M is for Money

Credit cards, like any financial tool, need to mesh with your lifestyle and goals. Late last year we chose the Amex Starwood Preferred Guest (SPG) card to earn points towards our honeymoon. A travel rewards card in general does not fit well with our lifestyle and spending habits, but we had a specific goal in mind that the card could help us achieve. Now that the honeymoon is booked the card has outlived its usefulness, making it time once again to go credit card shopping.

For years the Chase Freedom card has served as my primary credit card. In short time I accumulated over $1000 in cash back thanks to their generous reward system. Unfortunately they decided to gut the program recently, killing the card’s competitive advantage. This leaves me in need of both an Amex card to replace the Starwood one and a cash back reward card to replace the Freedom card – enter Blue Cash from American Express.

There are many cash back reward credit cards and a huge variety of reward programs. Many offer different levels of reward based on categories of spending, say 1% on all purchases but 3% on gasoline and groceries. Other cards emphasize dining out or travel related purchases instead. The first step in finding the right card is to determine your normal spending habits, how much do you spend and where?

There are a couple of general traits that define our spending, one we don’t eat out often. We prefer to prepare our own meals, so a card that emphasizes grocery store purchases, rather than restaurants, makes sense for us. Two we don’t travel often, so a card that rewards you for travel won’t do us much good. Three we have relatively short commutes, so gasoline is not a big part of our budget. Finally, we tend to spend a lot! We racked up $23,000 in 6 months on the SPG card, though that was unusual due to some home improvement spending. With the wedding and honeymoon coming up I expect our spending to remain high through the rest of the year.

Based on our spending characteristics I decided on the Blue Cash card from American Express. It has a tiered rewards system, once you hit $6500 in annual spending the reward level jumps to one of the highest in the industry. They also have a higher reward level for purchases at grocery stores, gas stations and drugstores, which fits well with our spending patterns. The basic cash back is 0.5% at all stores and 1.25% at grocery, gas and drug stores. Once you reach the $6500 level, the reward jumps to 1.0% at all stores and 5% at grocery, gas and drug stores. Best of all, there are no annual fees with Blue Cash, unlike the SPG card. I wish Chase would bring back the old Freedom Card rewards program, but the Blue Cash Amex looks like my next best choice.

I rarely talk about the investments I hold beyond mentioning which fund families I invest in like Vanguard or T Rowe Price. I am no expert on investing and I certainly don’t want to lead readers down the wrong path. But occasionally the actual fund I am invested in becomes part of a relevant story about money and finance.

Recently I saw a headline that made my heart skip a beat, a mutual fund I hold is being dropped from the Kiplinger 25, a list of recommended funds. While my mind immediately raced to poor performance or bad prospects, the reason was much more mundane. The fund is closing to new investors on May 28 and the magazine will not recommend funds that people cannot buy. The fund in question is T Rowe Price’s Mid Cap Growth, which I’ve been investing in since 2003.

Mutual funds need to keep control of the money flowing into and out of the fund as part of proper management. One way they can do that is by opening or closing the fund to new investors, people or institutions already invested in the fund at the time of closing can add to their holdings, but no new investors are allowed in. This helps keep popular funds from growing too large to effectively manage. Recently I started investing in a fund that reopened to new investors after being closed for many years. In general, the market crash caused many people to pull their money out of stocks and some mutual funds reopened in search of new cash. Mid Cap Growth’s closing seems to run opposite of current trends.

This news won’t change my investing strategy, I plan to continue adding to my holdings every month like I have been. If you’re interested in investing in Mid-Cap Growth you have a few more days before the door closes. Like all T Rowe Price funds you can start with $0 initial investment as long as you sign up for $50 monthly investments through Automatic Asset Builder.

If you are anything like me, you have a lot of financial goals to juggle. Beyond the whole get out of debt problem, you have to save for an emergency, a down payment and an education. On top of that there is the biggest challenge of all - preparing for retirement. So how do you approach these goals, do you focus on one or tackle them all?

