Ask the grumpies: How do you decide on donations?

Another activist economist asks:

What is your donation strategy right now? Are you giving to more places, or more to places you were already supporting? I was torn at the end of last year and just did the latter. Trying to decide what to do for 2017.

#2 says:  Both!

#1 also says both.  I think I must have the warm glow version of donating because I am totally just giving to places as they come on my radar.  I have no strategy at all for this stuff (my only planned giving is to my alma mater and DC1’s former private school).  Something horrible happens, I donate to the relevant agency or agencies, it makes me feel a little better.

I know that’s not optimal for the organizations in question (based on graduate public finance*), but it’s optimal for me!  Plus it’s a strategy shared by a ton of people since whenever I give, the news says that organization has just received record amounts.

Another activist economist replies:

If lots of donors share that behavior, it might become optimal for the organizations (getting small amounts from huge numbers of people)? Also, maybe your strategy (or non-strategy) means you donate more over the course of a year than you would if you explicitly made a budget for donating and only gave to a few places. Which is better for the places getting your money.

I have been holding back so far this year since I’m torn. For instance, a friend of mine started supporting this local organization that gives financial assistance to women who can’t afford abortions. But is it better to give to them or Planned Parenthood or split between the two? I’m leaning toward only PP.

I’ve given to both! Because I cried super hard when my sister told me that she was working with an organization in [City] that provides rides and housing for women seeking abortions and had someone staying in her spare bedroom for 3 days because the woman had taken an 8 hour bus in from [a neighboring state] to get an abortion. So I gave $100 to that organization to make the crying stop. Planned parenthood is where we regularly give whenever one of these things comes up in the news, plus it’s where many of our blog proceeds end up going.

While DH remains employed and with the mortgage gone and our retirement accounts maxed out and DC1 no longer in private school and no firm plans going forward for major expenditures, we can afford to just give money whenever so we don’t really need a strategy (still, this has always been how we’ve donated, it’s just that before it was much smaller amounts in grad school and I’d have to cut back on our grocery expenditures to make up the difference). We should be giving more, but I keep thinking, what if we have to move to Paradise permanently? We don’t have enough money in non-retirement non-529 accounts to buy a house in a decent school district, and renting would still be difficult on just DH’s salary. So mainly it’s the emotions that get me to part with my pocketbook even though we should be giving much more than we do.

Another activist economist replies:

I look forward to reading the responses [from the grumpy nation]!*** I should probably stop thinking about what would be optimal and just give when I feel like it. The reality is that my total giving across the year would likely be higher if I did that. But it is hard to turn off the little voice in my head that asks “if you give that $50 here are you taking it from somewhere else where it would have a bigger marginal impact?”

Yeah, I don’t listen to that little voice. It gets shouted down by the, “Look, do you want to stop crying right now or not?” voice, because I have very little impulse control. And since I don’t have a set budget constraint on charitable giving, there’s more likely to be crowding in** than crowding out of giving.

Plus it probably helps that I wasn’t all that convinced by grad PF’s discussion of optimal charitable giving given that most non-profit’s revealed preferences are to go all out and accept lots of little donations from people like me (and then sell my contact info to related organizations that could crowd out my donations to them…).

Agree about the crowding in (probably true for me too) – I don’t have a fixed budget either, exactly. (Though because I am a procrastinator, during normal times I tend to do all my donations at the end of the year, so then I am thinking about the total amount I want to give for that year.) But there’s a budget in the sense that I have an upper bound even if I don’t know exactly what it is. And that is what that little voice reminds me of. Hmmm….

*Graduate PF, if I’m remembering the lecture correctly, suggests that rational individuals interested in making an actual difference rather than just feeling warm and fuzzy should donate large sums to a small number of charities so other places don’t waste money trying to get more money out of you and you’ll have a bigger impact on that organization and more say in what is done with your money. I am obviously just motivated by warm fuzzies. Plus I’m not sold that that’s a bad thing, as you will see in our discussion.

**”Crowding in” in this context means that giving some money makes it more likely that you’re going to give more later.

*** emphasis added

Grumpy nation, do you have a donation strategy?  Do you have a set amount you give each year, or do you give on a case-by-case basis?  Have you had to make any sacrifices for giving?  What makes  you decide to give?  How do you pick who to give to and how much?

RBO answering First Gen American’s questions about #1’s finances post-mortgage

The next near term unmet savings goal seems to be DC1 and Dc2 college fund. More posts on that would be interesting to me as I also have one about the same age. Although I am about a year behind you on payoff, that is my next savings goal.

