Sunday, September 11, 2016

Debt Calculator

How long will it take me to get out of debt?  How do I figure out what order to pay off my debts?  Which debt payoff method should I use?  These are all questions I've heard many times, and without getting very personal details from the asker, the best answer I know is to send them to an online debt calculator.  Problem is I didn't like the ones I was finding.

Solution:  I decided to make my own debt calculator.  It compares the time and amount of interest paid if you were to pay the minimum payments for the life of each loan versus three debt pay-off methods: Debt Avalanche, Debt Snowball, and Debt Spiral.  I made it in Google Sheets so that people could download their own copy and keep the results without worrying that they were downloading a virus.

When you click on the link above, it'll take you to this page.

By clicking "Make a copy," it will add a copy of the Debt Calculator to your Google Drive.  If you don't have a Google account and don't want to make one for some reason, here's a downloadable Excel version.

If you have questions about how to use it, find any bugs, or have any feedback about features that you would like, please leave a comment here.

Friday, April 17, 2015

Why You Don't Want a Tax Refund

In case you hadn't heard, Tax Day was this week.  As I was perusing my preferred news outlet, I came across a link to this article.  It explains how criminals file tax returns on behalf of others, both living and dead, taking advantage of several flaws in our tax system.  A young couple, for example, was supposed to get a $3,500 tax refund this year, but because someone else already filed taxes as the husband, it would be months or years before they see a dime.  This couple was going to use the refund to help with the downpayment on a house, but now they're going to have to move in with his mother.

I have two issues with this article:  
  1. While $3,500 is a substantial chunk of change, it should never be the difference between BUYING A HOUSE and MOVING IN WITH MOMMY. In other words, this couple is probably not even close to being ready financially to buy a house.
  2. Why in the world is your refund $3,500 in the first place?  
I know that most people see tax returns as "surprise" money, but it's YOUR money and you are loaning to the government, interest-free.  If this couple had set-up their W-4s correctly, they wouldn't be waiting for $3,500 or moving in with mommy, they'd have their money.

"Well, even if I put $3,500 in a savings account for a year, I'd still only get like 50 cents in interest.  So it's not worth the effort to fix my W-4."  If you've ever thought something similar to this, try thinking about it like this:  You could give yourself a raise of $300 per month with that $3,500 refund.  Now, you can obviously get by without this extra $300 a month, because otherwise you would have fixed your tax withholding long ago, right?  But if you paid even a dollar in interest on a credit card, mortgage, car loan, etc., you could've netted way more than 50 cents.  Here are a few examples (here's the math behind them):

Example 1 
Say in January 2014, you had a $2,000 balance on a credit card with 18% interest rate and $50 minimum payment.  If you pay the minimum payment until it's paid off, it'll take 5 years and cost ~$1,000 in interest.  Maybe you're a little better and only pay the minimum payments until April 2015, when you receive your $3,500 refund and then completely pay it off.  In this case, you pay the debt off in 15 months and pay ~$420.  If instead of waiting for the refund, you give yourself a $300/month raise and use it to pay off credit card ($350 monthly payments), the debt will be out of your life in 6 months and you'll have limited the paid interest to ~$90.  This approach saves you about $330, which, last time I checked, is substantially more than 50 cents! 
Example 2
If we replace the credit card debt in Example 1 with a student loan of $50,000 at 6% and $500 minimum payment, the same three approaches look like this:  
  • Only minimum payments takes almost 11.5 years and costs ~$19,200 in interest
  • Minimum payments with a lump sum of $3,500 each April takes just under 7 years and costs ~$11,300 in interest
  • Pay $750/month (initial minimum payment + $300 each month) until it's paid off takes just over 6 years and costs ~$9,900 in interest
This saves you ~$1,400 over 7 years or ~$200 a year.  Saving yourself $1,400 seems like a pretty good use of the 30 minutes it would take to fill out your W4 each year.  When was the last time you got paid $400/hour?
These examples require that you change NOTHING about your current lifestyle, spending habits, or career path.  All you have to do file a single page form with the US Government, and I didn't even take into account state income tax returns.  So you should definitely fix your W-4 (talk to your HR person if you don't know how to do it) and get super excited about the higher paychecks you're now getting instead being disappointed that you don't get to wait until April for a lump sum.

