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Do you have a Purpose and a Plan for your Money?

July 17, 2009 · Filed Under Finances · 1 Comment 
Photo by Odalaigh

I like to save money;  I always have.  Even as a kid I remember saving up all the money I earned for a long, long time.  I still like to save today.  And since we paid off the remainder of our student loans last year, we’ve been saving a lot of money in various accounts.

But why am I saving?

I tend to fall into the trap of just saving money for the sake of saving it (now there’s a lot worse things you could do with your money, frankly).  I feel, however, that you should really have a purpose for the money you save (and I don’t usually do a good job of this).  Remember, money is only useful when it is spent.  Amassing a huge fortune doesn’t really do you or others in this world much good if you hoard it all for yourself and die with a huge bank account balance.

The genesis for this post came as I was preparing my latest monthly net worth update.  I usually look at the overall net worth increase or decrease as a rough gauge of how we are doing financially.  While doing that the other day, Istarted to think, “that’s all well and good, but will I have enough money to buy a car the next time I need to get one?”

Different goals require different strategies

The point that I’m trying to get across is its not enough to just stash a bunch of money in a 401k or IRA or savings account or whatever.  There are many different goals for which you are saving money right now such as your next car, a home, college, vacation, retirement, starting your own business, etc.  And you will (at least you should) use a different strategy to save for each of them.  For instance, saving for next year’s vacation (a short-term goal) probably involves monthly deposits to a CD or savings account while preparing for retirement (assuming it’s a long-term goal for you) probably requires a diversified mix of stocks, mutual funds,  bonds, real estate, etc.

Set specific savings goals and track them

So in my last net worth update post, I mentioned that my net worth increased 4% this past month…but so what?  Would I be able to get new siding on my house if I wanted to?  What about remodeling our master bath?  It is very important to set goals for your savings and monitor your progress toward each goal individually.  This obviously makes it easier to track your progress, but I think it is also highly motivating as well.  Creating a goal and seeing yourself step closer and closer to that goal can be very powerful in helping you to continue down the path.

Think about it, it’s always easier to save for something like an upcoming vacation because it’s a short term and attainable thing.  Longer term and bigger goals require much more effort to stay motivated while pursuing.  Try to make your saving as tangible as possible by creating each as its own specific goal and tracking progress towards it.

It doesn’t matter how you do it, just do it

There are a few methods you could use to accomplish this goal setting and saving.  Personally, I have a bunch of sub-accounts opened at my online savings account of choice (EmigrantDirect).  I have automatic transfers setup each month to drop money from my checking account to each individual savings account.  This works well for me (I love automation) as I accomplish the saving and it’s very easy to see my progress by viewing my account balances whenever I need to.  You could just as easily track your saving using an application like Quicken, a spreadsheet, or good ol’ paper and pencil!

Save what you need and give the rest away

In summary, save for what you need to save for (retirement, college, etc) but don’t just save for the sake of saving (that’s usually called hoarding).  If you already have more than enough for all your short and long term needs (Congrats! Do you have a blog I could read?), then think about giving a bit away to someone who needs it more than you do. How will you know if you already have enough….well, that’s why you need a plan and a purpose (weren’t you reading the post!)

Coveting a Smaller Mortgage

May 22, 2009 · Filed Under Finances · 9 Comments 

I realized recently that I’ve been coveting quite a bit lately. I find myself driving through neighborhoods and looking at the different houses and often thinking to myself, I wish I had that house.

To be a bit more specific, the thoughts that go through my head are something like this, "hmmm, that house is smaller than ours, and I bet the people have lived there for a while which means they probably bought it before house prices started to drastically increase…..I bet their mortgage payment is a lot lower than mine."

That’s right, I’ve started coveting other people’s mortgage payment (or at least what I guess to be their payments with the underlying assumption that it is less than mine).

To be fair, I don’t have a ridiculous mortgage payment.  In fact, the entire payment (principal, interest, taxes, & insurance) is less than 26% of our take home pay (18% of our gross).  Those numbers are much smaller than most mortgage lenders were willing to lend three years ago when we bought it.  So, we didn’t go crazy when we bought our house, but I’d still like to be paying less each month for it (but who wants to be paying more for someting!).

A few things to remember when buying a house

You decide how much you can afford, not your agent or mortgage lender

When buying a house and deciding your price range, do not let the mortgage company tell you how much house to buy (unless it’s lower than you were planning, of course).  I feel that people sometimes think, "well, the mortgage company approved us for $X, so I guess that’s what we can afford."  No, No, NO!  Sit down before you start looking at houses and figure out exactly what you say can fit into your budget.  And make it a comfortable number that you can live with for 15 or 20 or 30 years.