We decided to up it to $750/mo/kid, basically splitting the difference between what we’d need for a super pricey school and what we were contributing already.  That also means that is eating $500/mo of the not-paying-the-mortgage-savings we were seeing.

I guess you can also ponder some more about when to get that next car

This is a constant pondering thing.  It was in the shop again for a week because it started doing the squealing thing that it had been doing two years ago, and even though it is a cheap fix (tighten things), it takes them forever to figure it out.  Partly because it only squeals when the engine is cold and it’s cold outside.  Only $70 for that + replacing the windshield wipers (because why not), but also there was a week of us having to deal with only having one car (indeed, they didn’t completely fix the squeal because DH had to drive to the city for a meeting and needed me to have the car to do dropoff).  And since they’ve tightened everything the shocks aren’t being as nice and shock absorbent as they usually are which means my ride is more bumpy.  But each time my car needs fixing, we don’t know if it’s going to be the last repair for a while or not.  If it is, then we’re happy, but if the car has to go in again, it’s a pain.  So I don’t know.  We’re still pondering.  Eventually there will be enough excess in savings that we won’t have to rebuild the emergency fund after buying a Prius or something similar.  (We’re not there yet.)  The other car seems fine for now, and the insurance company of the at-fault driver took care of our costs and our insurance company’s costs.

Do general posts on spending budgets (not the day to day expenses, But those emergency ones). I remember feeling a little overwhelmed when my TV, washer and water heater broke within months of each other, until I realized they were all old and due to be replaced… A lot does get fixed when you have a big emergency fund. You don’t really need to keep such close track of everything.

Yeah, we just have a big emergency fund that could cover a washer and water heater and heck, even a new roof (though maybe not solar panels to go on said roof, which we might do after getting a new roof).  We have two water heaters and I guess they’ll be due to be replaced in a few years– can’t remember if we got the 15 year or the 20 year kind.  (And actually, a few months after we moved into this house, shortly after we finally purchased a washer and dryer, the water heaters needed to be replaced, and our dishwasher broke and we ran through a series of broken microwaves… fortunately we’d had paychecks for a few months at that point.  But it did put off our ability to buy furniture.)

Maybe some posts on where you’d move in retirement. I guess if you earn a lot but don’t have a lot of house, a no state income tax place may be a good place to live. I think I generally prefer paying state income tax as there are limits to what low income folks are required to pay. Paying crazy property taxes with a fixed income in retirement is no fun.

We hope to maximize friends and fun things to do in retirement, so we’ll probably be moving to a high tax state!  Most people will retire in place or move closer to family.  But it is a good idea for some folks to think through the tax and cost of living implications of different geographical areas once they’re no longer tied to a job.

Ask the Grumpies: Do I need to see a financial planner about a 300K inheritance?

A asks:

Tl;dr: Would a windfall that doubled your (age appropriate but not amazing) savings overnight change your savings/investment strategy?

My dad died recently; my mom died a while ago. They were both relatively young and had saved extensively. The bulk of his assets, around 300k, are in various types of IRAs and we plan to roll them over as inherited IRAs and opt for option to take the required minimum distribution over my life expectancy, with the understanding that we can draw down more if we wish.  These assets are currently split nearly evenly between various stocks and bond funds. Additional property based assets also exist but the valuation is less clear – this will likely come to us as cash but at a much later date.

Having been saving appropriately ourselves for retirement, my spouse and I, at 40, have around $350k in various index funds through TIAA CREF and Vanguard – we have in the past several years fully funded our Roths, made our maximum contributions to our own IRAs, and done some “catch up” saving to offset the time my spouse spent in grad school/not working to his full potential.  We have planned/budgeted to continue to do so for the foreseeable future. We also had planned to pay off our house over the next 2-4 years in lieu of investing in bonds.  Our allocations are nearly all in small set of mid-large cap domestic and international index funds.

My question is, given this windfall, which nearly doubles our total savings, should we simply allocate the new funds into our existing allocation? Should we reconsider our savings rate into IRAs? Should we change our financial goals ~ 1) pay off house 2) save for retirement 3) save for other things (kids’ college/travel/etc).  We both like our careers but we also view savings as a means of having choices – to quit a job, to take a leave of absence, or to stay in a job we love that isn’t paying what it should.

We are getting some pressure (from family/from our tax attorney) to find a financial advisor and engage in more expensive actively managed investing.  We aren’t sure about this – should we engage someone for short term advice and pay for it? Should we keep doing what we are doing, which is reading up and figuring it out ourselves? Neither of us works in this area…

Thoughts and advice?

So sorry to hear about your loss.