Also, in case it wasn't obvious, you should file your taxes as soon as you're able, so criminals don't have the chance to file them for you and cause you a massive headache.

IMPORTANT NOTE:  If you're like me, you might be thinking "Can I get a free loan from the government by underpaying my taxes until April?"  Answer:  No.  If you substantially underpay your income taxes, the lovely government will hit you with a penalty on top of the taxes you owed all along.  So the goal should be no money due AND no money paid at tax time.

Thursday, February 26, 2015

The Debt Spiral

Throughout the personal finance community, there's a lot of debate over what the best way to pay off debt is.  The two main approaches are the Debt Snowball (popularized by Dave Ramsey) and the Debt Avalanche.  Both methods say to pay the minimum payment on all debts except for one, focus all extra payments on that one debt until it's paid off, then repeat with the remaining debts.  The difference comes with the order; all the methods discussed below are included in this handy Debt Calculator I made.

From a strictly mathematically perspective, the Debt Avalanche is the best method because you end up paying the least interest. With this method, you order the debts by interest rate, starting with the highest.  For example, say you had the following 5 debts:
  1. $2,500 on a credit card at 8.5%
  2. $10,000 on a home equity loan at 3%
  3. $8,000 on a student loan at 6%
  4. $7,000 on another student loan at 5.2%
  5. $18,000 on a car loan at 5.5%
Using the Debt Avalanche, you would pay them off in the following order to limit paid interest: credit card at 8.5%, student loan at 6%, car loan at 5.5%, student loan at 5.2%, and home equity loan at 3% (i.e., A, C, E, D, B as shown in the animation).  However, the first few "wins" may take awhile, and it can be harder to stay motivated.  If you don't stay motivated, you'll end up paying more in interest no matter what method you use.

Debt Avalanche
The "wins" come the quickest with the Debt Snowball method.  I used to think this method made absolutely no sense, and to a financially rational person, it doesn't.  But the people who find themselves in debt probably aren't thinking in a financially rational way, or they wouldn't be in such a mess.  These types of people need the encouragement that comes with completely paying one of their debts off.  Using the same example, the Debt Snowball would pay off the debts as follows: $2,500 credit card, $7,000 student loan, $8,000 student loan, $10,000 home equity loan, and $18,000 car loan (i.e., A, D, C, B, E).

Debt Snowball
Despite the benefits of the Debt Snowball, I have a hard time conceding that you should pay off a $3,000 debt at 2% over a $4,000 at 20%.  So, I thought, "What if I used both the interest rate and the debt balance to determine the order?" instead of one or the other.  I call this the Debt Spiral (because of how the graph looks).  Basically, you divide the debt balance by the interest rate, and then order it smallest to largest.  If you have a debt with a 0% rate,  it goes last unless it's temporarily 0%, then use the eventual interest rate.  The Debt Spiral would pay off the debts in our example in the following order: 1) $2,500 on a credit card at 8.5%, 2) $8,000 on a student loan at 6%, 3) $7,000 on another student loan at 5.2%, 4) $18,000 on a car loan at 5.5%, and 5) $10,000 on a home equity loan at 3%.

Debt Spiral
So why should you use the Debt Spiral instead of the other well-known methods?  Because it simultaneously limits the amount of interest you have to pay like the Debt Avalanche while spreading out the "wins" to keep you motivated like the Debt Snowball.  Here's an example to illustrate (all the math can be found here).
John Doe makes $50,000/year and $3,300/month take-home.  At the end of each month he has just under $45 left to save, but he has the following 4 debts
  1. $5,000 on a credit card at 18%, minimum monthly payment $125
  2. $12,000 on a personal loan at 10%, minimum monthly payment $220
  3. $6,000 on a car loan at 3%, minimum monthly payment $75
  4. $2,500 on a student loan at 5%, minimum monthly payment $35.42
John would like to use the $45** to help him pay off his debts faster, but is unsure which method would be the best.. 
If John paid only the minimum monthly payments
Debt Balance Interest Rate Pay Off Time Total Paid Interest Paid
$5,000 18 % 61 months $7,599.81 $2,599.81
$12,000 10 % 73 months $15,977.28 $3,977.28
$2,500 5.0 % 84 months $2,959.36 $459.36
$6,000 3.0 % 90 months $6,693.31 $693.31
Totals $33,229.76 $7,729.77

