Wisdom Wednesday: Treat Your Personal Finances Like a Business

Photo from H&R Block

Since becoming adept in my studies of Business, Accounting, Finance, and Economics, I have made it a point to look at my personal finances with business acumen.  Before looking at numbers, I had to first think about why I am making my personal finances one of my life’s ongoing focuses.  Here’s what I came up with:

“To live a secure life, with the freedom to live in comfort, where I want, and continually experience the joys of time with friends, family,with professional and personal endeavors that feed my passions.”

This might seem kind of corny, but any legitimate business will have a charter indicating its purpose.  If a company does this, why shouldn’t we?  People start businesses to better their personal financial position, which hopefully is geared towards living their eventual dreams.  Dreams don’t usually happen overnight, and that’s why you need a mission statement. 

Next, you need to think about profitability in terms of your personal life.  One way to look at it is to consider your savings your actual earnings & profits (E&P).  E&P is a tax term, but can also be equated to net income and retained earnings.  During your working life, you should aim to have a constantly increasing bucket of retained earnings.  These first take the form of your three to six months of emergency savings, then your retirement accounts, home equity, and other investments made further down the road of life.

Increasing revenues, or income, should also be a big focus for individuals and businesses.  A firm may invest in new product development and the individual might want to invest in higher education or a certification.  Either way, both are looking at the big picture.  If you love your job and the pay increases are holding you back from meeting your personal goals, then look for ways to make yourself more valuable to your employer.  Alternatively, maybe you can start a second job, or “side hustle” to bring in more income.  Either way, you need be looking at ways to increase your income to stay on track and build wealth.  You might also need to consider if you are paid fairly compared to others doing similar work in your market.  Look for resources like Glassdoor for comparative salaries in your geographic area.  Always be on the lookout for opportunities to grow your career and income.

Sometimes you will have “storms” in your life, which will sideline your ability to save.  Other times you will have wants that might have you dip into savings, but this is okay if you are progressing on an annualized basis.  Taking time and money for a wonderful vacation, to start a family with kids, care for parents or loved ones who are ill, or renovating your home to improve your quality of life are all common and valid reasons to temporarily sideline savings.  This concept can be related to a business taking money and having team building days, or company picnics and award parties.  In the grand scheme of both life and business, taking some time and money to do fun things improve the overall quality and give you the motivation to keep going when you get back to work.

Ultimately, you cannot measure the quality of your life by your net worth, but you can definitely make your life less hectic and more predictable, giving you the flexibility to try new things and live out your dreams.  Life is short, but money can be shorter if you don’t plan for the future and monitor your progress.  Live in the present, plan for the future, and be prudent for the sake of making the really important things happen in life.  Stay safe, happy, and focused!

I want to hear why you work, sacrifice, and save!  What motivates you to get up and work each day?  If you are fortunate enough to not need to work anymore, what are you doing with your time? 

Liquidity! It Affects Everyone, Not Just Big Banks

Image from https://www.treasuryandrisk.com/

You might have heard about the markets having “liquidity” problems, but to the average Joe, this could sound like technical mumbo jumbo.  I mean, how does liquidity in the markets affect you?  Believe it or not, it can massively affect you.  Besides inciting panic in the stock market, which probably has affected your investments since late February, lack of liquidity means there is less cash out there to lend.  For a few weeks, this made it difficult for people already in a home purchase contract to close on the deal without paying a premium interest rate for their new mortgage. 

Most conforming loans are made by a mortgage lender who fully intends to sell your loan on the secondary market, typically to a real estate investment trust (REIT) that takes capital from investors, ranging from ordinary people to big funds owned by the likes of Vanguard or Fidelity.  The REITs also take out loans from big banks to buy more loans.  Then, when people pay their mortgages, the cash from those payments flows through the REITs to pay off principle and the interest is distributed to shareholders as dividends.  The principle in reinvested into new mortgages, and the cycle of life continues.  The main investor draw to REITs is their high dividend yields.

In March, something crazy happened related to the Coronavirus crisis.  Some of those big banks called the loans made to the REITs.  Why?  The banks were worried and wanted to get some cash to act as a safety net in case cash flows from operations waned significantly.  The REITs didn’t envision being so unstable that the banks would ever call the loans due.  At the same time, stocks like AGNC and MITT dropped by as much as 80%.  MITT could not come up with enough cash to pay back the called loans, and many feared default.  Lucky for the REITS, their knight in shining armor, A.K.A, the Fed rode in on their shining horses and bought up some of the REITs’ holdings at a discount, potentially staving off a wave of bankruptcies.  This also shored up the mortgage market for future loans.  This situation is a case-in-point on how delicate the economy is.  Liquidity is everything. 

