Back before we became self-employed, my husband and I each worked for a large company, and we both had 401k accounts.  When we quit our jobs, we rolled those accounts over to IRAs, and that has been our retirement savings ever since.  In the early days, we didn’t contribute anything at all, but gradually worked our way up to putting the maximum allowable amount into our accounts for the last few years.  Although we were happy to be maxxing out our IRAs, we were aware that a lot of people our age have IRAs in addition to employer-sponsored retirement accounts.  We incorporated our business four years ago, and considered setting up a retirement plan at the time, but the money just wasn’t there.  We were drawing pretty small salaries, and just maxxing out the IRAs was a stretch.

But time has passed and our business has grown, and we decided to revisit the retirement account question.  We looked at three options: the Individual 401k, the SIMPLE IRA, and the SEP IRA.  The 401k option would have allowed us to contribute a larger amount of money, since the contributions aren’t based on salary (we could each put up to $49,000 into a 401k).  The SIMPLE would have allowed us to contribute $11,500 of our salaries, plus up to a 3% match from our corporation.  The SEP allows our corporation to contribute up to 25% of our salaries into our accounts.

We debated the relative merits of each option, and discussed it with a representative at Vanguard, where we had decided to open our accounts.  The 401k allows the highest contribution, but is also the most complicated to set up and maintain.  And neither of us is going to come anywhere near having $49,000 to put into the account.  So the higher limit would pretty much be a waste at this point.  That narrowed the choice to the SEP or the SIMPLE, and we liked the simplicity of just having the contributions come straight from our corporation, without having to mess with paycheck deductions and contributions from multiple sources.  We’re an S corporation, so all of the money our business earns above expenses goes to us one way or another – either by salary or by distributions.  Now we’ll just have lower distributions and the the company will put money into each of our SEP IRAs each month – and the company will get a tax write off for doing so.

We’re still working at paying off our mortgage as quickly as possible, and we will continue to max out our IRAs and HSA, and keep contributing to our emergency fund and our son’s college account.  With all of that, I think that the restriction on the SEP that limits our maximum contribution to 25% of compensation will be more than enough.

It feels great to be opening our new SEP.  We completed all of the paperwork yesterday, and things should be on track for initial contributions in March.  After eight years of self-employment, our business is finally starting to be all grown up.

As with any financial ideas that you read on a blog, please don’t think that what works for us is the best option for you.  If you’re looking at setting up a retirement account for your business, do your research and talk with an accountant if you have questions.

In other news, my article was an editor’s pick in the Festival of Frugality today.  Thanks RC!

Recently I got an email from a long-time reader, asking me if we still keep track of our monthly expenses.  I guess the answer is both yes and no.  We do pay close attention to what we are spending, and I check our bank balances and credit card transactions on a daily basis.  But we no longer keep track of every penny, nor do we break our spending down by category anymore.

We paid off the last of our non-mortgage debt in 2007.  Our income has slowly increased over the years without an increase in our living expenses (actually, as we paid off debt, our expenses went down).  And neither of us liked keeping every receipt for every purchase.  It was interesting to keep track of our expenses, and it did provide some motivation for keeping our spending down.  But we’re pretty far along on our frugal journey at this point.  Frugality is second nature around our house, and we never spend money mindlessly.  We ponder our purchases, buy used whenever possible, and avoid buying much of the time.  We use homemade cloth diapers, prepare pretty much all of our food from scratch, ride our bikes instead of driving, read books from the library, and we don’t even have a TV anymore.  Our cars are nearly 20 years old (no payments, and very inexpensive insurance and registration fees), and everything we wear comes from thrift stores.  We’re spending so much time trying to turn our little plot of land into a mini farm that we don’t have time to go out and spend money (we have spent money on things like fruit trees and berry bushes, but we planned for those expenses).