This is a tough one.  If it were me, 300k isn’t so much that it seems like it needs special financial planning above and beyond what you are already doing.  On the other hand this whole inherited IRA thing could be tricky and have tax consequences that I don’t understand but you sound like you’ve looked into them.

When #2’s husband got a large lump sum from stock options he just added more to the investments he already had using the same strategy as before (also some of that went towards a wedding and moving expenses– they still can’t afford a house where they live).

If it were me I would do 1. Retirement 2. House 3. Other.  You also want as much of that as possible put into vehicles that you can hide from colleges (like retirement and your house) because 300k in cash means you pay 100% tuition etc. while 650k in retirement doesn’t, depending on your income.  So if making those moves is complicated or you don’t know how colleges are going to treat different assets, it might be worth it to talk to a professional.  But that seems more in the realm of your tax person than a financial planner.

Active investing is almost never a good thing and I can’t see 300k being so big that you need it.  It’s not like you’re trying to dodge an inheritance tax at age 40 with less than 700k plus a home.  It’s not a big enough portfolio to really benefit from munis.  So I’m not really sure what active management would add.

On the other hand, when my father dies, my mom already has a firm (apparently a branch of Charles Schwab does this) picked out to forensically untangle all of his investments.  Simplifying them in a way that doesn’t create massive taxes will be the next step.  That’s not active management but it will take a professional in the short term.

So I guess a fee only financial planner might be worth it if this is beyond your tax person’s abilities, but not one who is going to encourage active management.  Instead someone who will help your figure out how to get the right asset mix (which you probably already know), how to avoid excess taxes, and how to maximize financial aid.  So like one or two meetings rather than them taking over your portfolio.

Grumpy Nation, what would you do in A’s situation?

The guy that recruited DH quit: Musings on stability

If you recall, DH’s company has been having money flow issues and isn’t sure it’s going to last through March.  Employees had to take about a month long 10% paycut in order for them to make payroll at the end of 2016 (they’re back at full pay now).  It’s also highly dependent on government contracting work which could mean lots of money or very little money over the next few years depending on how/if money is allocated to the DoD.  (The DoD does a surprising amount of life-saving research– it isn’t all weapons.)

The guy who recruited DH to the company just quit the company in order to take a job in a more stable company at a lower salary with no benefits (they do reimburse ACA claims and they’re in a state with its own exchange program and individual mandate so Trump won’t make the exchange go away).

He has a SAHM wife and two small children.  He needs the stability more than he needs the larger paycheck.

The company CEO called DH to make sure he wasn’t going to follow suit and also leave.  It would have been a good time to ask for concessions if there wasn’t a worry about the company going under in a couple months.

DH has a wife whose job has high stability and doesn’t really need a paycheck at all (we’d have to cut down on education/retirement saving and some luxuries, but we’d be fine).  That means he can stick with a job that has a high salary and high flexibility but at any point in time could go under in the next three months.  Heck, he could cut down to part-time contract work at any point in time and he would be ok.  I provide that ability.  Our heavy retirement saving these past few years means that we could even cut down retirement savings and we’d be fine.  Being massively risk averse, ironically, means we can take more risks because with my job security and our savings these risks are measured risks.

But most people don’t have that kind of financial independence.  That means that when a company does something like temporarily cut pay by 10% they’re going to lose good people who need that stability.  Breadwinners from single earner families may be less likely to leave a stable job (I assume– I haven’t read research) but when that stability disappears they may be more likely to seek a new position so as to not have to deal with an unemployment spell.  At least, that’s the case with DH’s colleague.

As for what this means for the company– it’s a small operation and his role was important.  They won’t be hiring to replace him any time soon.  But that won’t be important if they go under in March.  So we’ll see what happens.

I’m just glad that we’ll be fine no matter what that is.

What determines when you or (if applicable) your partner changes jobs?  Could you handle a lengthy unemployment spell?

The Last Mortgage Payment

Last month (January):
Balance:$1,510.75
Years left: 0.166666667
P =$1,214.40, I =$10.74, Escrow =$812.79

This month (February):
Balance:$0
Years left: 0
P =$1,214.40, I =$5.98, Escrow=$0, Recording fee: $30
Amount of interest saved in this month’s prepayment: $1.20

So, I know that this is ending a month early.  But what happened is my regular mortgage payment is $2027.19, and there was only $1510.75 left on the mortgage (technically $1510.79 because Wells Fargo steals micropennies from us), so it seemed silly to write a bigger check this month and then another check for ~$1100 in March, only to have them send back ~$1600 from the escrow for those two months (along with the ~$500 that’s still in there after they paid our property taxes).  Cashflow and interest argue that in this specific instance, it is better to pay off the loan than to let them have two months of escrow.