Without the government providing free capital to all of these REITs and banks, mortgage rates would go much higher.  This was the case for many years.  I remember in the 2000s, a 5.50% interest rate was fantastic.  A good rate in the mid-1990s was 9%.   I also remember earning 4-5% on my ING savings account.  I would be elated for rates on my savings like that now.  I keep chasing a 1.40-1.70% yield on savings and the banks keep dumping the rates because they can get cash for less from the Fed.  Banks make their money on the margins of what they pay out in interest and what they charge on loans and credit cards.  When you deposit your money in a bank, the bank keeps a mandated reserve and can loan the rest.  If they fall below this threshold at the end of each business day, they take an “overnight loan” from the Fed at the low, low rate that you hear about in the news constantly.

Liquidity makes the capitalist market ebb and flow.  Many may talk badly about day traders or big fund managers, but the cash coming into the markets is what keeps prices real.  If they were not there, trading every day, you would never be able to sell investments out of your 401(k) and retire.  Everyday traders keep things going, even though some view Wall Street as criminal, the reality is most are out there working hard so that those who put money into the markets get a healthy return over the long term and can make their dreams come true.  The alternative is Social Security, which we know isn’t enough on its own for most to live a comfortable life in retirement.

So, all hail liquidity!  It’s essential for a smooth-running economy and stability for you and me.  To work, it needs a good balance of those who want to lend or invest and those who want to borrow and pay back the principle and interest, as scheduled. 

Check out my other blog posts and follow me on Twitter!  Thanks for checking out today’s read.

Disclaimer:  William owns AGNC and has recently traded MITT.  He also owns shares of SRET, an ETF that holds a range of REITs.  This article is not intended as investment advice.  Please consult a licensed investment broker for complete investing advice that aligns to your risk tolerance.

Lessons Learned: Auto Buying Tips

Quite often, the purchase of an automobile is the largest purchase one will make aside from the purchase of real estate. Although most homes cost more than cars, there are some parts of the country where luxury and heavy truck retail prices rival a nice piece of rural land in the countryside. I have purchased six vehicles in my adult life and my first one was gifted to me. I’ve also sat in with some of my friends and helped them navigate the negotiation.

My former 2013 Tacoma the day of purchase- An impluse buy made on a Sunday afternoon – by W. Vance

My first advice, which most people won’t take, is to buy a vehicle that you can pay cash for. Why?  Not having the burden of a car payment will greatly increase your ability to build wealth.  If you pay cash, the average person will purchase a used car, which most likely has taken the large depreciation hit compared to a new car.  Never call a car an investment.  An investment is something that is expected to provide a future return, and in the context of this blog, that should be a financial one.  A vehicle is an asset that is consumed over the years.  With that said, I’ll get into my tips from my 20+ years of experience in this area.

1. Always set a budget before leaving for a car lot, even “just” to test drive.  So many people with car fever will leave the house, or even stop by a car lot after a relaxing Sunday lunch to check out that dream car.  The next thing you know, you are driving off the lot with that car, or even worse, less of a care than you dreamt of, and an unplanned payment due in 30-90 days.  Instead, sit down and decide what your budget reasonably allows, payment-wise.  Don’t forget to check insurance rates on the model(s) you are considering and understand the costs of routine maintenance.  Fuel economy should also be brought into the mix, depending on expected miles driven each month.

2. Once you have a monthly budget amount in mind, use an auto payment calculator to figure out how much the total cost should be and make comparisons. Also, check your credit and see where your score is. If you have an idea of your credit worthiness, you can shop for financing before heading to the deal. Also, check the dealer’s website because I have seen dealers advertise low APR financing on certain models with certain minimum credit scores. If you don’t mention this when you sit down at the deal desk, they surely won’t automatically apply that rate. Car dealerships are out to make a profit, so if they don’t know you came in because of a special deal, they surely won’t just reduce their profit to be nice.

3. Now that you know your monthly auto payment budget, start by going to KBB.com and figuring out the cost of the vehicle you want to purchase. You can change the year and options to see the price different option levels will command. You might even see ads for nearby dealerships with pricing.  You can look at these, but also check different dealer websites to find inventory of the model you want to purchase.  If inventory is limited locally, check dealerships within a day’s drive to see if you can get substantial savings that way.  I know several people who have found a vehicle that is super popular in our area for several thousands less, plus the dealer paid for a plane ticket and cheap hotel.  Details were worked out online, so all that was left to do in person was sign and drive!  Some dealers within a few hour’s drive will even deliver the vehicle to your home or office.  Just remember that the more service or extras you want, the less they will deal on the price.  If you’re a member of a club store, like Costco, see if they have any member exclusives.  Alternatively, mention you are a member to the dealer you are working with and see if they can give you that price.