If John added the $45 to his Debt Avalanche
Debt BalanceInterest RatePay Off TimeTotal PaidInterest Paid
$5,00018 %39 months$6,577.83$1,577.83
$12,00010 %57 months$15,515.12$3,515.12
$2,5005.0 %59 months$2,911.94$411.94
$6,0003.0 %64 months$6,620.72$620.72

If John added the $45 to his Debt Snowball
Debt BalanceInterest RatePay Off TimeTotal PaidInterest Paid
$2,5005.0 %34 months$2,677.03$177.03
$5,00018 %49 months$7,317.78$2,317.78
$6,0003.0 %60 months$6,582.06$582.06
$12,00010 %65 months$15,884.31$3,884.31

John now wants to determine which order the Debt Spiral method would generate.  So he calculates the debt to interest ratio for each debt and orders them from smallest to largest.
Debt BalanceInterest RateDebt / Interest RatioDebt Spiral Payoff Order
$5,00018%5,000/18 = 2781
$12,00010%12,000/10 = 1,2003
$6,0003.0%6,000/3 = 2,0004
$2,5005.0%2,500/5 = 5002
John would pay the minimum payments on his student loan, personal loan, and car loan while putting every extra dime he has towards paying off the $5,000 credit card balance.  In this case, it happens to be $170 ($125 + $45).  Once the credit card is paid off, he'll have an extra $170 each month to start paying off the $2,500 student loan.  So he'll be paying $205.42 ($35.42 + $125 + $45) each month to the student loan until it's paid off.  Once the student loan is paid off, John can use the $205.42 to help pay off his $12,000 personal loan.  And finally, the $425.42 ($220 + $35.42 + $125 + $45) that was going towards the personal loan will be added to his $6,000 car loan minimum payment ($75) until it's payed off.  Now that John is debt free, he has just over $500 to save each month and hopefully keep himself out of debt!
 If John added the $45 to his Debt Spiral
Debt BalanceInterest RatePay Off TimeTotal PaidInterest Paid
$5,00018 %39 months$6,577.83$1,577.83
$2,5005.0 %46 months$2,841.63$341.63
$12,00010 %59 months$15,661.03$3,661.03
$6,0003.0 %64 months$6,621.67$621.67
As expected, the Debt Avalanche produced the lowest interest paid.  But it only beat the Debt Spiral by $76.54 or 1.2%, whereas it beat the Debt Snowball by $835.57 or 13.6%.  Also unsurprisingly, the Debt Snowball wins the contest for earliest debt paid off by a few months, but the Debt Spiral actually ties the Debt Snowball for the average time between debts paid off.
MethodTime Until 1st "Win"Average Time Until "Win"
Minimum Payments61 months77 months
Debt Avalanche39 months54.75 months
Debt Snowball34 months52 months
Debt Spiral39 months52 months

So the Debt Spiral is a win-win!

**Paying off debt quickly requires you to live differently.  In the John Doe example, he doesn't change anything about his life and so it takes several years to pay off all four debts.  Cutting expenses, getting a second job, and selling stuff would have helped him cut years off his debt sentence.

Friday, January 9, 2015

Argument for Emailing Invitations

For some reason, whenever I bring up the idea of emailed invitations, people respond with a grimace and a "That seems tacky."  But why is it tacky?  I have yet to hear a sound, logical reason for this.  And even worse, I haven't found anyone truly arguing FOR email.

The main argument for paper invitations is etiquette.  That's what Emily Post says we have to do, and besides, it's tradition!  I understand some traditions come from culture, but this one seems to have stuck around because the wedding industry makes a lot of money off people who think they have to have double-enveloped invitations addressed with the finest calligraphy.

