Wednesday, July 25, 2012

Dear 401k loan: prepare to die

Well, I've decided. Or rather, I've been convinced by my fabulous commenters here and on the Mr. Money Mustache forum. There seems to be a consensus that the debt snowball approach will keep me feeling good, deliver less risk, and not materially hinder my student loan payoff.

It was JR on the MMM forum who broke the metaphorical camel's back. It's not often I think about getting laid off. But, as a self-professed "wage slave" who depends on getting paid for my labor in order to live comfortably, losing my job is a risk I deal with. Eliminating that risk is a big part of working toward financial independence.

With my 401k loan, I'm even more exposed to job loss risk: if I lose my job, I have weeks or months before I need to repay my loan, or it counts as premature disbursement and triggers an income tax event and a 10% penalty. That's really bad! And it would be on top of losing my job.

I've been reading a lot of Warren Buffett lately, specifically his annual letters to Berkshire Hathaway shareholders. One thing I've taken away is that he assesses risk differently than most do: he always keeps catastrophic risk or "tail risk" in mind. Through Berkshire Hathaway, Warren Buffett holds billions of dollars in excess liquid reserves, earning a pittance of a return, so that he will always be solvent. He readily admits foregoing a few percentage points of return. But in the 2008 financial crisis he was able deploy massive amounts of capital both keeping the financial system afloat and ensuring Berkshire would not sink (and making a tidy profit along the way).

With that in mind, the best way I can justify paying off my 401k loan is through reduced catastrophic risk. The natural high I get from paying off another loan is a nice side benefit.

Now that that's decided I've got to follow through. Sending in this payment is not going to be nearly as easy as making a student loan payment, which I can do right now from the comfort of my desk chair. I've got to get a certified check, cashier's check, or money order to my HR person. Then hopefully she'll deal with the 401k company. I've got to make sure the amount on the check is correct and hope the check arrives at its destination while the 10-day payoff quote is still valid.

Of course, getting a cashier's check requires visiting a bank and spending a few bucks. That's annoying. There is, however, a silver lining. I'm going to use this as an excuse to extricate myself from Bank of America's tendrils once and for all. I've been fed up with their fee-this and extra-charge-that attitude for a while now. They were nicer when they held our mortgage but those days are past. Now I only use them as a physical check cashing and cash withdrawal location.

I did some research and found a local bank, walking distance from my house, that offers a completely free checking account with no minimums and no direct deposit requirement. Checks still cost money, of course; otherwise it's no-hassle. Remember that Bank of America doesn't have any no-fee checking accounts, they just have different ways of waiving the fees (one of my accounts has direct deposit; the other is grandfathered in, I think).

The headline reason I'm going to switch banks, though, is the cost of getting a cashier's check. Bank of America charges $10. My soon-to-be-new local bank charges $8.

Oh, one more thing. Even though I decided to pay off my 401k loan, I'm still making payments on my student loan. Pending my decision on the matter I set aside enough to pay off my 401k loan, and then sent the rest of my cash to the feds. And what do you know, the payment cleared today.

$2500 payment on 7/23/2012. Applied principal: $2,403.57. Applied interest: $96.43. Outstanding balance: $16,536.79. Those are some good-looking numbers.

Friday, July 20, 2012

Decision: student loan or 401k loan?

Dear readers, I have a question that I can't decide, and I'm hoping I can solicit your feedback.

As you know, I have around $19k of student loans outstanding. I also have a loan against my 401k, which in my pre-Mustachian days I took to scrape together a down payment for my house. Well, suddenly I find myself with enough cash to cover the 401k loan, and I'm wondering: should I close out my 401k loan, or should I toss all that money at my student loan?

Here's some more background:

After last month's student loan payments I was light on cash. Then I hear from my company's HR department that accounting had made a mistake processing my 401k loan paperwork last year. As I think I mentioned before, in addition to the loan I took a hardship withdrawal (yeesh, I really wanted this house). The terms of a hardship withdrawal are such that you can't contribute to your 401k (or get company matching contributions) for six months. Except that somehow their communication wires got crossed between the HR department and the 401k company, and they kept my payroll contributions flowing. The way the 401k company rectified this situation was to cut me a check for the amount of money that I shouldn't have been able to contribute for that six months.