My current vehicle, a 2016 Tundra, purchased after much thought and negotiation – By W. Vance

4.  When you’re on the lot, or even conversing online, do not become attached to a particular vehicle!  Remember, autos should be treated like commodities, unless you are buying a unique collector car.  In that case, you should have amassed a large net worth and pay cash for your collector car.  This is not the same thing as sensibly purchasing reliable transportation.  Remember there are many vehicles that are the same out there.  If you get emotional, you will probably end up overpaying for the vehicle and possibly taking on too much debt and interest.

5.  Know the total price, not just the payment amount!  This is so important. If you know how much the vehicle will be, sales taxes, registration, and any other required fees, you should have a limit as to how much the vehicle will cost.  Typically, dealers negotiate on a payment basis.  In this case, they will “bake in” profit-heavy items, or even inflate the interest rate beyond what your credit score dictates.  Dealers make profit by selling you a higher interest rate than you qualify for and sell it at a premium to finance companies.  Always shop for a car loan independently, and if the dealer can beat that rate, then go for it!  That’s the power of shopping around and being well informed. 

6.  Avoid add-ons at the signing table.  Almost always, the “finance” person who you sit down and sign documents with is required to talk you into add-on items that are highly inflated.  Do not buy extended warranties, clear bras, after market anti-theft devices and so on.  Instead, note items you are interested in and shop around afterwards.  Sometimes, the service plans can be a good value if you like having your vehicle serviced at the dealer.  Ask how much each required service costs if done a la carte, and you will notice if there is substantial savings.  If you are worried about the car you are about the buy breaking down, you should first think about why you are buying an un-reliable car, and also you need to have your emergency fund in place to cover any unexpected repairs.  Inquire about any included warranties and what systems are covered.  Even a newer, used car will typically have some portion of the original manufacturer’s warranty left, which may give you peace-of-mind. 

7.  My final rule: Never be afraid to walk away!  When you buy a car, unless it’s a Tesla, you should understand it is a business transaction.  Always be ready to politely walk away from the negotiating table if they cannot meet your reasonable requests.  If you have a reason that they should lower their price, or throw in an incentive, you should have some proof that the competitor is doing that, or you can pull it up online.  Always back-up your counter-offers with facts.  If you do this, you will either buy the vehicle from them or the other guy with the best deal. 

Again, there’s always another car like the one you want, another dealer willing to give you a better deal, and you are in control. Don’t have regrets after you drive away. If you are unhappy with your purchase, it is likely you will trade it in sooner and end up paying more over your lifetime for cars. If you’re in the wealth accumulation stage of life, you can’t afford to roll over and just do what feels good. Save that for the grocery store or dinner date with your partner!

I want to hear your best or worst car buying experience!  What happened? Share your story in the Comments field below.  As always, thanks for reading my blog!

Credit Scores: Playing the game

If you’ve been following my posts, you probably realize I’m not very excited about debt.  Like most things I’ve ever wanted in life, a great credit score is something that I wanted for years and today don’t care to use very often.  I used to be all about getting the best interest rates, but today it’s about saving as much as I can to build wealth and realize my next big dream of owning a house I designed, on a good sized lot, away from people.  Well, far enough away that my Great Danes barking near the house won’t both my neighbors. 

Image from wsj.com

I learned a long time ago, building credit is a like a game.  It’s you against your creditors.  If you minimize your balances and carry almost no credit card debt, don’t open new accounts often and always pay on time, you will build a great score after several years with minimal interest paid, and you win.  If you’re impatient, run up your cards near or over their limits, and pay late, you’ll suffer financially and you lose on interest and fees and your score is lower. My advice is to never open a card account if you don’t have self-control.  I do admit having self-control with credit and the self-control to stick to a budget is pretty much the same thing. 

Throughout the years, I have found it much easier to spend on credit.  Every automobile I have purchased was on credit, although through each car acquisition, I had more down and a priority to pay off the load as fast as possible.  Now that I have enough saved to go out and buy a car with cash, I wouldn’t dream of parting with my hard-earned cash.  I’ll continue to enjoy my paid-for truck for years to come. 

What makes up your credit score?