So we stopped keeping track of every penny spend quite a while ago.  Instead, we use a pay-ourselves-first approach that we like better.  Our only debt is our mortgage.  That means that each month our bills amount to current living expenses plus the mortgage.  In addition to that, we’ve created “bills” for several savings accounts.  Some are automated, some are not, but they are all priorities.  We have our son’s 529 plan, our HSA, our IRAs, and our emergency fund.  We also pay an additional amount towards our mortgage principal each month (it varies, but we try to make sure that each month we pay a little more than we did the month before).  Once we pay all of those “bills” we can use whatever is left over for current living expenses.  If there is a higher-than-usual amount left over, we tend to stash it in one of our savings accounts – we don’t spend it just because it’s there, but that’s probably a result of being frugal for so long that the habits are ingrained.

This is what works for us.  It guarantees that we keep making progress with our savings goals, but it also allows us some flexibility with how we spend our money.  Now that our checking account is paying more interest than our on-line savings accounts, we’ll be keeping more money in checking.  This means that we’ll have to do a little more keeping track, since money that is in our checking account will technically count as savings, and thus be untouchable for day to day expenses.  I do like having our savings in a separate place (out of sight, out of mind), but the extra interest in the checking account is enticing, and we’ll make it work.

What about you?  Do you prefer to keep track of every penny? (my mother started doing that in the early 70s, and still does to this day, even though she and my dad don’t need to anymore)  Do you use the pay yourself first method?  Do you have a budget at all?  Have you started keeping more careful track of your money since the economy headed south last year?  I’m curious to hear what other frugalites (and not-so-frugalites!) do.

As I mentioned yesterday, our stock-based retirement portfolio is looking a little rough around the edges these days (and I’m sure it’s even worse now than it was yesterday – but I’m not looking).  Times like these are when I’m glad that we’re focusing on paying off our mortgage as quickly as possible, in addition to funding our IRAs and our HSA (since both are equities-based, they’re a bit ulcer-inducing at the moment).  People who oppose paying down a fixed rate mortgage (ours is at 6%) point out that you can make much better gains in the stock market, especially after you consider the tax-deductibility of mortgage interest.  But our mortgage interest is relatively low, and the only other income tax deduction we had last year was charitable contributions (HSA and IRA contributions are deducted separately – we had both of those as well).  The end result was that it was better for us to take the standard deduction.  So our mortgage interest isn’t really even a tax deduction for us, since we get about the same tax benefit from the standard deduction (this year we might be able to deduct interest, since we’ve been able to give more to various charities.  I don’t know the final numbers yet, but it’s going to be very close between the two options, so mortgage interest deduction isn’t really saving my family much money at all).

Since our stock market assets are tanking by the day, I’m happy that we’ve also been putting extra money towards our mortgage and into some basic online savings accounts (while they’re not paying much in interest, at least they’re not losing money).  Since we’re still in our "starter house" and planning to stay, we really don’t care what the value of the house is.  To us, it has immeasurable value, since it’s a home for our family.  We bought a house in a less-expensive neighborhood in a somewhat expensive city, so while our home didn’t appreciate like some during the early part of this decade, it also hasn’t dropped in value the way some bigger homes have.  But as I said, the current value of our home isn’t important to us, since we don’t intend to sell.  The mortgage payment is well within our means (one of the best things about staying in the first house you buy), and we love living here.  What is important to us is the principal balance on the mortgage statement we get every month.  We love seeing that number go down.  So while we will continue to max out our IRAs and HSA, we’ll also continue to put extra money towards our mortgage every month.  Because no matter what the stock market does, an extra principal payment on our mortgage always translates into a lower number on the next month’s statement.  And that provides a bit of balance when the IRA balances also seem to be getting lower each month. 

Over the last few weeks, as the stock market kept dropping, I decided I just wasn’t going to look at our retirement account values for a while. After all, we’re in our early 30s and have many years to go before we’ll be using those funds. But tonight I decided to take a peek, after reading about yet another very bad day on Wall Street. Man, I wish I hadn’t looked. At the end of August, our combined retirement accounts were worth about $42,000. Today they’re worth about $31,000. Ouch. Obviously our investments are pretty heavily tied to stocks, since we have such a long time until retirement. So for all intents and purposes the values are just on paper, since we’re not going to be pulling money out of those accounts for many years to come, and one would assume that the market will bounce back over the next 30 years. But still, ouch.