I have always taken the tackle it all approach, even if it’s not the best financial decision. When I had mountains of credit card debt, I still saved money in my 401k and mutual funds. Currently I’m splitting our savings between the wedding, emergency fund, down payment for a new home and our many early retirement goals. I take this approach mainly for emotional reasons, it makes me happy to know that we are working towards these goals even though they are many years away. It may be decades before we can retire and sail off into the sunset, still I save $100 each month towards that retirement boat. Knowing that I am preparing for the future satisfies me today. Also, many financial goals are easier to achieve when time is on your side. This explains why you have to start saving for retirement in your 20’s, even though it will conflict with more immediate goals like buying a house. But is tackling all your goals at once the best approach?

There are definite drawbacks to trying to accomplish everything. By dividing your resources, it is more difficult to achieve any one goal. It also takes longer to achieve those goals. Tackling everything may not make the most financial sense either, sometimes giving priority to one goal above the others (like paying off debt) will be best for your bottom line.

Lately I’ve been wondering if I should change my approach. It will be very difficult to save up a down payment for a new house while still tackling our other goals. We could eliminate our retirement savings, our monthly investments and such in order to set aside more towards a house. It would get us into that new home faster, but I worry about making up for lost time with the other goals. For now I will split the difference by putting more emphasis on the down payment while scaling back, but not cutting completely, our other investments. How would you approach the situation? Do you prefer to focus on one goal at a time or do you try to do it all at once?

I’m tired of our neighborhood. I’m tired of the parking wars, the drive-bys and the police helicopter circling my house every night. I never thought we’d live here for more than a few years, it’s a starter home in a sketchy neighborhood. But we recently passed the 5 year mark with no end in sight because like every other underwater homeowner, moving isn’t easy.

I want a home in a safe, quiet neighborhood with good schools for the future munchkins. In fact I know just the place, one town over, but it’s out of our price range. Prices have come down in the last few years, meaning a crummy starter home is no longer a million dollars, it’s a mere $800,000! I’m really hoping prices there continue to fall to a more reasonable $500,000 - $600,000. Then at least we’d have a hope and a prayer of buying there. In the meanwhile I have started planning for a new home and adjusting our budget to meet new goals.

A $150,000 Down Payment

Last year our financial goals centered on paying off debt, merging our money and starting a nest egg. The plan for this year, and for every year hereafter, was to focus on early retirement. Our early retirement goals are a combination of savings, taxable investments, retirement funds and real estate, all of which we’re working on simultaneously. But my overwhelming desire to get the hell out of our current neighborhood has me questioning priorities. I’ve started playing with a budget that increases our savings for a down payment, while reducing the monthly savings and investments earmarked for retirement. Unfortunately, to live in the area we want we will need a lot of money for a down payment, at least $150,000. Since we don’t have any equity in our house to draw from, we will need to save up every dime.

Like many of my goals, it is unlikely we will achieve this one in my preferred timeframe. We spent much of our savings repairing our house this winter, so we are starting from zero. The size of our goal makes it difficult as well, in many parts of the country $150,000 would buy an entire house, not just the downpayment! But the difficulty of the task won’t stop me from trying, we will save as much as we can and keep an eye out for opportunities. With a little luck, we can make it out of the ghetto before I hit 40!

I work in one of those fields where it is possible to have a long career. In fact judging by some of my more weathered colleagues, it’s possible to have a very long career. On both current and previous projects I have worked with people well past normal retirement age. For some, it’s obvious they enjoy the mental stimulation and challenge of working. In their case, it appears that working past retirement is a choice they have made without financial consideration. But others I fear are working through their golden years because they have no other option. It’s their stories I wonder about the most.

Many years ago I worked with a sweet old gentleman, he was the perfect kindly grandfather figure. My office friend happened to be updating personnel files and was shocked to see his age – almost 80. The saddest part of the story was the fact that in order to work, he lived apart from his family. His wife lived in Washington State while he made a living in LA. I know his decision to work was not a choice, but I don’t know why.

At my current office there are two gentlemen well into their retirement years, and frankly everyone in the office wishes they would hurry up and leave! Their mental acuity has slowed with age and they are suspicious of current technology. One is sweet and kind, but the amount of hand-holding he requires is a burden for his co-workers. The other has grown arrogant with age, making him difficult to work with. Both have significant health issues that keep them away from work for periods of time, but neither has made any indication that retirement is in their future.