This reminds me of a story I heard several years ago.
Every time Sarah made pot roast, she would cut off both ends before putting it in the oven.  One night, her husband John asked why.  Sarah replied, "I don't know.  That's just the way my mom always did it."  So the next time Sarah and John visited her parents, John asked her mother why she always cut off the ends of the roast.  Her mother thought about it and said, "I don't know.  That's just the way my mom always did it."  John, really wanting to get to the bottom of the mystery, then called Sarah's grandmother to ask her why, and she replied, "So it would fit in the pan."
Tradition can sometimes force us into doing wasteful things for essentially no reason.

Another argument I've heard is "Not everyone is technologically savvy."  It's 2015 and all of my grandparents have computers and email addresses, so this reasoning's relevancy is fading fast.  But even if there are a few people on your invite list who don't have email addresses, this doesn't mean that everyone needs a paper invitation.  You could even use this opportunity to encourage them to get an email account.  "Grandpa, until you get an email address, you are grounded from all family events, including but not limited to weddings, showers, christenings, birthday parties, and funerals."

And the most ridiculous and infuriating argument:  "Compiling all of your guests' current email addresses can be a daunting task."  I'm sorry, but how is this any different than having to compile a list of their mailing addresses?  Actually, gathering email addresses is easier because people move way more frequently than they change email addresses.  Anytime I am about to get a formal invitation, my friends end up texting or EMAILING me to ask for my address, which I sometimes don't know, depending on how far in the future they plan on sending me something.

So now that I've dismissed all the half-baked arguments against emailing invitations, here are the reasons FOR email.
  1. The most obvious:  It's less expensive.  Whether you just send a regular email or use a service, paper invitations cannot compete.  Between envelopes, RSVP cards, stamps (don't forget the one on the reply card), other inserts, and then the actual invitation, the costs can really add up.
  2. Keeping track of RSVPs has never been easier.  Instead of asking your guests to mail back RSVP cards, which could get lost in the mail or be illegible, you can provide links or embedded RSVP forms which automatically populate all the responses in a spreadsheet.
  3. It's a lot easier to individualize each invitation.  Each potential guest can be sent a separate invite with their own RSVP card so it's obvious exactly who they can bring.  When using paper invitations, people tend to make a generic one and then count on the recipient understanding some ancient addressing rule that you can only RSVP for the exact names on the envelope and up to the number of guests indicated (see:  John Doe vs John Does and guest).  How are you supposed to learn this rule if you've only ever seen it addressed without a guest?  Most movies imply that you always get a guest so it's not crazy to assume that!
  4. You waste less.  Most guests will probably end up throwing the invitation away.  With emailed invitations, there's no trash and you don't have to worry about your identity being stolen because one of your relatives didn't shred the invitation (i.e., the piece of paper which has your full name, mother's maiden name, father's middle name, and town where you grew up).
  5. Speaking of which, you don't have to worry about your identity being stolen.  See above.
  6. If you have a typo, you find out right away.  If you make a mistake with the email address, the server should kick it back to you in seconds.  If you make a mistake with a mailing address, it'll take a couple days if at all.
  7. You can get notified when they've received/opened/read/clicked the link.  With paper invitations, you basically have to call or EMAIL each person to make sure they got it.
To me, this really doesn't even seem like a fair fight, but somehow, I'm in the minority.  Can someone please explain this to me?  Or give me more ammo to fight off the haters?

UPDATE:  So another argument on the paper side is that they are sometimes kept as keepsakes, which you obviously can't do with an electronic version.  While I can understand some people will actually do this, I think hosts tend to overvalue the sentimentality of the invitation.  The people most-likely to want the keepsake are the hosts.  Plus, if somebody REALLY wanted a keepsake, party favors can serve the same purpose and emailed invitations can always be printed out.

Friday, February 28, 2014

Why Couponing Is Worth Your Time

One of the most common arguments people use when I bring up couponing is "It's not worth my time".  I'm here to prove that it is.