Ok, I’m going back to my ‘not looking’ strategy. Our investments are on auto-pilot, we have a diversified portfolio, we don’t have consumer debt, we’re working to pay off our mortgage as fast as we can, we live in a smaller house than we can "afford" as far as mortgage companies are concerned (and we plan to stay), and cracking into our retirement accounts is still on the distant horizon. So now I’m going to just try to not worry about the stock market, and get on with the rest of my week. And if you haven’t looked at your account balances this week, trust me – you don’t want to know.

Well crud.  That exchange traded fund purchase I made last night didn’t go through.  The markets had already closed by the time I settled on GEX, and it had closed at $42something.  I had talked to a rep at Ameritrade who said that if the price for the number of shares I bought went higher than the amount I had in my account, it would show a deficit and I’d have to send in more money to cover it.  But I’ve already maxxed out the account for the year, so I can’t send in more money until January.  So I had to set a limit above which I wouldn’t buy, in order to not spend more than I have.  (I wanted to just say “buy $5000 worth of this etf at whatever price it opens at,” but they wouldn’t let me do that).

So this morning I went in and looked at my account, and the order was still pending, because GEX opened $2 higher than it closed yesterday.  Then while I watched, it went another dollar higher.  But this time, the markets were still open, so I canceled my pending order and placed a new one, to buy at the current market price.  So I ended up with 107 shares instead of 115.  The purchase I made in my traditional IRA did go through, because that etf opened at about the same point it had closed at yesterday.

Dang it.  If only I had gotten around to my purchase yesterday while the markets were still open.  I’d have 300 extra dollars in my account right now.  But then again, I could have gotten hit by a car on my bike ride home from the gym last night.  All in all, life is still good.  And now I really don’t have to think about my IRAs again until January.

Earlier this week, we made our final 2008 deposit into my Roth IRA.  I had let the money accumulate in a money market all year, in anticipation of buying an ETF once I maxxed out the account (my plan is to buy one ETF per year, in order to minimize the amount I pay in commissions).  I had been searching for a clean energy ETF, and have been researching them for some time.  I looked up “clean energy etf” and read everything on the first two pages of google.  I also referenced this site, which has some good info on mutual funds and exchange traded funds.  By no means do I know everything there is to know about clean energy ETFs, but I know more than I did six months ago (that’s your disclaimer – make sure you do your own homework, and find the fund that works for you).  I settled on Van Eck’s Market Vectors Global Alternative Energy ETF (GEX).  I liked the focus on wind and solar energy, and I liked the level of US vs. foreign holdings (35% US companies – compared with PBW, which holds nearly all US companies, and PBD, which holds mostly foreign companies).  So as of the opening bell tomorrow, I’ll own 115 shares of GEX.  I love saving, and socking money away for retirement.  But picking funds is not my favorite way to spend a day.  Good thing I’m a buy and hold investor – I like only having to do this once a year.   I also had $1800 sitting in my traditional IRA from contributions I made last year, and I used that money to buy shares in PowerShares Global Clean Energy (PBD).  Now I can sit back and let them do their thing.  I have no interest in timing the market.  The money in my IRAs is there for the long haul, so I’m mostly ignoring the downward spiral that the stock market has been in this week.  I figure that the whole landscape will look a lot different 30 years from now anyway.  I’m just glad to have made my choices, bought my ETFs, and closed the book on my IRA for 2008.

We’ve almost checked everything off our financial goals list for the year. Not bad, since we still have almost five months to go. We’ve maxxed out the HSA, and my husband’s IRA is on an automatic deposit schedule that will reach $5000 by December. We’ve paid off $5000 in our HELOC, which continues to be a priority. We’re now working on my Roth IRA. We’ve put $2000 into it so far, so we have another $3000 to go. The money we’ve contributed so far is just in a money market account. My plan is to get the entire $5000 into the account, and then pick one exchange traded fund to buy. I can buy ETFs for $10/trade (so one $10 charge for the whole $5000 investment), as opposed to $50 if I want to buy a mutual fund. I like the idea of buying one ETF each year. Over time, my portfolio would include several ETFs, which are automatically diversified much more than individual stocks.

