Keeping the family in synch with finances

I often come across couples where one or the other manages the family financials. We fall in this category as well. I am a personal finance junkie and my wife has little interest in it - so I end up managing most of the finances for our family. To keep my wife in synch, we do the following:

• First, I try to consolidate our accounts to as few as possible. To this end we have done a few things: rolled over prior 401K accounts into a single IRA, moved all investments into 2 brokerage accounts, and closed some bank accounts that we were not using. However having a small number of accounts is not easily achieved. We still end up with a handful of accounts: I have a 401k and a stock grant account at work, a traditional IRA which has roll over from previous 401Ks, we each have a Roth IRA, one 529 account for our kids, one checking/savings account with one of the large banks, two online savings account with a high yield bank (we could go for one but I do not want to break the CDs that are in the other), one brokerage account (in which we do regular investments). We also have savings accounts for our kids in online banks and are planning to open up brokerage accounts for them. So we can reduce the number of accounts but cannot get to a few accounts.

• Next, we create a list of all our accounts every year with account information and balances. We also add to the list our life insurance information (through work and outside), active credit card accounts, mortgage account and different frequent flyer accounts. For each account we list our account number, online access ids and passwords, and balances that we have. We keep this list in a safe place that my wife knows how to access.
  

• We also have a will that defines custody for our kids and beneficiaries for our accounts.

Here is the template that we fill out every year. http://mtgoyal.googlepages.com/Accountinformationshell.xls

Please share things that you are doing to keep your family in synch on finances. Comment on this blog or write to me at tgoyal@hotmail.com.

Earn higher returns by investing regularly

If you invest a fixed amount of money in a mutual fund periodically, you can boost your returns. This method, called dollar cost averaging, is a simple way for investors to accumulate wealth and earn a good return on their investment. If you have a certain amount of money to invest, it is better to purchase equal value of the investment at periodic intervals.

There are obvious reasons for which dollar cost averaging is very beneficial. First it lets you avoid taking a big stake in a security when its value may be high. If the security loses a value initially, it can take a long time for you to recover the initial loss. Since I have never been able to time the market, I like buying periodically. Second, most of us with a paycheck get paid at periodic intervals. Setting up an automatic investment plan that invests money at these intervals also helps from a cash flow perspective. But the third reason that I like dollar cost averaging is that it can help you get a higher return on your invested capital. This is because when you purchase a fixed value of a fund periodically, you automatically buy more units when the price is lower and buy fewer units when the price is higher. This results in a higher return on your investment. Today, I am going to illustrate this with a contrived example.

Let’s take a mutual fund whose price on December 1^st and August 1^st was $100. Let us assume that we were on an automatic investment plan purchasing $200 worth of this mutual fund at the beginning of every month. Our total investment in this example for the 5 month period would be $200*5 or $1,000. The price of the mutual fund varied over the dates when we purchased the stock. On the first of Aug, Sept, Oct, Nov, and Dec, a mutual fund unit was priced at $100, $70, $100, $130, and $100. The following table illustrates the number of units that we would purchase over time.

The value of our investment at the end of 5 months is $1,040. The total money we invested was $1,000. This resulted in a return of 4% over the 5 month period. So although the mutual fund price went up by 30% and went down by 30% off the price you purchased, you still came out ahead.

We can explain this magic of dollar cost averaging as follows. In Sept, when the price of the mutual fund was lower, because we were still purchasing mutual funds worth $200, we purchased more units (2.86 units). In Nov, when the price of the mutual fund was higher, we purchased fewer units (1.54 units). Since we are investing the same amount of money every month, we automatically purchase more units when the price is lower and purchase fewer units when the price is higher, giving us higher returns. In the above illustration, if we had invested the entire capital of $1000 on August 1^st, our return would have been zero. This example is made-up and assumes a very high volatility to amplify the impact and has the same price in the first and last period to make it simple. But it is still useful to illustrate the benefit of dollar cost averaging.
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Refinanced without costs...

A couple of weeks ago, I had written about the merit of refinancing without paying costs (see: It does not make sense to pay for refinancing your mortgage…).

Following the same thought, this week, I was able to refinance my mortgage at a fixed rate of 5.875% for a 30 year term with a lender's credit of $2,800. Interestingly, I am using the same lender that issued my current 30 year fixed mortgage of 6.125% in December 2006. The closing costs this time are estimated to be $2,400, which is slightly higher than what I paid last time. Since the lender's credit of $2,800 is higher than the estimated closing costs of $2,400 I will get a one time benefit of $400 at closing. My current loan has 28.5 years left on it. Since I plan to pay off the new loan in the same term, I will see a savings of $50.70 a month, or $608.38 a year.

I also had the option to receive a slightly lower rate if I was willing to pay for the closing costs. However as last time, the math again was in the favor of a slightly higher rate with no closing costs.

Leave a comment or contact Tarun at: tgoyal@hotmail.com