Couponing is a misnomer.  It should be called sales shopping with coupons because most of the savings comes from the store sales, coupons are just a bonus.  Only 17% (~$200) of the money I've saved over the last 2 years was from coupons.  The remaining 83% (~$1000) is from store sales and coupon doubling.  Now, these savings aren't just going to fall out of the sky.  You do have to prepare for your shopping trips, but once you get the hang of it, you'll be more efficient with your time.

Now for some math!  I've spent about $1,400 on groceries (which includes food and hygiene and household products) in the last 2 years or so and saved almost $1,200 over approximately 70 shopping trips.  So each transaction should have cost me $37, but I only paid $20.  Also, assuming you actually save this money and don't use it on a new toy, compound interest or growth (depending on whether you invest it or put it in a savings account) will turn it into even more money.

The additional $600 that I get to keep each year is also tax-free.  The IRS doesn't suddenly come a-calling because my disposable income increased; they already got their piece.  If you're in the 25% tax-bracket, that's like increasing your pre-taxed income by $800.  (I'm assuming that you are safely in the 25% so all $800 would be taxed at the same rate.)

But wait, there's more!  The $108.33 I would have spent with no store sales or coupons is well under the monthly average for a single person.  According to the USDA, the average monthly grocery cost for someone between the ages 19 and 50 is more like $250.  So in comparison with the average American adult, I'm saving $2300 each year, and I'm only a moderate couponer!

Now since I don't punch the clock when I start and stop couponing, and I'm almost always multi-tasking while I do it, I don't know exactly how much temporal effort it takes.  But I think 3.5 hours per shopping trip is a conservative estimate.  That equates to 123 hours per year and $18.70/hour post-tax or $24.93/hour pre-tax (at 25%).  So on top of the income I'm getting from my day job, I'm also getting paid substantially more than minimal wage to essentially watch TV while I surf the Internet.  A cushy job that I can never be fired from...sounds like winner to me.

Plus, I love it so it doesn't really feel like work.

Tuesday, October 29, 2013

What Do Allen Iverson and Curt Schilling Have in Common?

After publishing my first couple posts, someone suggested that I read Mr. Money Mustache's blog.  It took me about a month to read through all his posts, and I learned a lot.  (For those of you who have never heard of him, he and his wife saved ~75% of their software engineering salaries and were able to retire at age 30).  It never even occurred to me that I could retire that early.  My parents are looking to retire in their early 50s, and I thought that was impressive.  Even without the goal of super-early retirement, I'm still saving over 50% of my salary, but I could never verbalize why I was.  Fortunately, MMM did it for me.  It's because I want to be financially independent.

Do you remember the feeling when you realized you had taken your last final EVER?  I do, it was something like, "I done with school forever!  I feel like I could cartwheel all the way home!"  That's the feeling I equate with financial independence.  You're not required to do anything.  You get to decide how to spend your time.  For me, it probably involves moving to Florida with my future family and switching to a career that involves sports and/or budgeting.  Could I be a personal finance manager for professional athletes? We all know they mostly suck at managing money.  (See Allen Iverson and Curt Schilling)

Friday, September 20, 2013

Moderate Couponing

One of my favorite places to save money is at the grocery store.  When I go grocery shopping, my goal to save at least 50%.  If you've ever seen the show Extreme Couponing, it's like that, but since I'm a 20-something sharing an apartment with a roommate, I had to modify their strategy.  For those of you who haven't seen the show, extreme couponers get items for around 80% off (although the show depicts it to be more like 95%).  So how do they save that much?  They buy in bulk.
  • Coupons and rebates normally require that you buy in multiples.  For example:  Save $1 when you buy 3 boxes of cereal; spend $30 on P&G products, get a $10 gift card.
  • Product pricing cycles.  So if you purchase enough of each product when it's at its lowest price to tide you over until the product goes on sale again, you will always pay the lowest price for it.
Unfortunately, this means you have to have space to store a stockpile, which I do not.

The second reason that I moderately coupon is because it's hard to get a diverse selection of high-value coupons without getting the Sunday paper.  There are printable coupons online, but only for a limited selection of products.  This means that I don't save as much on my groceries, but I've found that since I don't go through food as fast as families do, I would end up wasting a lot of coupons or food.