So here’s the tough part. I want to invest my Roth in socially responsible funds. In particular I’d like to go with sustainable and alternative energy, organic farming, fair trade in developing nations, etc. But I’d also prefer that my retirement funds gain value as time goes by.

I’ve been looking at some exchange traded funds that are considered socially responsible, and I’m finding some tough choices. For example, I found PowerShares Wilder Hill Clean Energy Portfolio (PBW), which is primarily invested in alternative energy (solar, fuel cell, etc.) We love the idea of supporting alternative energy research and development. But Morningstar gives this ETF one little star, above average risk and low returns. On the other hand, the iShares KLD Select Social Index Fund (KLD) gets three stars, below average risk, and average return. But when you look at the top ten companies that KLD is invested in, it’s things like General Mills, H.J. Heinz, and Pepsi Co. It’s a socially responsible fund because they’re not investing in guns or alcohol or the Chinese government, but I’m not really that into the idea of supporting Pepsi. I don’t really want to send my money to big processed food companies that encourage conventional agriculture and junk food addictions.

I’m still working on this. I’m going to keep searching, trying to find my ideal ETF. Maybe it’s not even out there yet, although socially responsible investing has come a long way in the last ten years. In our day to day life, we’re very focused on minimizing our ecological footprint, avoiding toxic chemicals, eating organic food, and minimizing waste. So it doesn’t make sense to be blindly throwing money into the stock market, investing in big-name companies that aren’t concerned with any of the issues that we consider really important. I have a few months to get all this figured out, because our plan is to put $1000/month into my IRA for the next three months. So it will probably be December before I’m ready to buy an ETF. I’ll let you know what I find.

What about you? How do you balance your values with your need for investments that perform well? Are you willing to settle for lower returns in order to really customize your investments to precisely match your values, or would you prefer to deviate a little from your personal beliefs, and invest in companies that show good returns but don’t necessarily mesh with your values? Or do you just say to heck with it, and invest in whatever companies make the most money, regardless of how they do it?

I just finished our taxes.  It’s the culmination of probably 40 hours of work over the last several weeks, and it feels pretty darn good.  I spent $125 to get one hour of consultation from our accountant, but other than that I did it all on my own.  I finished the state and federal corporate returns last night, and our personal state and federal returns today.  I put an additional $1000 into my IRA for 2007, to get our AGI down below $52,000 (it turned out that I didn’t need to make the contribution after all, because our AGI dipped below the $52K mark with some other changes I made along the way, but the money’s in the IRA now anyway, and we did get an additional deduction for it).  So we qualified for a $400 savers credit, which is a nice bonus. 

I had wanted to have the corporate returns mailed today and the personal returns e-filed, but I think I’m going to wait until Monday.  I’ve spent so much time on them over the last few days that I think it might be a good idea to just leave them alone for a couple days and make sure I don’t think of anything I want to change or add before I file them.  The extension I filed for the corporate return gives me 6 more months, and I still have 3 weeks on the personal returns before tax day, so I suppose it’ll be ok to wait a few more days. 

Assuming I don’t think of any changes I need to make, we’re going to be getting a $3800 refund.  Oops.  In the words of our fearless leader, I guess I misunderestimated our taxes last year.  I usually try to pay pretty close to what we owe each year, in order to avoid big free loans to the government.  But I’d still rather be getting a big refund than be in the boat we were in a few years ago when we owed the IRS $7000 at tax time.  Last year was tough, because it was our first year as employees of our corporation, and I wasn’t sure how much our dividends (from which no taxes are withheld, but taxes are still owed) were going to affect things.  Also, we ended up contributing more to our HSA than we had thought we would.  So all in all, I’m happy with the refund (and it will go straight towards our HSA and my husband’s 2008 IRA).  But I’m going to make some changes in our withholdings to make sure that we’re not withholding too much for the rest of this year.