Plan for contingencies

Remember that things may change in the future too.  If you’re married, you might eventually have kids and you or your spouse might want to stay at home and raise the kids.  I don’t like to say that this is no longer working (just ask a stay-at-home mom if it is a full-time job) but your income will drop drastically if you do this.  Or maybe you’ve always wanted to start your own business.  Make sure you can still afford the house if you decide to do this or make some other change.

Know your real monthly payment (all the other payments too)

Another thing to remember is that the costs of home ownership do not end with your monthly mortgage payment.  Besides the principal and interest portion of the mortgage payment, you will probably also need to pay into escrow for home owner’s insurance and real estate taxes.  This will most likely add thousands of dollars to your yearly expenses, so plan for them.

Beyond the mortgage payment, there are many other costs as well to keep up your house.  Stuff gets old and breaks, pipes freeze , work needs to be done…this can add up quickly so at least keep it in mind when deciding how much you can afford for your house.

Consider a shorter mortgage term

If possible, opt for a shorter mortgage term.  Of course, each monthly payment will be more (sometimes substantially) but over the long run a shorter mortgage can save you tens or hundreds of thousands of dollars!  Usually, shorter mortgages have lower interest rates as well.  Play around with a mortgage calculator to see the long-term difference this can make.  As a real quick example, consider a $250,000 house at 5.5% interest.  Even at the same interest rate, a 15 year mortgage will save you about $143,000 in interest payments!

I didn’t intend this to be a comprehensive list of all things to consider when purchasing a house…just a reminder of a few things.  In today’s market, mortgage lenders appear to be much more strict on the mortgages for which you can qualify and I think that is a good thing.  At the end of the day, though, you are still the one who must pay the mortgage and the upkeep and other expenses for your house , so go into the process with your eyes open and learn as much as you can before proceeding.

House poor

In today’s uneasy economy (with decreasing house prices, possible job losses, and general uncertainty), buying a house that you can’t afford can certainly show you the meaning of this verse:

The rich rule over the poor, and the borrower is servant to the lender.  Proverbs 22:7 (NIV)

Say you and your spouse bought a nice house a few years back that was a bit too expensive for you to afford (but hey, the value would keep increasing – it always does!).  Now you’re having a child and one of you wants to stay at home and devote yourself to raising that child.  Unfortunately, you can’t afford the house payment on only one salary and you currently have negative equity in the house because of the decrease in real estate prices.  Well, in that lamentable situation, your freedom is drastically limited by that mortgage debt.

House prices have been coming down recently, so you could argue it is a good time to be in the market for buying a house.  If you are, be smart, be realistic, and plan for some contingencies in the future.

Photo Credits: woodleywonderworks

Redbook Cover Story on Debt-Free Living: The World Really has Gone Mad

April 1, 2009 · Filed Under Finances · 2 Comments 

Last week was Spring Break for my daughter’s school so we packed up the family and headed to Great Wolf Lodge for a few days of water park adventure (that’s why there weren’t many blog posts last week).  Anyway, between our water-parking and MagiQuest-ing, I happened to be perusing the gift shop when I noticed this magazine cover you see nearby here.

Redbook Cover on Debt-Free Living

No, it wasn’t the picture of Jaime Pressly that caught my eye but rather the large article title splashed across the top left: "Live debt-free – How women like you are spending less and loving it"  Seriously?  Redbook has an article on debt-free living?!  Spending less and loving it?!  If you check out the Redbook website, some other articles that pop out immediately are "8 Hilarious Sex Life Don’ts" and "10 Things your Man Really Wants in Bed."  So, excuse me if an article on the benefits of spending less than you earn and getting out of debt seems a bit out of place to me.

I haven’t been blogging for very long (about 9 months) but I’ve been talking about finances and the economy and related topics (a lot) for a number of years (just ask my friends – or the few that I still have) and I am taken aback by how many people I now encounter discussing the economy.  And now I see the Redbook article (I didn’t notice if there was a Cosmo magazine on the rack – now that would be something if they had articles about getting out of debt!)

I feel that it is very unfortunate that it takes extreme circumstances like we are going through now to pique everyone’s interest in this important topic.  If as many people discussed debt and savings and the economy a few years ago before all of this badness started to happen, a lot more people would be in position to weather this storm.  In fact, if enough people would have been more realistic about house purchases and investments, etc, etc, the effects of this whole downturn might have been a lot less severe.  Certainly, I am no economist, so take my opinion for what it’s worth.