[Update:  After we paid off the mortgage in full, we got the bill for the next month’s mortgage.  Then a few days later we got a note saying that we were not allowed to pay the bill (that we had just gotten), instead we would have to pay the mortgage in full because the mortgage balance was less than a payment.  And the in-full payment was due three weeks before the regular mortgage bill!  For a mortgage that had already been paid. Wells Fargo’s departments really need to talk to each other.]

So we got a final payment slip and sent off a final payment check.  Now we wait for our final paperwork to return to us.

So what does this all mean?

Well, the house cost $265,000.  We have paid down that $265,000 including the $53K downpayment in principal in ~10.5 years.  In total, we have paid $364,161.71 on the house, or about 100K in interest more than the house cost initially (but only $20,761 of that since we refinanced 76 months ago– those big interest costs really do come at the beginning of the loan). We paid $114,873.36 extra in pre-payments since our last refinance.  We’ve saved $18,783.83 in interest (not accounting for inflation at all) by prepaying since we refinanced, but I don’t know how much we’ve saved overall since I wasn’t tracking before the refinance.

As we’ve said many times, we will not ever really own the house free and clear.  This year we’re paying about $8K/year in property tax and $2K/year in insurance.  Those numbers will only go up.  We could rent a 2br apartment in town for about that amount and not have to worry about repair bills.  But we won’t.

How does this change our lives?  Well, we now have about $14,573 extra cash flow each year that we had been sending to our mortgage as principal or interest payments.   And I no longer have to write out a mortgage check every month which should save ~12 checks a year meaning we should have to buy new checks less frequently (daycare still takes checks out of the credit union account– I have lessons and incidentals coming out of the Wells Fargo account right now).

It also means that we will need to keep a high enough balance in both Wells Fargo savings and checking to not get charged monthly fees on those two accounts.  Right now we are already doing that because that’s where we’ve been depositing DH’s reimbursement checks and any side payments or gifts that we get.  But I’ll have to be careful going forward.

Also… I guess I won’t be writing these monthly posts anymore, because I have nothing left to track!  It’s the end of an era!  For nostalgia’s sake, here’s the first one from November 2010.  (And here’s an earlier post about refinancing before I started tracking monthly.  And here’s a popular post on why we did some prepayment of the mortgage but didn’t focus everything on prepaying.)  Here’s the mortgage tab if you want to read them all.

Given that I don’t think #2 wants to be pressured into saving up for a down-payment, any thoughts on what should go in this space?  Anything?  Nothing?

College Savings are hard to plan

If DH and I remain employed at our current jobs for the next ~6 years (something that is not incredibly likely given DH’s job situation), then we will not qualify for financial aid at most schools.  (IIRC, we’ll be in the phase-out range for Harvard and Princeton and may be able to move money around to get some aid there.)  If one of us loses a job, then DC1 will qualify for about ~10K/year in aid at many private schools, which isn’t that much given sticker prices (although on just one income, hiding moving money around will have a larger effect).

We currently (barring weird changes in the stock market between the writing of this post and its posting) have around 98K in DC1’s college account.  That’s $500/mo for the last 10 years invested in Vanguard.  That’s enough to go to our local flagship schools for 4-5 years if we stop saving now.

And that really sounds like a lot.  But in the world of private schools it isn’t.

It’s hard to tell what DC1 will want to do in 6-10 years, but current indications are that computer science or some form of electrical engineering will be involved.  Zie might want to go to MIT or Harvey Mudd or Stanford (and zie might get in– it is hard to say).  These schools are not cheap, and at >55K/year in total costs (and rising), there’s not enough in the 529s to pay for even two years of school. We have another $170K in taxable stocks (that’s from the 50K we had in 2005 and the leftover money from leave we just put into the market) that presumably we would use for the remainder.  However, we will be taxed on that remainder, so it might make sense to start saving *more* in the 529 vehicle while we still have six years for earnings to accrue.

Indeed, the simple saving for college calculator suggests that we would need to more than double our monthly contribution for MIT and almost triple it for Harvey Mudd.

If I drop DH’s income, then the college calculator suggests we should start putting away $638/mo, which is still more than the $500 that is currently going towards college.

