Investing 100% of My Income: April Update

april investing reportIt’s the time of the month when I reveal my spending and investing habits for the past 30 days.

At the start of 2012, I pledged to invest 100 percent of my income into a combination of retirement accounts, real estate ventures and website-building activities. Will and I are living as a one-income household, spending his money and investing mine. Since I’m self-employed, it’s hard to predict exactly how much I’ll earn, but it’s reasonable to estimate that Will and I will bring in roughly the same amount this year, which means we’re investing 50 percent of our joint income.

You can read my January, February and March investing reports here.

So how did I do in April?

#1: I Maxed Out My Roth IRA!

I’m done, finished, finito with my 2012 Roth IRA contributions. Hooray! As you’ll recall, I fell just a few hundred dollars shy of maxing out my Roth by the end of February, and in March my budget got gobbled up by needing to pay for repairs on the 3-bedroom rental house that we bought for $21,000. I’ve been wanting to cross the Roth line-item off the list for more than two months, and I’m jazzed that I’m finally done!

#2: I Paid a Hefty, Hefty Tax Bill

Ah, the joys of self-employment: I get to write the government four checks a year.

My taxes aren’t withheld from my paycheck (because I don’t get a paycheck). Four times a year, I file “estimated quarterly taxes,” which consists of guessing how much I’ll owe and then sending the government a check for one-quarter of that.

After crunching the numbers, I discovered that every ounce of money-making effort I exerted during the month of April goes straight to the government. Gee, I hope they’re investing it soundly. :-)

Between taxes and capping off my Roth IRA, April’s income is spoken for.

Now Comes the Hard Part

Until now, this investing project has been simple. I make a hefty retirement contribution and continue working in the same manner in which I’ve always worked, without questioning the strategic growth or direction of my business.

This month, the hard part begins. If I’m serious about investing in my fledgling little businesses, then I need to carefully consider HOW my money is going to get spent. Should I concentrate on buying real estate or growing websites? Should I branch into podcasting and videos, or should I start upgrading my rental units? How will I have the time to grow these projects if I’m ALSO trading my time for money as a freelance writer?

I can’t just throw money at a business; I need to manage it carefully, making sure every penny is spent strategically. But that requires answering some tough questions.

This is an issue I didn’t have to deal with for the first four months of the year, when I was simply making retirement contributions and getting our rental house ready for move-in. I’ll face these questions head-on in May.

Perhaps this is an unexpected benefit, a blessing, of investing money in your business: it forces decision-making. It forces growth. It forces strategy.

In a strange way, perhaps investing forces you to hold yourself accountable. If I’m merely contributing my time, I might be tempted to sell myself short. But if I’m spending hard-earned money, I demand better results.



Thanks to Jimmy Benson for today’s photo.

How Much Does It Cost to Maintain A House?

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kitchen remodel
When we first purchased a house, we thought the only expense would be the mortgage. Haha!

Little did we realize that the mortgage is only the beginning.

Homeowners pay for an absurd amount of operations, maintenance and repairs:

Trash service. Water and sewer bills. Gutter cleaning. Termite treatment. Pest control. Power-washing. Replacing the siding, windows, roof, fascia, rotted joists, appliances, floorboards, drywall holes. HVAC tune-ups. Reinforcing a crumbling foundation.

The list goes on …

How can you estimate home repair costs? Read on.

What’s in a Mortgage?

First, let’s start with the obvious expense that leaps to everyone’s mind: the mortgage.

Your mortgage payment consists of four elements:

  • Principal (Your Equity/Ownership)
  • Interest
  • Property Taxes
  • Homeowner’s Insurance

Together, these are called “PITI” (Principal, Interest, Taxes, Insurance), which leads to the obvious joke: “Homeowner? What a pity!!”

How much will this cost? As of January 2015, the national average interest rate is 3.63 percent on a 30-year fixed loan for borrowers with good credit. If you’re cash-out refinancing a home, add one to two percent to the standard mortgage rate. If you’re putting less than 20 percent down (which I don’t recommend, unless you’re getting a screamin’ deal), you’ll also need to fork over private mortgage insurance, or PMI.

