Done To Zen

This post is dedicated to Chris Moran for being the first one to comment on my blog. :-)

For whatever reason, I thought I was wasting most of my income. I crunched some numbers today and realized that, no, I wasn’t actually wasting most of my money. Apparently, I was saving some of it, too.

Savings/Expense Breakdown: 

I’m saving 45% of my paycheck. 52% goes towards fixed expenses and 3% towards variable expenses. My discretionary spending amount is miserly .1% (let me repeat that: .1%) of my salary. That sucks.

I would much rather prefer the % to be something like: 60% savings, 30% expenses, and 10% discretionary. More than increasing my savings, I really, really want to decrease my fixed expenses. The two areas where I can realize the most savings is in taxes and mortgage interest. I have to figure out how, though. I was fortunate to buy my house at the right time, so my interest is really low already. But taxes…

Anyhow.

Savings Breakdown

My 401K contributions are embarrassingly small right now. I have a plan to steadily increase my contributions over the next couple of years until I max out the account. For the time being, though, I have to keep enough cash in my emergency fund to feel comfortable. I also need to save enough to meet the minimum ($3000) for opening an index fund account.

As far as the wedding fund goes, I’ve been hearing rumors that even simplest of weddings take about $25,000 these days, so I figure that now is the time to start saving for it. I’m not adding too much to the account right now — I plan on increasing the amount by a couple of hundred dollars annually.

Expenses Breakdown

I was amazed to find out how much tax I’m paying. Then I got depressed and mad and frustrated and a whole slew of negative emotions. I now know what I’m going to be researching over the next couple of months: studying the tax code to figure out how to minimize the amount of money I pay to Uncle Sam each year. One thing to note is that these calculations don’t take into account tax savings I get thanks to my home, which is a couple of thousand dollars.

Another thing to note is that these calculations don’t take into account my student loans, which I’ll have to start paying off starting in a month or so.

House Equity/Net Worth Breakdown

Right now, my home equity is worth about 60% of my net worth, which isn’t the suckiest aspect of my finances but comes kinda close. The recommended ratio ((house value - mortgage) / net worth) is around 20%. I have a long way to go, but I’m not too worried about this. Since I only recently bought my house (at a great deal, too), it makes sense that it would contribute the most to my net worth. What would be worrisome is if this ratio didn’t change for the better over 2008 and 2009.

Income Breakdown



Right now, most of my income (about 95%) comes from my day job while the rest comes from rent (I’m sharing my home with another girl). As I mentioned before in Is net worth the only statistic that matters?, I believe that passive income is one of the most important aspects of financial freedom. While I took a major step in the right direction this year (two years ago, all of my income was from my job), I think there is much to improve in this area…

I’m always on the lookout for ways to diversify my (currently practically non-existent) portfolio. I had heard about T-bills at some point, so I took the time today to research more about various treasuries offered by our government. Treasuries are attractive because they are loans taken by the US government, and the likelihood of a default is somewhere south of non-existent. Another nice thing about them is that the interest is exempt from state and local taxes. On the other hand, treasuries don’t provide as good of a return as the stock market, for example, so they should be used in moderation.

There are four main types of treasuries: treasury bills, treasury notes, treasury bonds, and Treasury Inflation Protected Services.

Treasury Bills, also known as T-Bills mature in one year or less. T-Bills don’t pay interest; rather they are sold at a discount. For example, a T-Bill valued at $1000 might be sold at $990. The difference between the face value and the purchase price is how you make money. Common maturity dates are 4 weeks (1 month), 13 weeks (about 3 months), 26 weeks (6.5 months), and 52 weeks (1 year).

Yield is calculated as follows:

% yield = ((face value - purchase price) / face value) x 360/days ‘til maturity

Treasury Notes, also known as T-Notes, pay you interest every pay cycle (usually six months) until the maturity date, at which point you receive the face value of the note back. Common maturity terms are two, five, and ten years. The purchase price of a T-note can be either smaller or greater than the face value. In the recent auctions, T-notes have been selling for just a fraction less than their face value for interest rates between 1.5% and 3.5% based on the term. Interest is exempt from state and local taxes.

Treasury Bonds, also known as T-Bonds, are similar to T-notes but offered for longer maturity terms, from ten to thirty years. Thanks to surpluses, the government stopped issuing T-bonds on October 31, 2001. But in light of record deficits and high demand for pension funds, it reintroduced T-bonds in February of 2006. T-bonds get auctioned quarterly. The interest is exempt from state and local taxes. Interest rates in recent auctions have been around 4.375%.

Treasury Inflation Protected Securities, also known as TIPS, are securities whose principal is adjusted to keep pace with inflation (increase in principal) and deflation (decrease in principal) through the Consumer Price Index. You get paid interest every 6 months on the adjusted principal. At maturity, you receive the larger of your original amount or the adjusted amount. So if the TIPS comes to maturity while the dollar value is deflated (don’t laugh), you make more money because you get your original amount back. Interest is, once again, exempt from state and local taxes.

Reasons for buying treasuries

Why would you buy treasuries when the largest interest payment is less than 5%? For the same reason you keep some cash on hand: for portfolio stability. While stocks typically give a far better return than treasuries, treasuries are stable and provide you with regular income, year in and year out.

How to buy a treasury

The discount price of all treasuries is determined at an auction. You can buy a t-bill through a non-competitive bid or a competitive bid. In the former, you are agreeing to loan the money out at the discount price determined by the auction. In the latter, you indicate what discount price is acceptable. Depending on the price set in the auction, the government may either accept your amount in full (for example, you state $990 is OK and the price determined by the auction is $980), accept less than full amount (your bid = price set at auction), or reject your offer if you bid less than the auction.

You can buy treasuries via TreasuryDirect.gov or through a bank or a broker.

Flexo mentioned how common forms of passive income (such as real estate investing and blogging) are really not forms of passive income. I completely agree. Real estate and blogging don’t provide truly passive income.

But the question is if a truly passive form of income is the ultimate goal? I’ll look at blogging as an example. I’ve been blogging since early 2003 (those blogs have long since slipped into non-existence due to neglect). Takes me about 10 minutes to 3 hours to write an article, depending on the length. Done articles (articles for this blog that is) take me around 1 hour. Since I wake up at 4AM every day, I’m done with the article for the day before 6AM. To put this into perspective, most people are still snoring at this point and even the sun is groaning and moaning. This leaves me with 15 hours to do what I want (except that I still have a job, dang it).

No, I did not count everything else that goes into blogging — responding to email, SEO, brainstorming for new ideas, advertisement, spam, hackers, server issues — but these are not things that take huge amounts of your time to do. Well, email might, but flexing your self-discipline muscle will leave you with no problem.

There are few truly passive sources of income. The trick is to find things that that will provide you income for little effort. One could argue that blogging requires a lot of work in the beginning, which is true. But if you enjoy writing, then it hardly matters. :-)