Both Harvey Mudd and MIT have 5-year BS/MS programs that are a good deal.  DC1 is so young– maybe we should be open to funding some graduate school.   It is also true that we have two children, and by the time DC2 is ready for college, we should know how much DC1’s experience ended up costing, so we’d be able to move some money over.  As of this typing, DC2 has $33K in hir 529 plan.  We’re on an oversaving path for hir for state school (the calculator recommends cutting back to ~300/mo), but would need to put away more for the average private school– for my alma mater, for example, zie would need more than double what we’re putting away (same for engineering schools, though it’s harder to tell if engineering is likely with a preschooler compared to a 6th grader).

Looking over all my old 529 posts, I usually contemplate putting less money into the 529s.  This is the first time I’ve addressed putting more money there.  I’ve been assuming we wouldn’t pay for any graduate school and have been worried about the risk of over-saving.  But with only 6 years left before college, I think it is unlikely I’ll end up moving to work for a university that pays even part of school tuition.  And college costs have been increasing, as has our net worth.  Maybe it makes sense to get more tax advantage, especially given that in 6 years taxes may have to go way up (or inflation may be sky rocketing).  It’s hard to say.  Not to mention that $500/month isn’t worth what it was 10 years ago.

And we’re no longer paying $1200/mo in principal and interest on a mortgage.  If DH doesn’t lose his job, that money has to go somewhere.

Under what circumstances would we regret putting more money in the 529s?  1.  If we move to the bay area for DH’s job and want to buy a house.  That scenario suggests needing loans for private school and DC1 being on hir own for graduate school.  2.  If for whatever reason neither DC1 nor DC2 end up using the money (ex. tragedy, one or both of the DCs becoming successful entrepreneurs, both DCs deciding they prefer much cheaper college options).  3.  The world goes to heck and we have to leave the country (in which case money in the 529s will be very low on our list of regrets).

Ugh, I keep going back and forth on this.  I could increase our monthly contribution to be more in line with what the simple calculator thinks we should be contributing, and then we could cut if off if DH loses his job.  We could put in a lump sum (though dollar-cost averaging seems much less risky given the current uncertain political environment).  I could split the difference and put in, say $750/month per child instead of either $500 or $1000 (which is about what we would need if I kept my job and DH stopped bringing money in entirely).  Or we could just keep doing what we’re doing, which is usually the easiest thing to do.

*note for newer readers:  We are already maxing out our easy retirement options (required contribution, one 401K, one 403b, one 457) and will pay off our house very soon.  So don’t worry about our retirement savings or debt loads!

What are you doing in terms of college savings?  How do you decide to change what you’re doing?

How do you account for big purchases in your budget/cash flow/etc.?

Stacking Pennies recently asked on her blog how she should account in her budget for spending on a new car.   She’s taken out a 0% loan (that she doesn’t need) in order to take advantage of the ability to leverage that money at no risk.  There are also complications involving getting a buyback on her previous car.

She wonders if she should put the 20K in a separate account both physically and mentally as if she hadn’t gotten a loan at all, or if she should incorporate the buyback and payments into her regular budget, and if so, how?

Now, there’s a proper accounting way to answer these questions, using assumptions about depreciating assets and so on, but proper accounting methods aren’t necessarily that helpful in personal finance where we aren’t getting tax breaks on rates of depreciation (meaning you should still do them for rental property or small businesses).

Instead what matters is that you get the information that you need to get a handle on your spending and your savings so that you’re taking care of your future self, saving for things you want to save for, and not penalizing yourself unnecessarily in the now.

There’s no one right way to deal with large lump purchases in your budget.  It’s whatever helps you keep track and make decisions.

I tend to think of things just in terms of my “emergency” fund (really it’s a slush fund since it includes money both for emergencies and for regular lumpy expenses) and how much it is growing or shrinking each month.  Whenever we have to decide on housing expenses like rent or a house purchase I’ll look at the whole fiscal picture and map out what we can afford, but in generally I’m really lazy about keeping track of our money, so just looking at the size of our slush fund each month.  We can do that because in general we spend a lot less than we earn each month.  So in the new car case, the car purchase might deplete our slush fund below levels that I felt comfortable with, meaning more of each month’s excess would need to be diverted to savings, and any monthly car payment would make it more difficult to refill the slush fund.

Another common strategy is instead of having one “emergency/slush” fund is to have specific separate accounts.  So car spending would come out of the “car” fund and anything not accounted for with the car fund would have to come out of the actual “emergency” fund (or luxuries fund or what have you).  Then you’d take into account the inflows and sizes of each of those accounts each month.  This method is similar to my lazy method but allows for more control.  You can better fine-tune your monthly spending and tracking of monthly spending so that you don’t have to have such a big gap between your take-home income and your spending.

How do you account for vehicle purchases (both with and without loans) in your budgeting?