Now to the good stuff!  Since I started couponing about 2 years ago, I've saved approximately $1,200 on groceries (which is a 46% savings).  To do this, I follow these rules:
  1. Know the prices of what you buy most.  One of the hardest parts for me when I first started was knowing when to buy and when to wait.  Just because the store says something is on sale, doesn't mean it's a good price.  This will be different based on where you live, so I recommend spending a couple of hours scouting the grocery stores close to you for the 20-30 products you buy most.
  2. Don't be brand loyal.  If you're dead set on Tide, you'll end up paying more for it because it won't always be the laundry detergent that is on sale.  Since you're not building a massive stockpile of Tide like extreme couponers would, you need to be flexible.
  3. Make a shopping list using online sales ads.  There are two types of items that will go on your shopping list:  Necessary and adjustable.  Necessary items are products that you need to replace soon (e.g., toothpaste, prescription drugs, milk) and adjustable items are items that can be changed based on the sales (i.e., you can have anything for dinner, so you pick the meal based on which ingredients have the best prices).  Find the best price, regardless of brand, for necessary items and add adjustable items to your list only if it's a good deal.
  4. Plan your meals based on the sales.  If chicken is on sale and beef isn't, figure out something to cook with chicken instead of the hamburgers you wanted to make
  5. Wait to print out coupons until you're making your shopping list.  After completing #3, search the Internet for coupons that match the items on your list.  If you print out every single coupon or even just every coupon you like, you'll end up wasting a lot of paper and ink printing coupons you never use.
  6. Shop at multiple stores.  Different stores will have good deals on each product at different times.  Shopping at more than one store will allow you to get the best deals.  But don't take it too far and drive all over town to save a couple pennies, limit it to 2 or 3 stores.
  7. Don't wait until the last minute to go shopping.  If you run out of toothpaste, you are forced to pay whatever the grocery store has priced it for at the moment.  Instead, when you notice that you have a few weeks worth of toothpaste left, start searching the sale ads and buy when you find a worthy price (which you'll recognize because of #1).
  8. Join customer loyalty programs at every grocery store where you shop.  Normally the sale prices will only apply if you scan a loyalty card first, and even if they don't, they'll reward customers who frequent their store.  Don't get cheated out of savings because you don't want to add another card to your wallet.
  9. Sign up for newsletters from companies whose products you use.  A lot of companies have coupons for people who sign up for their email newsletters or create accounts on their website.  You may want to make a separate email address just for those accounts so your regular account doesn't get flooded with promotional material.
  10. Avoid eating out when possible.  This will actually increase your grocery bills, but will save you money in the long run because eating out is ALWAYS more expensive than eating in.  There was a time where I was spending almost $200/month eating out and most of the time it was just because I was too lazy to pack a lunch.
I have adapted these techniques over the years as I learned what worked best for me.  I originally cut out all coupons and organized them, before I realized what as massive waste of time it was.  Moderate couponing is how I've turned extreme couponing into something viable for me.

There are roughly three groups of groceries, for which you should have different levels of expectation for savings.  They are food, household, and hygiene.
  1. Hygiene products (e.g., toothpaste, shampoo, and deodorant) are the EASIEST to save money on.  They are non-perishable, need to be constantly replaced, and their manufacturers and retailers are always releasing new coupons and putting them on sale.  These are the products you are most likely to get for free.  
  2. Food (for a balanced diet) is a little harder to save on.  As a general rule, you will not find coupons for meat and produce.  Occasionally, the store will put them on sale, but they will still be one of the most expensive food products you buy.  To balance this out, food items with long shelf-lives are very easy to save on.  You can easily get food like cereal, canned goods, and condiments for way less than the retail price.
  3. Household products (e.g., trash bags, laundry detergent, and light bulbs) are similar to hygiene products in that they are non-perishable and are constantly on sale.  However, since their base price is higher, they are difficult to get for free.  Silver lining:  There's more to be saved per unit.

Happy savings!