It’s after midnight, and I’ve been working on our taxes since about 11 am, so I’m a bit cross-eyed at the moment.  But I’m nearly finished.  I have a meeting with our accountant on Monday to go over our corporate return, which I need to finalize in order to complete our personal returns.  But it shouldn’t take more than a few hours after my meeting with her to be able to file everything. 

I deposited our paychecks today and was planning to transfer $2600 to our HSA tomorrow, which would have maxxed it out for the year.  But now that I’ve got a rough idea of what’s going on with our taxes, I think I’ll only put $1000 into the HSA, and hold onto the rest for a few days.  When I did our taxes today, I estimated the amount that is going to show up on our K1s from our S-Corp, since I haven’t finished the return for the S-Corp yet.  All my other numbers were exact, but the K1 amounts could be off by a few hundred dollars in either direction.  With the estimate I made, our AGI for 2007 is just over $53,000.  That puts us over the limit to claim the Savers Credit for our IRA contributions (we put $4200 into our IRAs in 2007).  But if I were to put another $1500 into my IRA as a 2007 contribution, it would lower our AGI to under $52,000 (the cut off for the savers credit for a couple filing jointly), and we would get a tax credit of 10% of our IRA contribution.  So by putting $1500 extra into my IRA, we would not be paying taxes on that $1500, and we would also get a credit of $570 on our tax bill. 

So… I’m going to hang onto the money I was going to send to the HSA.  Once I meet with our accountant and get the final numbers for our K1s, I’ll figure out exactly how much I need to put into my IRA for last year in order to get our AGI below $52,000, and send in my contribution.

I’m exhausted right now, but I’m stoked to be so close to finishing our taxes, and I’m really glad I noticed how close we were to qualifying for the savers credit before I drained our checking account to max out our HSA.  The HSA will still be there in April – and I’ll be able to use our tax refund to max it out.

All is takes is a quick glance around the internet to see that the financial outlook these days is not as rosy as it has been for most of this decade.  The doom and gloom crowd is predicting a full blown recession, while the more optimistic folks say that there will just be a bit of an economic downturn.  Nobody is predicting 2008 to be a booming year for the dollar, housing market, or finances in general.  So for all the personal finance people out there, does all this economic rumbling change anything about the way you spend or save money?

For us, I think we’ll keep right on doing what we’ve been doing.  I don’t see us hiding gold bars under our bed anytime soon (but I can’t tell you where I live, in case we change our mind…) or selling everything and moving to Australia. 

We’re going to keep plugging away at our emergency fund, and keep focusing on our main financial goals for 2008 (we just put $1200 into our HSA this week, which is a good start toward the $5800 allowed for the year).  We’re going to keep paying extra principal on our mortgage every month, working towards our goal of paying it off by 2018.  We’re going to keep paying off our credit card every month.  We’ll keep the bulk of our assets in the stock market, because we’re in this for the long haul – most of what we have is in IRAs and can’t come out for more than 30 years anyway.

When I read about economic instability, the sagging dollar, and the mortgage industry mess, I’m very glad that we worked so hard to get ourselves out of debt over the last few years.  I’m glad that we got a fixed 6% mortgage when we bought our house, and aren’t stuck with an ARM.  I’m glad that we didn’t refinance and take cash out since we bought our house.   And I’m glad that our frugal habits are so ingrained that they are second nature to us.  It provides a sense of comfort, knowing that we can get by with very little. 

I hope that 2008 turns out to be a good financial year.  Nobody wants to see the stock market decline or the dollar dwindle any further (except maybe all the people with gold bars hidden under their beds…)  But I’m comfortable knowing that we’re on the right track for long-term success, and that our living expenses are currently well below our means.  So we’re just going to stay on the same course we’ve been on for the last few years.

What about you?  Does all the financial pessimism in the news make you nervous?  Are you changing any of your short-term financial goals or plans because of the current economy?