Yes, it sucks that I missed out on six months of 401k contributions, and six months of company matching contributions. I made that decision and I'll accept the consequences. But the silver lining is that I've got an extra $2400 cash that I can use to pay down debt.

The total balance in my cash accounts is $5100. In addition to the $2400, I've been setting a few hundred dollars aside per month both as a cash buffer and so that I could pay off my 401k loan. There's about $3200 outstanding on the 401k loan, and I need to pay it off all at once by sending a certified check.

But now that I'm looking at all this cash in my account, I'm visualizing taking my student loans down from $19k to near $14k, and it looks pretty good!

The interest rate on my 401k loan is 4.25%, which I'm paying with after-tax dollars back into my 401k account. The payments are $38.91 twice a month, with a five-year term that I'm about 14 months into. So the increased cash flow would be small. There is a $50 "maintenance fee" charged once a year, so that's a reason to pre-pay this loan, but it's already happened in May so I won't get hit again until next May.

Basically the choice is between a debt snowball approach and a highest-interest-rate-first approach. In recent weeks I've been leaning toward just sending all but a few hundred dollars to pay off the student loan.

What do you think? One fewer loan to think about, or 25% off of my student loan?

Wednesday, July 18, 2012

Acolyte answers some questions

I've had a bit of a hard time this week thinking of what to write about. Luckily for me Yabusame left me a comment with some questions that I think would make a nice post. It's good timing, too; I've been meaning to review some of my previous endeavors to become more Mustachian, and this is as good an excuse as any.

1. How's the cycling to work going? Are you doing it EVERY day now?

Honestly it could be better, but I'm optimistic. Like I mentioned it's been a bad month for biking due to a bunch of mostly complainypants excuses. I definitely feel my awesomeness (and my legs) atrophying over time due to my lack of biking.

But there's good news! Actually I'd say there's quite a bit of good news. First, I'm convinced that biking isn't one of those fads I go through once and then drop forever. Most of my self-improvement projects fall into that category after they lapse for a month. I found myself in the car last week, when I couldn't have biked to work without remaining sweaty and gross all day, and an interaction with another driver got me really angry (the guy was a jerk, fyi). Road rage, you know? And as I was stopped at the next red light I reflected upon my situation. I never felt that stressed biking. The emotions I feel driving to work are mostly boredom, mild fear (of having some jerk slam into me with his car), and occasionally intense anger. But when I bike to work I feel focused, calm, centered, occasionally fearful (of having some jerk slam into me with his car), and accomplished. Oh, and sometimes when I'm coasting down a hill I feel like I'm flying. That's pretty awesome.

Second bit of good news: the showers at work are fixed! And now there are two showers instead of one. Actually there were always two showers but one was broken, so I'm glad building management has done something to make my life better.

The third bit of good news is that I biked to work on Monday. I didn't bike yesterday or today on account of needing my car to drive to meetings in a different building. I consider that a valid work-related excuse. But I'm free and clear to bike the rest of the week and I'm looking forward to it.

And as another minor victory, I (mostly) completed my push-up challenge last week. I did 20 push-ups in the morning and 20 push-ups in the evening every week day, except when I took a recovery break on Wednesday morning. Sticking to my plan was pretty hard! I mean, the first day was easy, but by Tuesday evening my arms felt torn apart. This puts me closer to my goal of being able to do 40 consecutive push-ups by the year's end.

I think that's the end of the story on how my biking has been going, for now at least. I'm planning on completing at least one more full work-week of bike commuting before the weather gets cold (and hopefully more than one), and I think it's feasible to bike three days a week at the least going forward.

2. How is the grocery and restaurant budget working for you and the GF?

That's actually a really good question. To be honest I'm not sure off the top of my head. Luckily I don't keep important things like that in my head, so wait a second while I go check Mint.

Ooo, this just in, it looks like Mint has improved their Trends functionality. So that's awesome.