So why do people keep working well into their golden years? In my field we make a good income, so saving for retirement should not be difficult. Was it poor planning, the unexpected or a choice which led them here? Unfortunately I am not close enough to these colleagues to feel comfortable asking them about their situation, they probably have great insight into how you get derailed on the road to retirement.

This past weekend I went clothes shopping with an old friend. It was time to freshen my work wardrobe; I was getting tired of the same old rotation of shirts and slacks. But before trying on any piece I would take a peek at the price tag, no sense in trying on something I would never buy. Still my friend kept urging me to try on things regardless of price. I had to explain to her that no matter how much I make, there is a limit to what I’ll pay for things.

As I’ve gotten older, and more frugal, that price limit has gone down. At the same time my income has gone up, I think this confused my friend who has witnessed the transition. But it is exactly this type of change that has helped us to save more than we spend and build our nest egg. I think my price limits fall somewhere in the middle range of people’s spending, cheap to some and extravagant to others. What do you think:

Shirts: $30
I might go a little higher for a nice dress shirt, but I can usually find those on the sale rack within my budget.

Pants: $40-$50
I’ve probably paid $80 for a pair of jeans, but that’s it. I’m hard on my clothes so buying expensive pants doesn’t make sense.

Sweaters: $50
The only reason I buy sweaters in LA is for work, they crank down that AC some days. We’re not talking bulky winter in Michigan sweaters, just light cardigans or wraps for the office.

Jackets: $60
Honestly, my favorite jacket only cost me $15 off the sale rack. I wish I bought two!

Winter Coats: $120
At least in LA a winter coat can last you forever, it’s not like it gets much use. I probably paid $130 for my current coat…5 years ago.

Skirts: $50
I remember when I was 20 and broke and thought nothing of paying $100 or more for a skirt. My how things change!

Dresses: $60
I don’t wear dresses too often and it’s been forever since I’ve bought one. How much do they cost these days?

Shoes: $40 - $60
I’m tough on shoes, I’m guaranteed to scratch or scuff them the very first time I wear them. It hurts a lot less to mess up an inexpensive pair of shoes.

My Weekend Haul

These are my upper limits for spending, but I prefer to spend a whole lot less! This weekend I was pretty successful in scoring deals off the sales rack. I bought two pairs of shoes, one $25 and the other $40. I got a handful of shirts ranging from $10 up to a whopping $25. Finally I bought two sweaters, for $27 and $40. Not bad considering most of that shopping was at Nordstroms. What are your apparel price points, the most you’ll spend on various pieces of clothing?

It’s been about 6 months since I first got the Starwood Preferred Guest (SPG) card from American Express. My plan was to use the card for home improvement and wedding expenses and cash in the points for hotel stays during our honeymoon. I’m happy to say my mission was a success, I’ve booked 5 nights at the Westin on Kauai, all paid for with points.

Unfortunately it takes a lot of points to stay at any Starwood hotel in Hawaii and this one didn’t come cheap either. Those five free nights required 48,000 points, which is a lot of points if you consider one dollar spent equals one point! Fortunately, we didn’t have to fork over that much in cash. Thanks to new cardholder incentives we accrued 25,000 bonus points, the other 23,000 came from our spending on the house, wedding and also everyday items like food and gas. As far as credit card rewards go, I think we did really well.

Most cash-back cards pay around 1%, so $23,000 in spending would result in a $230 check. Since I am paying for a 6th night at the Westin, I know the value of those free nights - $188 each. $940 in free hotel rooms on $23,000 worth of spending is a little over 4% in rewards, much higher than a cash back card and better than the other hotel rewards cards.

But, now that our honeymoon is booked I have no more use for the SPG card. I plan to cancel it once we return from our trip, there is an annual fee after the first year and we don’t travel enough to justify keeping it. I’m now shopping for a new Amex card to take its place, probably a cash back card since they are a better fit for our lifestyle. The SPG card was perfect for our purpose and well worth using.