Another benefit to being in a strong financial situation is that it is possible to position yourself for the long-term right now.  If you don’t have much debt and do have cash to spend, you can purchase stocks that are very cheap compared to their prices of a year or two ago.  If you have the time and money and believe that economy will eventually recover, then you can pick up some serious bargains and wait for the market to recover.  Or consider rental properties – in most places in the US right now housing prices are down quite a bit.  With some money and little to no debt you can purchase property for much less than it was selling for the past few years.  This could lead to some considerable financial benefits years down the road when the housing market recovers.

See, there is more benefit to being fiscally responsible than just being able to sleep easy at night or weather financial storms.  With the proper planning, you can not only survive an economic climate like we are experiencing right now but also thrive in it and set yourself up for long-term prosperity.

Tax Refunds: Free Loan to the Government or Forced Savings?

March 17, 2009 · Filed Under Finances · 7 Comments 

It’s that time of year again here in the USA – tax season!  I finally completed and submitted my tax returns (federal and state) early yesterday morning.  I’ve found TurboTax to be fairly straightforward to use (at least for the Federal) so I’ve done them myself for as long as I’ve done them (I’ve tried TaxCut too but prefer TurboTax).  It has handled my returns sufficiently as they’ve grown in complexity (this year I have Schedules A, B, C, D, H, SE, and Form 2441).  With my side business growing, however, I am definitely considering turning it over to a pro next year….we’ll see.

Side note about using TurboTax: as most of you know, you put all your income in first before adding your deductions.  For us, that leads to TurboTax telling me that we owe this enormous amount of money!  Then I view it as a challenge to whittle it down and I get real excited as it gets closer to $0.  But it’s a bit unnerving to look up and see that you owe the federal government alone almost $10,000! (last year, I think it peaked for us near $15,000!).

Anyway, I’m getting a pretty good chunk of change back from my federal and state governments this year and I find it interesting to see how different people react to the idea of getting a tax refund.

Woohoo – free money from the government

In this corner there is the group of people who consider their tax refund to be a windfall from the government.  It’s found money or an April Bonus.  If you fall into this camp, remember that this is your money !  This is not our generous government giving you some money for the fun of it (that’s called a stimulus check).  You have basically allowed the government to borrow your money (kinda like your deadbeat uncle) for about a year with no interest (Unlike your uncle, however, if you actually ask nicely by filling out the correct forms the government will give it back to you).  But it’s not a gift or a bonus!

A splinter group of this camp is the people who might view a tax refund as forced savings.  If they had received the extra money in each paycheck, it probably would have evaporated into the ether by now.  By overpaying the government, at least they were able to end up with some money come April.

A 0% interest loan

As I mentioned above, the other group considers a tax refund to be a wasted opportunity.  This money has an opportunity cost of the  lost interest they could have earned throughout the year.  This is a mathematically accurate way to look at a tax refund, but as Dave Ramsey likes to say to his listeners (I’m paraphrasing), "Don’t talk to me about math, if you were good at math, you wouldn’t have all this debt to begin with."

If you want to talk about math, the optimal strategy is to underpay as much as possible (just remember there is a penalty if you go too low).  This will leave you with a large tax bill, but the maximum amount of your money will have been working for you throughout the year.  Writing a huge check to the government is easier said then done, however (Personally, I think I’d like to shoot for being pretty close to $0).

If you are good about automating your saving and investing, then a large tax refund is a certainly a less-than-idea situation.  If you can put that money to work for you throughout the year, you’ll end up with more money (in the long-term) than you would have by allowing the government to sit on it and give it back each spring.  If you are not good about controlling your money, however, then this strategy will just lead to more squandered money and you might be better off having the government save it for you.

My thoughts on a large refund this year

I guess I get freaked out about underpaying my taxes so I am reluctant to decrease my withholding.  I did decrease it a bit last year, but with starting a tiny side business, I was wary of decreasing it too much.  And I’ll chicken out and do the same thing this year because I am foreseeing an increase in my extra income.  So, I’m left annoyed that I’m letting the government sit on so much of my money each year.

On the other hand, If I had the money during this particular year, I would have maybe put some into the stock market (and would have much less of it now) or I could have put it into a savings account and earned 2% interest or less.  So, taking into account that possible 2% gain at best (reduced further by taxes), I am trying to tell myself not to feel bad about the refund this year.

Besides, we made it through the year in good shape for our finances, so I won’t be complaining when I get the money deposited into my bank account.  I’ll take the money, put it into my emergency and vacation funds, and start trying to convince myself to decrease my withholding again this year.