I forget the last time I did a budget update, but it feels like a long time ago. So here are restaurant numbers since March:
March - $192
April - $88
May - $480
June - $294

We only went out twice in March, both expensive, and one of which was buying for six as part of a bar crawl we organized with friends on St. Patrick's Day. I totally agree with No More Harvard Debt that spending money on social events is way more effective at generating happiness than buying things.

April we went out twice as well. Once was to Melting Pot. That trip is showing up as less expensive because part of it was paid with a discount gift card I bought off Plastic Jungle. It's still money spent, though, so part of this low number is as a result of an accounting gimmick.

May looks a little crazy. We spent a week vacationing with my girlfriend's family so that meant more eating at restaurants.  One time was a fancy little night out between us that cost $130. Worth it, but only in small doses. So I'm not too worried.

June was a bit high but I think it's acceptable. We went out five times, which is around the number of dinners out I'd like to target per month. One of them, though, was a very fancy five-course wine-pairing dinner we went to with six of our friends. Again, those are the kinds of dinners I enjoy doing but only infrequently, or else I can't appreciate my food over the sheer guilt I'm feeling.

All in all, these numbers look reasonable. That up-tick in June is something to keep my eye on, though another concern is forgetting to plan dinners out. I think that one dinner out a week is a healthy way to break up the monotony of life as a wage slave — as long as it's not costing too much.

Next up, grocery numbers since March:
March - $10
April - $289
May - $509
June - $511

Ten dollars in March? A single trip to Trader Joe's? That can't be right. I must not have categorized my March purchases correctly. You've been warned: take all these numbers with a grain of salt.

April was pretty good, well within budget.

May looks high, and it is, but again that's because of our vacation. One day we cooked dinner for everyone (it was a huge house with like 12 adults), so that trip to Harris Teeter cost $225. Note that we didn't have to pay for vacation amenities, but there is no such thing as a free vacation.

June though? I don't know what happened in June. $511 is way too much. Maybe I've been slipping. In any case, I'm going to spend more time planning our meals for the week, because I know that keeps our food costs down. Today, for instance, I made fajitas from one of those do-it-yourself kits (this one actually, though why is the picture so small?). I enjoyed the food, my girlfriend enjoyed not cooking, and in the future I can learn how to mix my own fajita seasoning to take the kit out of the equation. It's things like this that are going to keep our grocery budget down.

3. Any no-spend months yet?

Really good question. Not yet! The thought has been stuck in my brain for a few weeks, though, and I think next month is the month. I have road trips planned on most weekends in August, but that's a challenge I'm willing to tackle head-on. Having the goal of spending money on as few days as possible in a month keeps me focused, and focus is a precious commodity.

4. Are you still making small overpayments on the mortgage?

Totally! I've sent in an extra $200 every month since we refinanced in June. It's practically automatic. I love locking away that extra money so it can keep paying dividends far into the future.

Well, that about wraps things up for now. Thanks again, Yabusame, for prompting me with those questions. It's nice to have someone keeping me honest.

Housekeeping note: I've added Brave New Life to my blog feed. I started reading BNL last December and I really like what he's doing. For some reason I thought he stopped blogging, but I must have gotten caught up and forgot to put his blog on my reader. I was pleasantly surprised to see a link to some of his new content. I encourage anyone not already familiar with Brave New Like to take a peek over there and see what you think.

Monday, July 9, 2012

My other emergency fund is debt pre-payment

I feel like it's been all debt reduction all the time around here, with relatively little in the way of frugality. I'm told I have a one-track mind and my student loans are where my mind has been for most of the year. Until I buckle down and dig up some spending numbers for the past few months, you can assume I've been making some mistakes here and there but otherwise sticking to my Mustachian roots. I'm guesstimating spending of $100/mo that I could pare down, in combined personal and joint spending, if I kept a closer eye and a tighter reign on things.

When I type out numbers like that it's a big motivation to get back to basics and pore over my Mint account. But that will come in the weeks ahead.