Insurance

As a general rule-of-thumb, homeowners insurance costs $4 per every $1,000 in home value, per year. (Or $400 per every $100,000 in home value.)

For example:

House: $200,000
Divided by 1000 = 200
Multiplied by $4 = $800

Homeowner’s insurance on this $200,000 house would cost $800 per year, which divides out to $67 per month.

Again, that’s a broad rule-of-thumb, so give yourself “wiggle room.” Remember: rental properties carry higher insurance premiums.

If your rental property is vacant, you’ll need “vacancy insurance,” which is more expensive than regular insurance. (We pay an additional $70 per month, on top of our regular homeowners insurance, for vacancy protection on a rental property that’s only worth $50,000.)

Water

When it comes to utilities, you control your destiny (within limits).

When we purchased our three-unit apartment building (triplex), the water bills regularly came to $350/month, or $120/month per apartment. Ouch!

So we embarked on an all-out Water Bill Offensive. We installed low-flow toilets, low-flow shower heads, and low-flow faucets coupled with additional aerators. We even redesigned the yard to minimize water usage. Eventually, we wrestled the water bill down to $120/month — only $40 per month per apartment. Hooray!

The moral of the story: You can chop (some) of your costs by more than half — but it’ll take focused effort in the beginning.

Trash

This rate will vary based on your city. We own 5 houses in Georgia, and pay around $33/month for every single-family home.

My triplex costs $100/mo for trash ($33 per unit * 3 units), because the City of Atlanta regards each unit as a separate home. Not all cities insist on charging multi-unit houses as “separate” houses, so research the policies of your particular city. If you have more than 4-5 units in a single building, it’s often cheaper to just forgo the city trash services and rent a dumpster through a private company (assuming your city allows this.)

Repairs and Maintenance

Here’s one of the BEST rules-of-thumb I’ve ever heard: Repairs and maintenance will cost one percent of the purchase price per year. In other words, for every $100,000 worth of house, you’ll spend $1,000 per year on maintenance.

“WTF? That sounds way too high.”

Au contraire, my friend.

  • Basic vinyl windows cost $250, including installation, permits and haul-off, and need replacement every 30 years. If your home has 20 windows, they cost $166 per year.
  • An asphalt-shingle roof on a 1,500-square-foot house will cost around $10,000 and needs to be replaced every 25 years. Your roof costs $400 per year.
  • Carpet, padding, installation, haul-away and disposal costs $15 per square yard and needs replacement every 8 years. If your home needs 100 square yards of carpeting, this costs $187.50 per year.

Apply this to everything: Water heater. HVAC. Gutters. Siding. Paint. Plumbing. Toilets. Shower valves. Countertops. Cabinets. Sink basins. Floor tile. Porches and decks. Appliances. Smoke alarms. Even outlet covers (yes, little things add up, especially when labor costs are involved).

We’re not done yet.

Those are replacement costs, but each year, you’ll have maintenance costs, as well. Your carpets need deep-cleaning. Your air-vents need professional suctioning. Your pressure-treated deck needs another coat of stain. You need to shell out for pest control, termite treatments, gutter cleaning, lawn aerating, re-sodding, mulching, weeding, re-sealing the grout around your tub.

Scared yet?

Don’t worry. This is where a “Home Repair Fund” comes into play.

Open a special savings account that’s earmarked specifically for home repairs and maintenance.

Many people don’t like the idea of cash “sitting” in their savings account, earning a return that’s so low it can’t even keep pace with inflation. I’d rather forgo some returns so that I can sleep at night. The water heater can burst at 2 a.m., or the dishwasher can overflow, ruining the carpet, or any number of other things can go wrong. When that happens, I like knowing that I can write a check to cover the bill, without breaking a sweat.

Property Management

This tip applies only to rental properties, of course.

Management usually costs 100 percent of the first month’s rent (for each new tenant), followed by an ongoing 8 to 10 percent fee. In addition, managers may charge extra fees for eviction proceedings, nuisance inspections and other additional work.