Generally, there are five attributes that are counted in your credit score (listed in order of importance):

  • Payment history:  Do you pay on time? (35%)
  • Amounts owed:  How much of your credit lines are utilized? (30%)
  • Length of credit history:  How old is your oldest account and the average age accounts? (15%)
  • New credit:  How many new accounts do you have and can you manage them? Inquires? (10%)
  • Types of credit used:  What is the mix of cards, installment loans, and mortgages? (10%)

For more detail on what makes up the average credit score, check out this old CNBC post as it is still relevant today!

Each attribute is weighted more than the other because paying on time is more important than your credit mix, but it all adds up.  This is why you can build a decent score in as little as two years, but it will take seven or more, and take multiple loan types, to show you really know how to handle your debt load.

To have the best scores, you should rarely apply for new credit.  Once you find a great credit card, if you use one, stick with it.  Don’t try to open up new cards in search of better rewards.  Also, if you do open a new credit card, do not close the old one unless it has an annual fee.  Try to keep the card active by charging something every few months and paying it off before interest accrues.  I have a lot of good card accounts that I have obtained over the last 20 years, and keep open just because of age and the high limits help me ensure that even if I have a balance of $5,000 or so one month, my utilization is only around 2-3% of my total credit lines.  Always keep your purchases well below your limits.  If you keep getting close to the limit but pay it off before interest is due, apply for a credit line increase to help keep your score high.  Remember the credit is like having money.  The more you have, the less you need, and the more attractive you are as a borrower (until you borrow too much!).

As far as credit mix, having auto loans, student loans, and mortgages will all help your score.  Mortgages are considered “good debt”, which is debt that shows you are really responsible and making sound financial choices.  Also, it usually means you have equity and assets, which means if you don’t pay your creditors, they can try and put a claim towards your assets and gives them a little more assurance you will pay them back.  Most people who own homes are responsible and want to keep their home, therefore why credit card companies love homeowners.  If you have not assets, besides retirement assets, you are judgment proof and if you default, creditors will have no asset to try and claim, so all they get to do is put a bad mark on your credit and make it impossible for you to borrow until you clean up the mess or it ages off your report in a decade.

Earlier, I mentioned that I don’t strive to have the best credit cards or brag about my credit score.  As I’ve learned through the years, showing how much you can borrow through flaunting lavish houses and flashy cars is not the best use of credit.  Instead, build credit to get the best mortgage rate and know that insurance companies look at credit scores when setting auto premiums.  When you do borrow, do it strategically.  For instance, I really am tempted to pay down my mortgage, but my interest rate is so low, that I feel good having a beefy emergency fund and plunking a large amount of my paycheck into retirement.  Based on historical, long-term returns, I will come out ahead having my cash compounding at 8-12%, rather than at 3%, which is what I get while I pay off my mortgage. 

I do agree with Dave Ramsey that you can pay your house off quickly and then shove boat loads of cash into investments afterward, and probably come out about the same, and there is more risk involved with holding a mortgage, but I do insure against potential chaos with a large emergency fund. If I had kids depending on me, I might change my strategy, but being single, I feel pretty good about my risk levels. 

How do you feel about the use of credit scores in consumer lending?  Is it a fair practice?  Do you think that creditors should look at other factors besides a score? Leave me a comment! I’d love to hear from you.

If You Want to Retire, It Takes Money to Make Money

Everyone has different ideas on how they should spend (or not spend) their money and that is fine.  If we all did the same thing, our economy would be vastly different and highly predictable.  However, I hear a great many people say they can’t get ahead or can’t afford to save, whether for a rainy day or retirement.  My question back to them is how can you not afford to save? 

Image from learn.stashinvest.com

In an earlier post, I talked about how difficult it was to save and all the mistakes I made.  It was difficult for me to get started as well.  I did not start contributing to my 401(k) plan at work until I was 25 years old.  I always had an excuse, yet when I lived in Southern California, I always had designer clothes from Abercrombie & Fitch and was eating out quite often.  Keeping up appearances and going out was my thing back then and my income was much lower that it is today.  So many people, especially younger ones, spend to keep up with their friends, coworkers, and even strangers they are somehow trying to impress for no known reason. 

There is always something to spend on, but you have to make saving a priority.  Most who don’t save likely don’t budget.  Having a clear vision, or some kind of long-term idea, of what you want to see happen with your money over time is the first thing on the saving to-do list.  You don’t just save for the heck of it!  Life is short and you really need to have goals set.  Retirement may seem like it will never come when you’re younger, but trust me, you will wake up at 35 or 40 and suddenly remember your 10th or 20th birthday.  You are now 20 or 25 years away from 60, where you could retire on a 401(k) or Individual retirement account if you had enough saved.  Time will march on and you need to be ready.

