

For younger people, I would take ESPlanner's recommendations with a grain of salt. The software requires many detailed projections of expenses, income, savings, household changes, etc. Any error in these projections could have a big effect on your plan and could throw off your projections. For older people who are approaching retirement, the variables are fewer and less fuzzy, and the projections are probably more accurate.

I wanted to go over my investing strategy, since it seems a little unorthodox (but really isn't). My wife and I follow Scott Burns' 10-speed portfolio. Mr. Burns (a finance columnist for the Dallas Morning News and USAA) is more famous for his Couch Potato portfolio, which is equal parts Total Stock Market index and Treasury Inflation Protected Securities. Since this is 50% bonds, it is a bit conservative for me (although ironically it has outperformed the S&P 500 over the last 5 years).

Luckily, Mr. Burns has created more complicated versions of his CP portfolios, with equal parts of different asset classes, up to the Ten-Speed, which has 10 equally-sized different "blocks" in it. Here is the breakdown of the Ten-speed:

Block 1: Domestic total stock market
Block 2: Treasury Inflation Protected Securities
Block 3: International total market
Block 4: International bonds
Block 5: REITs
Block 6: Energy
Block 7: Large U.S. value stocks
Block 8: Small U.S. value stocks
Block 9: Emerging markets
Block 10: International value stocks

The reasons I like this portfolio:

-It is aggressive. With 80% equities, it fits my risk profile. In my case, I slightly modified Block 4 to use International Inflation-Protected Bonds, so all my bonds will keep up with inflation. I see inflation as a big problem in the future with all our government's pending obligations. The only real way to fund these obligations will be to print lots of money, which causes inflation.

-It is simply to implement and maintain. Simply total your portfolio, move the decimal point one digit to the left, and you've got your allocation in each block. Rebalancing is just as easy.

-It can be very cheap to own. I use Vanguard funds and ETFs whenever possible. Because of this, the average expense ratio for my portfolio is around 0.50%. I have read numerous studies that the best indicator of future performance is low expenses. Almost all of the 10-speed blocks are available as index funds or ETFs, which makes it relatively easy to find cheap choices for the blocks.

-It is diversified. With about 27% in large cap US stocks, 13% in small cap US stocks, 20% in international stocks, 10% in emerging markets, 10% in REITs, and 20% in inflation-protected bonds both here and abroad, it is not concentrated in any one asset class. This meshes nicely with David Swensen's investing strategy. Swensen is the incredibly successful manager of Yale's endowment, which has returned over 15% a year for the last 10 years. Swensen does not advocate holding large portfolio holdings in any one asset class.

The one thing I don't like about this fund is that it can require a lot of money to fund the minimums on 10 funds. Since our retirement accounts are split between 4 different accounts, we couldn't have 10 funds in each account and still make the fund minimums. The way I have gotten around that is to spread the 10 funds over 3 of the accounts. The 4th account is a 403b which has limited fund choices, so I use a more traditional asset allocation there. Once we've gotten large enough balances built up in the other 3 accounts, I plan to institute 10-speed portfolios in each one, which will make management easier.

For more information, see:

http://assetbuilder.com/default.aspx
http://en.wikipedia.org/wiki/Scott_Burns_(newspaper_columnis...

Well, I've been posting for awhile in the forum, so I thought I'd try my hand at blogging, since so many people seem to love it so much. I guess it can be kind of carthartic in a way.

To start off things so everyone is on the same page, I thought I would summarize my financial mindset:

1) Minimize unnecessary lifestyle expenses. This does two things simultaneously: make saving easier, and reduce the amount you need to retire on. My wife and I are pretty frugal people. We don't eat out a lot, indulge in mindless consumerism, or have many expensive hobbies. I do like to golf but I do it so rarely (and poorly) that it can barely be considered a hobby. Before our daughter was born we skiied a few times a year, and will probably continue to do that in the future. We drive older vehicles and are trying to get a good amount of life out of them. I work from home and my wife commutes only a mile or two so we don't put a lot of wear and tear on our vehicles. I am hoping to get 10 years out of them.
2) Splurge on things that matter, but pay cash for them. For one, we love to travel. It isn't as easy as it used to be with a young child, but we still manage to fit in 1 or 2 major vacations and a few long weekends a year. We save up for them all year long and pay cash when it's time to go. Technically we use a cashback credit card and then pay it off when the bill comes in. We love watching movies, so I "invested" in a low-end but functional home media center in our basement. Of course we paid cash for all of it. We don't go out to the movies nearly as much now that we have a kid, so this is the next best thing.
3) Save aggressively for retirement. I'd love to retire early, so I have tried to make retirement savings a priority, more so in recent years. My wife and I both took time off of working when we were younger to get master's degrees, so we started a little late. In addition, we didn't save much the first couple of years after we bought out house. But we've tried to make up for that the last few years, saving more than 20% of our pay yearly. That includes maxing out my SIMPLE IRA, putting about 10K in my wife's 403b, and maxing out 2 Roth IRAs. Our investments are about 80% stocks and 20% bonds, because I feel that 100% stocks is not going to get you that much higher return and is going to make for a rough ride along the way.
4) Use debt judiciously. I haven't followed this rule as well as I've liked. We don't carry credit card debt month to month. Our cars are paid off. Student loans are a thing of the past. We do have a mortgage, 2nd mortgage, and HELOC. The 2nd mortgage was part of the financing when we bought our house and is about 1/2 way paid off (it was a 7-year loan). The HELOC was supposed to just be for emergencies but I decided this year to take a large chunk out and put it in a savings account in case the bank decided to freeze our line. The rate is prime minus 1/2, currently 3.5%. Our savings account pays 3.75% so we actually make a little money doing this. My goal is to leave the savings account alone, giving us a sizeable (6-month) emergency fund, and pay down the HELOC over the next 3 years.

Well, that's the meat of it anyway. I'll be posting more detail in later entries. I don't want to give it all away now, or I'd have nothing to talk about!