What are your thoughts on your income taxes?  Do you like to get a large refund?  Do you like to pay a little bit?

Photo Credits: BallGame68

Noodling Over a Mortgage Refinance

February 4, 2009 · Filed Under Finances · 13 Comments 

With all the news about "historically low interest rates,"  I lately find myself giving a lot of thought to refinancing our mortgage.  I am sure that a number of you have been considering and investigating it as well.  After looking into it, however, I’m not convinced that refinancing is the best course of action for me at this point in time.

Rules of thumb for a refinance

I’ve heard various criteria for deciding when it is a good idea to refinance (like if you can save 2% off your rate, for instance, or figuring out if it is better or not based on how much longer you’ll live in your house).  The problem with that, of course, is that a simple formula can not possibly apply accurately to the unique circumstances of each individual.  I think a better course of action is to look at the details of the refinance tailored to your specific situation.  (BTW, do people actually know how long they will live in their house?  I’m sure there are a few stable people out there, but it just seems crazy to me to know that you’ll be living in this house for 10 or 20 years or whatever! – I guess because we’ve lived in 6 different places in the 12 years we’ve been married).

Considerations for refinancing a mortgage

There are a number of reasons why you might want to refinance your mortgage.  In the olden days (they weren’t  really that long ago, but they sure seem like it), your home would make a great ATM for whatever you wanted and couldn’t afford.  I didn’t recommend this in years past so I am certainly not going to recommend it now as house values plummet (Seriously, this is a really bad idea right now).

Some better reasons to refinance

A much better motive for refinancing in the current environment would be to secure a "historically" low rate.  Especially if you have an adjustable rate mortgage, this feels like a good time to lock it in (to be honest, we currently have an ARM though there are 5.5 more years before the rate adjusts for the first time).

Another great reason would be to lower your monthly payment.  If you can get a significantly lower interest rate, then your monthly payment might decrease quite a bit (and that extra cash flow would surely help out these days).  If you are doing this, however, keep in mind how long you’ll be making these payments.  It might sound like a good idea to save a few hundred bucks each month, but if you are trading in a mortgage that you’ve had for a number of years and starting over with another 30 year term, you might end up paying a ton more money over the length of the mortgage).

Some (potentially) bad side effects of refinancing

If you, like me, do not have very much equity in your house, then refinancing might drop you into the realm of the dreaded private mortgage insurance (PMI).  Unfortunately, after the events of the past year or so, I would guess that a lot of us find ourselves with less than 20% equity which is the typical cut-off for PMI.  I currently do not pay PMI but if I were to refinance, I would be required to start paying it.  Depending on the type and amount of your loan, the PMI could run as high as hundreds of dollars a month.  Just to review: PMI is bad.   It’s extra money (on top of the principal and interest) that you have to pay each month that doesn’t reduce the principal…it just disappears into the ether (from your perspective, that is…it certainly ends up someone’s pockets).

Of course, do not forget that refinancing a mortgage is an expensive proposition.  You will need to pay closing costs and lender fees and all that junk to get the refinance done.  In fact, if you end up paying points on the mortgage, the refinance itself could run up near or over $10,000.  I do know of some companies, like CapCenter Mortgage , that advertise no closing costs – so that could potentially save you a lot of money.  Most of the mortgage companies out there, however, will take their share.

To refinance or not to refinance?

In my specific situation, I really don’t know if it makes sense to refinance at the current time.  I do have an ARM that resets in 5.5 years so it would certainly be advantageous to lock in a low rate.  I would also love to refinance into a shorter term loan that could save me more north of $100,000 compared to continuing on my current 30 year path.

On the other hand, I do not currently pay PMI and do not like the idea of starting to pay it.  In my specific situation, I could refinance into a 20 year mortgage and end up paying about the same monthly payment but for 7.5 fewer years…plus a PMI of almost $300 per month!  And don’t forget the cost of the refinance itself – the estimates I’ve gotten from one company range from $5000 to over $9000!

So the question becomes,would I be better off using that cash to pay down my current mortgage a bit and then applying the extra I’d be paying for PMI to accelerate my monthly mortgage payments?  I don’t know…I think I’ll create a spreadsheet and run some numbers for a future post (woohoo – a spreadsheet!) (BTW, Dave Ramsey has a pretty useful mortgage calculator for playing around with these numbers)

What are you thoughts on this?  Have you recently refinanced?  Have you been considering it?  Have I missed anything else that I should be considering?

Photo Credits: Mirko Macari

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