If you can only save for one thing, save for retirement.  Social Security is not enough for most to live on today, and according to the Social Security Administration, benefits will likely erode over the coming decades.  Health care will likely need to be a larger part of your budget as you get older if you want a good quality of life or to live a long life.  I have learned from my mother and her recent change to Medicare still requires a supplemental plan to not have prescription drug costs and other procedures wipe out her savings over time.  While the plan is affordable, it is an additional line item many don’t have today. 

For those who make it to their golden years and have issues with retiring due to income, the problem isn’t whether they invested in mutual funds, stock index funds, or some other diversified way of building wealth, it’s that they didn’t put money aside to grow.  That is why this article is called It takes money to make money, because if you do not put anything aside, just like if you don’t plant seeds in the spring, you will not have a harvest to reap later on. 

Make a small sacrifice of three to five percent of your income and your older self will thank your younger self in your elder years.  It’s never easy to cut back or see your take-home-pay shrink, but you are actually just delaying pleasure.  That money will be there in the future, except it will have grown much more than what you originally contributed.  If something happens to you before retirement, you will be leaving a legacy for your spouse, kids, or whomever you designate as a beneficiary.

What was your turning point?  What made you start saving for retirement?  Was is being automatically signed up for your employer’s 401(k) plan, or did you make the decision consciously?  If you aren’t saving, what is your reasoning?  Please leave me a comment.  Thanks for reading!

I paid that balance off! Why do they keep charging me interest?

Recently, I went to pay off one of my older, higher-interest rate student loans, and was excited to finally have it at $0.  I paid the amount shown in the “balance” field on the FedLoan Serving website, so I thought the loan was history.  Wrong!  I went back the next week to see my beautiful $0 balance, and the site said I still owed $1.05.  I know, not very much, but still annoying!  If I would had left that $1.05 there and not paid attention, I could have seen interest or late fees and have it grow again.  That would be frustrating!

Photo credit: Alamy.com

The same can happen with your credit cards.  You might think you are paying off the balance every month, and you might be, but not within the contractual time period, known as the “grace period”.  The grace period is the time you have to pay your balance before interest accrues.  If you only pay the minimum by the due date, and then pay the remaining balance off before your statement cycle closes, you will suddenly have a balance applicable to interest.  This means you will be subject to an average daily balance interest rate computation.  So if you owed $1,000, paid $100 on the due date, and then the remainder on Day 29 of 30, your average daily balance would be closer to $1,000 and you would pay interest on that amount.

What’s worse is that if you keep paying your card off by the due date, you will still have average daily interest calculated and accrued on each statement.  Why?  Not paying your balance by the due date one time puts you into perpetual interest calculation.  To stop this from occurring, you need to pay your card off and not use it until the next statement cycle.  This will reset your grace period.

Also, be wary of offers to transfer a balance at a low rate on a card you are using for daily purchases and intend to pay off each month to avoid any fees.  If you do this, your payments will go towards the promotional balance and you could end up paying interest on all purchases until you pay it down to $0.  I suggest shopping for a card with a great balance transfer rate, at a site such as Bankrate or join Credit Karma, which can recommend the best cards based on your credit profile.  Keep your everyday spending card, which hopefully gives you rewards of some kind, separate from balance transfers that you are using to reduce interest and have a plan to pay off before the introductory period expires.  Strategize your balance transfers with the intention of fully eliminating revolving debt and not just to move it around.  With any kind of debt, you should always have a plan with an endgame designed with payoff as the goal.

On a related note, I found a great post on creditcardinsider.com in case you are interested in learning more about how credit card terms work.

Have you ever been frustrated with interest charges that you thought should be paid off and done?  Briefly share your story in the comments section on the blog page.  As always, thank you for reading!

Should I Refinance? Completing a Break-even Analysis

Last week, in my post Lessons Learned:  Financing My First Home, I wrote about buying my first home and the financing process behind obtaining it.  I mentioned briefly that you should do a break-even analysis anytime you are thinking of refinancing.  This could be a mortgage loan refinance, or something else like student loans or an auto loan.  What’s the best way to go about figuring out if the refinance is viable and the best choice?

As an accountant, I like to do this in a spreadsheet.  I have added the Excel file shown within this post to my new Templates page, where I intend to share my tools that you can use to become savvier. 

