Last month, we opened an IRA for my husband with Fidelity, and now we have a Fidelity Retirement Rewards American Express.  The card gives us back 2% of all our purchases, and will automatically contribute the rewards points to the IRA.  We’re keeping the Visa for places that don’t accept AmEx, but most of our purchases will be on the Fidelity card going forward.

We put $2500 into the IRA when we opened it, and we’ll put another $1500 into it sometime this summer.  Then we’ll just wait and see how much we spend on our credit card over the course of the year, and make up the difference to get to the $5000 contribution limit sometime in December or January.

Our typical monthly spending on our credit card is usually somewhere between $1500 and $2500 (last month I paid a year of auto insurance on our card, so it was closer to the high end.  This month, we’ll likely be under $1500.  It varies quite a bit).  But every time we reach $2500 in charges, we’ll get $50 deposited into my husband’s IRA.  Should happen at least once every two months, sometimes more often than that.

I have a friend who has been using the Fidelity AmEx for years, and has always been happy with the card.  As far as I can tell, it’s a pretty sweet deal if you’re consistent about paying off balances in full each month.

My husband and I have been reading the Bogleheads forum for a few months now, and have found a lot of the discussions to be fascinating.  We’ve also gained some great ideas in terms of strategies for maximizing risk while minimizing expenses with our own investments.  If you’re not reading Bogleheads yet, check it out – there’s a topic for just about everybody on that site.

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!

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.

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. 

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.

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.

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 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.