Since I've gotten down to one student loan, early payoff has been niggling in my brain. When I think of logging into my ING account I imagine scrounging up another few hundred dollars and sending in another payment. When I'm looking at my Google calendar, I'm checking when my next payday is. On my recent vacation to visit my mom, she dug up a stack of Series EE federal government savings bonds, which apparently I've had my whole life, and which (of course!) I'll be using to accelerate my prepayment. I think about them a lot.

Occasionally I'll think about my emergency fund, or lack thereof. I think almost everyone is doing the right thing when they save 3-6 months of living expenses in case of emergency. But I also think that in my case, an emergency fund of approximately zero is the best course of action. Being a two-income household, where we could scrape by on one of our salaries if we absolutely had to, is pretty luxurious. And I may be brash being a relative kid and all, but I'm not so set in my ways that I couldn't find work — any work — if I had to in a hurry. Not to mention that "safety" is overrated anyway.

There's one more ace I have up my sleeve. (On that note, I have found that the more I live by Mustachian principles, the more aces I find hiding up there.) Remember that whole thing about advancing your student loan due date a few months back? The short of it is that when you made a pre-payment, you could choose whether to keep your next due date the same (which would shorten the time period of the loan), or push it out a number of months proportional to the size of the pre-payment (which would buy you time in case you needed it).

Well, as best I can tell that's not an option anymore. I made three payments last month and I wasn't prompted to "advance my due date" once: it advanced the due date for me. That's all well and good. It's not going to make much difference for me.

Check out where it leaves me:
No payment due until next year
No payment due for two years
No payment due for three years
 My June 2012 payments of $6,800 mean that I don't have to make a single payment on my loans until May of 2015. The most likely scenario is that I lose my job and am unemployed for a number of months. It's a nice safety cushion in case I need it.

I like it better than six months of expenses in a savings account, personally.

Sunday, July 8, 2012

Falling off the biking-to-work bandwagon

The past three weeks have been weird. I got sick, I took two and a half sick days off work, and I took another two days of vacation. I biked to work exactly zero times, and due to circumstances beyond my control this week is not looking good for biking either.

It started the week of June 18th.  I felt like I was coming down with some kind of upper respiratory illness (probably allergy related and not unusual) so I took off of work on Tuesday to try and head it off with extra fluids and sleep. No luck. I ended up sick anyway. Just the same, I'm glad I decided to take off. Too often I feel people will try to power through an illness, which only serves to infect co-workers while your productivity is diminished. I probably would have taken another sick day if not for a big deployment I've been working on that's due to ship soon.

I didn't bike because I didn't feel well. I don't know if that's a good enough excuse but it sure felt like one at the time. The rational side of my brain could recall articles about how exercising when you're sick doesn't hurt and can actually help speed recovery. The emotional side of my brain wanted none of it. To anyone reading this who has a story about biking in spite of being sick, I'm very interested to hear about it.

That brings me to the week of July 4th. My girlfriend and I had festivities planned for both weekends, but none included my mom who I still wanted to see, so I decided to take two vacation days on Thursday and Friday. I think it was a pretty good decision in retrospect. I got to catch up with an old friend and clean out my old bedroom, which had stuff in it from my highschool days.

I haven't been to work in five days. Coupled with the sick days I mentioned earlier I'm getting a faint glimpse of what early retirement might be like. It's pretty nice! I have plenty of things to work on, and I feel like less of my time is spent in a brain dead recovery state. I've been reading about investing and doing little jobs around the house.

Back to biking. On Friday I got an email from a co-worker. Building management sent out a notice that the shower room would be closed all next week. I don't like our building management. Giving us short notice about facilities not being available is par for the course for them. I'm not willing to spend all day being sweaty and gross, so I don't plan on biking this week. I am hoping and praying that it will only take a week.

Losing our shower room for a week is unfortunate. It's outside of my locus of control. During times like these I try to compensate by picking something that is under my control and running with it. It's time to dust off my list of goals. For the most part I've been ignoring my 2012 non-financial goals, but with half the year gone already (!) it's time to get serious. I'm going to aim at doing 20 push-ups twice a day every day this week, to partially make up for not biking to work. That should jump start my progress toward being able to doing 40 consecutive push-ups.

Does anyone else have New Years Resolutions they're not ready to give up on yet?