There are different scenarios to look at when doing a break-even analysis.  First, in a refinance, you shouldn’t consider “sunk costs” or money you have already spent on interest.  That’s because you have spent it and will not save anything in the future.  Let’s imagine you were thinking about refinancing from a 30 to a 15 year mortgage with the objective of paying less interest and owning your home free and clear, sooner.  Imagine the interest rate you have on your 30 year is 3.625% and the new rate would be 3.125% on a 15 year.  Also, let’s say you are three years (36 months) into paying your 30 year mortgage, so all the interest you have paid at the higher rate is a sunk cost.  According to my spreadsheet, you have paid interest of $27,804 (note: for this exercise, I am rounding to the nearest dollar).  This point is important because you will want to start at your current ending balance for the refinance, or $247,625.

Loan amortization schedule snapshots by W. Vance

Next, copy the tab and use your current ending balance for the refinance, or $247,625, as the loan amount.  If your loan officer tells you there is no “out-of-pocket” costs, you will need to add in the closing costs from your good faith estimate.  Let’s assume the costs to refinance come to $3,500.  This will need to be added in as your loan balance will increase, for a new loan balance of $251,125.  Change the interest rate to 3.125% and the term to 15 years.

Loan amortization schedule snapshots by W. Vance

You can already see you would save BIG by making this move if you take the total interest of the 30 year loan, less interest already paid, less interest that would be paid on the 15 year, less closing costs ($142,486-$27,804-$43,170-$3,500=$68,012).  This savings is if you assume you stay in the home for the next 15 years and would have paid the minimums on the 30 year mortgage. 

So, where is the break-even in all this? 

This part is where the Excel spreadsheet makes it easy to spot about when you will hit that magical point in time where you are profitable in your refinance.  To do this, I went back to the original, 30 year tab and added columns for the cumulative interest from the refi-point (December 01, 2017 in this case) and linked the cell for cumulative interest from the 15 year tab.  Then, I added in a difference tab (30 year cumulative interest, minus 15 year cumulative interest), and followed the total down until it was close to $3,500 in closing costs.  In this case, in month 31, or two years and seven months into the schedule, I would break-even on my refinance.

Loan amortization schedule snapshots by W. Vance

So, this seems like a lot of numbers and does it really matter?  I mean, a lower rate is always better, right? 

Not always!  Let’s say you started paying your 30 year like a 15 year.  Then your break-even would be much further down the road.  In this case, by not refinancing, you save the $3,500, but pay your old, slightly higher rate.  This means it takes even longer to break-even, which is at month 41, or about three and a half years.

Loan amortization schedule snapshots by W. Vance

Let’s imagine that I wanted to move to a new home and sell this one within the next three years.  Then it would be a bad move to refinance, because I wouldn’t recoup my closing costs with interest savings.  Doing nothing is better in this scenario.

Other Considerations besides savings and break-even points

Sometimes saving on interest looks good on paper, but may be more difficult to execute in real-life.  If you have seen a good increase in income since purchasing your home, and other goals are complete or well underway, then refinancing to save interest over the years may be a great move.  However, if you still need to build up emergency cash, kid’s college savings, or have consumer debt, you should hold steady and divert extra cash to those goals.  Also be careful that a higher mortgage payment doesn’t drive you into debt in other areas such as using credit cards to make up for the cash being spent on the house.  This defeats the whole purpose of a refinance and likely has you paying more interest because of the credit cards.  Only refinance if it saves you a considerable amount of interest and beware the temptation to fall for those ads to refinance and take cash out or lower your payment by resetting the amortization clock on your loan.  If you have 20 years left, and find rates have dropped, make sure you request a 20 year term and not a 30.  No one wants to be paying for their home long after their retirement, or worse yet, can’t retire because they took out a 30 year mortgage at age 55! 

Did I completely overwhelm you with all these calculations?  Don’t feel discouraged!  I’m an accountant and sometimes get carried away.  Send me a comment on your situation and I’m willing to help!

Lessons Learned: Financing My First Home

From Fortune.com via Getty Images

I can’t believe it has been 13 years since I started the process of buying my first, and current home.  I was intimidated.  I didn’t know a lot about the process and I was mostly scared of rejection.  For a long time, I didn’t think I would ever qualify.  My then significant other and I would drive around, looking at homes with for sale signs in the yard and talk about what we like or didn’t like, but we would always be taken back by the prices. 

Then, in April 2007, I found a new home development in the suburbs that seemed like it was in our price range.  We went and looked on a Saturday afternoon and liked what we saw.  The sales person happened to have attended high school with my significant other, which helped make us feel at ease.  In hindsight, we probably should have sought the help of a realtor, but we were naive and only in our mid-twenties. 