Sure, you can manage it yourself — but this takes time, and time is money. If you manage it yourself, you should pay yourself. You can’t pay yourself $0 and pretend your “profits” are higher — that’s B.S. accounting. “Make a profit AFTER paying yourself. That way, you can remove yourself from the equation and the numbers will stay the same.)

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An Open Letter to Early Tax Filers

An Open Letter To Early Tax Filers


Dear “responsible” people who filed your taxes months ago:

How the heck do you do it??

This January, like EVERY January that came before it, I pledged to file my taxes early. I hoped this would be the year I stop speeding down the road, flying through yellow lights, praying I don’t pop a tire, anxious to mail my taxes before the post office closes in five minutes. This will be the year I dodge the risk of peering through the locked Post Office doors, envelope in hand, realizing with a sinking stomach that the IRS will slap me with a late penalty for my tardy postmark.

In fact, every January I vow that filing taxes will be my first act in the New Year! I’ll drink champagne, wear a sparkly hat, and bust out my 1099’s.

But alas, reality steps in. My W-2 doesn’t show up until February. I certainly can’t calculate my taxes without my W-2. I also freelance for a handful of publications and, as anyone who works in the publishing industry can attest, editors are lazy busy. My freelance tax forms (the 1099-MISC) don’t debut in my mailbox until March.

Then there are the requisite 1099-DIV forms, tracking my dividend payouts; the 1099-INT forms, tracking my interest income; the 1099-B forms, tracking the stocks I bought and sold. Forms pour from every brokerage house where I’ve stuffed some cash. And let me assure you: my cash is so spread out it would make a “lady of the night” blush.

My investments are scattered among so many brokerage houses and banks that they read like a guidebook to America’s financial institutions. I have a so-called good reason for choosing each one. Firm X offers the lowest stock-trading fees. Firm Y carries the highest savings interest rate. Firm Z sells one particular index fund I’ve been eyeing for months. Come tax season, all of these institutions are mailing me forms.

Each form trickles in, slowly, over the span of months, and summarily gets stuffed into a giant manila envelope without a cursory glance. When I eventually peer at the results, I’m astonished: Firm A paid me $21 in interest. Firm B says I earned $45 in stock profits. Firm C tells me I paid $2.50 in foreign taxes.

Each of these must be tallied. “Box 1a gets reported on Form 1040, line 9″ … heaven forbid I enter the wrong boxes’ tally on the wrong line. It would trigger a massive do-over.

A neighboring manila envelope holds a stack of receipts for my freelancing business. These also must be tallied and entered on Schedule SE, a self-employment form which helps me fill out Schedule C. Lather, rinse, repeat: when I’m done, I launch a second self-employment form for my other business.

I tabulate my health costs, my mileage, my contributions to tax-deferred accounts. Then I run a Google search for this year’s tax credits, find a few for which I qualify, and fill out those forms as well.

The process eats several hours. It’s boring. But it’s gratifying, in an odd sort of way. My taxes are complicated, but not SO complicated that I can’t do it myself. It’s a challenge. It’s a mystery. It’s an emblem of DIY culture.

And it’s not due until Monday. Monday at 5 p.m. when the post office closes, to be exact. So despite my promise to myself in January, I don’t actually start my taxes until Monday at noon.

It takes me four hours to finish my taxes, and another 45 minutes to rummage for an envelope, find my car keys, and honk in rush hour traffic while thinking “now I remember why I never drive anywhere at 5 pm on a weekday!” I screech my car to a halt outside the post office, clutching the envelope in my hand, at precisely 4:55 p.m. I’m shocked to see that I’m the only one there. Where is everyone? Are they all filing late? Or … have they really all filed early? Am I the only uber-procrastinator in town?

So dear responsible tax filers, those of you who processed your taxes months in advance: I hold you in high esteem. Although in the back of my mind, I suspect you e-filed at 11:59 p.m., taking advantage of the glorious 7-hour extension that e-filing brings. Which makes me truly the early bird.