We went back the next day, Easter Sunday, and decided to take the big leap and go into contract.  I wanted to be a homeowner so bad.  I rationalized everything, and took the only lot available with the floorplan we could afford.  In hindsight, I wish we would have waited for a bigger lot.  The next week, we went to the affiliate mortgage company and applied for financing.  In order to keep the house under contract, it was required we get approved for financing.  An important part of getting a mortgage is to have a property picked out.  Without it, you can only get pre-approved, which is a good way to see how much home you qualify for, but is not that same thing.

We didn’t know much about the types of mortgages available, so we went with what the loan officer said was the best for us.  In hindsight, a 7/1 adjustable rate mortgage was not the best pick.  Payments were interest only for seven years, with an adjustable rate, then reset at regular payments for the remaining 23 years.  Five percent of the home price would be our down payment and 15% would be from a home equity line of credit (HELOC).  Prior to the 2008 financial meltdown, people could avoid private mortgage insurance (PMI) by financing this way, because the first mortgage was only 80% of the value. 

I believe these types of loan packages are a thing of the past (thankfully!).  I recommend a 15 or 30 year, fixed rate mortgage, with no points, unless someone else is paying those for you.  Points are prepaid interest that lets you buy down the rate so your payment is lower over the life of the loan.  Always do a break-even analysis with any type of refinance and see how long it will take to recoup the savings versus the higher rate.  If you are not planning on staying in your home longer than the breakeven point, then don’t spend the extra money and refinance or pay points.  To understand more about the different types of mortgage programs, visit this Bankrate page.

Once approved, we didn’t have a locked interest rate because our home was not slated to be completed for over four months.  Eventually, in June, we were able to lock our rate and know better what our monthly payment looked like.  At the same time, we were saving for our down payment, which back in 2007, was allowed to be stated, and not verified, as long as you had that amount by the time you closed.  Of course we made it and bought the house, rode the value down and in 2012 was able to refinance to a fixed-rate, 30 year loan, at 1/3 less interest.  This was made possible by the HARP program, which allowed people to refinance underwater mortgages that were at a higher rate or part of a sub-prime loan such as the one we were sold.

The lesson I learned is to always do your homework by understanding the different options available.  If you don’t qualify for a financing option you want, make sure you understand the reason.  If you feel uncomfortable with a mortgage officer, or company, then step away and call some other companies.  Also, remember that you are the customer and they want to sell you a loan because if not, they don’t get paid.  If you don’t qualify, or don’t feel good about the deal, chances are you will regret it.  Speak up and be your own advocate, and if you have an elder family member or friend who has been through the experience, don’t be afraid to ask them to sit with you, or at least look over the deal.  You can buy your first home, but make sure it is planned out well, or your home might own you and limit your life outside of making your monthly payment.

Do you have any home financing nightmares to share?  Leave a comment!

Learning to Behave, Financially

Personal finance bloggers give a lot of advice on what to do to save money or how to set up a budget, but it is a well-known fact that personal finance success is mostly reliant on your behaviors and patterns.  We all know that we should be saving some money for retirement and that a “rainy day” is coming sooner or later, but how can we put mind over matter?

Start small.  You may be gung-ho on getting your financial life turned around, but it often isn’t realistic to implement your plan in one day, one week, or even one month.  Instead of planning to do it all from the start, incrementally work your way towards success.  For example, if you eat out for lunch every day, start bringing your lunch one or two days a week.  If you spend substantially less than when you eat out, such as bringing a $3.00 frozen meal instead of spending $10.00, transfer $7.00 to your savings, or allocate that amount to your debts.  If you equate your behavior to actual money in the bank, you are likely to keep it up as you see your progress. 

Track your progress.  How many times have you made a perfect budget only to get so busy that you don’t track what you spent money on?  Let’s face it; not all of us are accountants with a love to tracking every cent that comes in and out.  Automate by using Mint or Everydollar, which sync bank and card accounts using a phone app and a web login.  Couples can stay in sync on income and spending by merging finances.  If a couple can get on the same page with money, you likely can conquer most other marital spats that come up over the years. 

Personally, I love tracking changes in my net worth over time.  If you have software that lets you download your finances, you can do this in Excel or run a report.  I use Quicken, but I am a dinosaur and now have to pay for Quicken, and I will give a crash course in a post later this month!  An alternative is to list all your assets on the top of a page or spreadsheet and list all your debts below.  Add up both assets and liabilities, and then take the difference of the two.  This is your net worth. Hopefully your assets are more than your liabilities, but I too once had a negative net worth.  It takes time and focus, so don’t let this number stop you before you start.

Net worth Report from Quicken Desktop 2020

Set attainable goals.  Instead of only making one big, fat, hairy goal, break it down into baby steps.  We all want to have a net worth of one million dollars when we are just getting started, but it takes years of good behaviors.  If you set out to save a million dollars for retirement, work backwards to figure out how much you will need to contribute at a historical rate of return that matches your investment risk levels.  Most retirement fund websites have calculators that you can plug in the number of years you have to work and the amount you want to retire with.  If you are paying off debt, list them out and make a game plan.  When you pay one off, celebrate a little and look forward to the next win!

Reward thy self.  If you set savings or debt reduction goals, and you meet them, be sure to splurge a little on one night out or a new clothing item.  You should set a limit for yourself, say $50, for a monthly treat, or maybe as much as a few thousand when you meet a major goal such as saving up three months of expenses or paying off all your consumer debt.  Of course, don’t go into debt or reduce your emergency fund to have fun, make sure you earmark new cash for this purpose.  Just as you sacrifice to complete a degree or get your kids through school, changing money behaviors is just as much of an accomplishment.  Change your behaviors slowly and they will become habit, which will show in the long run.

What’s your worst money habit?  Leave me a comment on my blog page!  

Easy Tips for Making Your Savings Goals Achievable

For many people, saving money in a bank account is a real struggle.  Everyone knows they should save, but many are confused on techniques to be successful.  Questions such as “should I save for retirement or an emergency fund?” or “how can I save in my already strained budget?” are common.  I will touch on a few roadmaps and strategies I have used to become successful at saving money.

The first technique I use seems pretty simple.  I just use my workplace 401(k) plan to scrape my retirement savings off the top before I even see my net pay.  Think of this like a tax payable to you at some point in the future.  While Social Security is somewhat of a safety net, it likely won’t provide enough for a comfortable retirement, especially with the rising costs of healthcare.  Saving something, especially in your younger years, will pay off big because the money has more time to grow.  If you start saving later, then you will likely end up having to more to retirement, with less time to let your investments compound.

There is no hard and fast rule about how much you should allocate to this, but the more the better.  Dave Ramsey’s retirement page suggests 15% of your gross household income, not including any company match.  While 15% is a great number to shoot for, this may be difficult for those just starting out in their field or those that have student loans weighing them down.  In addition to Dave Ramsey’s site, Fidelity also has a great set of calculators you can use for free to get an idea of what you need to save.  If your company has a match, contribute at least the minimum to receive the match because this is “free” money, or at least extra compensation that can grow and can be worth much more down the road.  If you are up to your ears in debt, then I would recommend stopping any retirement saving and putting every extra cent into paying down high-interest debt.  Another tip, don’t turn down your savings so that you can “afford” a new car with a high payment or a house that is too expensive.  The older you, at age 65 will thank you for having self-control!

The second technique is using a zero-based budget that includes a line item for saving.  Now that your retirement fund(s) are automatically accumulating, you don’t need to have a line item unless you have separate accounts that pull from your net paycheck or net income, if you are self-employed.  Start with your expected monthly net take-home pay and list out your expenses. 

You should have some room built in for savings.  I typically plan out my expenses for each paycheck and there is something left over.  Sometimes it is a small amount, other times it can be a good chunk of money.  Maybe you can’t save on some paydays but can save more on some others?  Either way, you should have savings for an emergency fund, then savings for other goals such as a new car, house down payments, college tuition, and so forth.  If you don’t have anything special to save for, really evaluate your future needs for big-ticket items and plan for something to need replacement.  There is always something that you can be saving for to avoid going into debt in the future. 

If you don’t have enough money for savings or extra debt payoff, you need to think about what you can cut to get more money in your budget.  If you have cut to bare-bones and are still coming up short, think about how you can grow your income.  Side hustles, or second jobs, are a good way to plug your budget holes, especially if the cash flow crunch is temporary due to paying off debt.  If the shortage is permanent, think about what you can do to increase your income permanently, whether applying for better paying jobs, or re-training for a more lucrative career. 

My last tip is to always be looking for “found” money, or windfalls.  These can be great ways to build up your savings faster than planned.  Income tax refunds, credit card cash back checks, birthday gifts, or refunds are all common and can boost savings quickly.  Also look around the house for items you no longer use and try to sell them on Craigslist, LetGo, NextDoor, or FaceBook Marketplace.  Social media makes it so much easier to sell things quickly while decluttering our homes.

Be sure to sock that money away in a safe, FDIC insured, high-yield savings account.  Some online banks are offering accounts with yields between 1.5% and 1.75% APR.  This is far better than the standard .05% paid by many large national banks.  You can visit NerdWallet.com for a review of the best savings accounts, plus ones with one-time bonuses for depositing larger amounts. 

Follow me on twitter or subscribe to my blog to keep up-to-date on all of my posts.