As part of my work at the church I do volunteer financial counseling.  A while back I met with an individual who had concerns about their finances – they just couldn’t get all their bills paid, had some credit card debt, and wanted me to look over their finances. So I went over to their place and we took a look at what was going on in their financial life.

One of the first things that I did was try to get an understanding of their monthly income and expenses. This way I could see quickly where they were financially – did they have enough money to meet expenses or were they digging themselves into a financial hole? Basically it is just putting down on paper what their “budget” is.

When I finished calculating their monthly income and expenses, I had to tell them that before taking money out for groceries (they weren’t sure how much they spent on that) they were already spending more per month than they were earning per month!

So I went over their spending and found a few areas they could trim. One of them was their T.V. expenses. They were spending over $100 a month on satellite and accessories. So I suggested that they cut back.  They just looked at me. So I repeated that they didn’t have any money in their budget for groceries so they had to choose between eating or watching T.V. Again, no response. I wrapped up the meeting as best as I could and thanked them for their time and willingness to have me come over.

This person was asking me for help. They knew that their finances were in trouble. But when it came down to choices, they were not willing to change their lifestyle, even if that meant no food! Financial choices are hard to make.

Budgeting is a simple concept, but it is very hard to do. We (and I include myself) do not like to deny ourselves. We want things, and we want it now, sometimes regardless of the price we will pay later. Living on a budget is not for sissy’s. It is hard. But the rewards are worth it.

P.S. The actual story above is true, but the events & situations have been modified to protect the identity of everyone involved.

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In January of 2009 we refinanced our mortgage, lowering our interest rate from 5.5% to 4.75%. So how did we do last year? We lowered our outstanding balance from $144,100 to $140,901. Our mortgage payment is $751.70 (interest and principal only). To that we paid an extra $110.30 per month for 10 months (beginning in March). So we paid an extra $1,103 last year. Plus, our credit card, instead of cash back pays our mortgage, so from that we paid an extra $225. We paid a total of $3,199 off in total principal last year in basically 10 months. Not bad.

Hopefully this year we can make an even bigger dent into that principal. I would love to pay this off in 15 years and save all those “pennies” in interest, but we would have to drastically increase our payments. Since banks aren’t paying any interest right now, I would rather get a 4.75% return on my pennies (savings on the interest from the loan) than the 1% the banks are giving. However, right now we have to focus on our emergency fund and get that built back up first since our “water” emergencies have drained our fund. After that is built up, maybe we can shift focus.

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One measure of how you are doing with debt is to look at your debt to income ratio, often referred to as the  DTI ratio. To determine this, you take your monthly payments toward debt – mortgage payments, credit card debt, car payments, etc. Add them all up, then divide it by your net monthly income. That percentage is your DTI Ratio. Some experts say that this ratio should be less than 35% (others give slightly higher or lower figures). The lower the number the better.

Lenders look at this number to determine your ability to handle your debt payments. Even if your credit score is high, if your DTI ratio is too high you may be denied a loan. For me, my DTI ratio is 19.2%, which is pretty healthy. If I needed to (which I don’t want to), I should be able to get a loan fairly easily and at good terms (especially linked with a high credit score).

Another good reason to have a low DTI is that if something happens to your income stream, you will have more flexibility in cutting back your spending. Having options in budgeting is always a good thing.

If you are having trouble making ends meet, one reason could be that your DTI ratio is too high. If more than 40% of  your income is going to pay off debt, that leaves you with very little to pay for everything else. This would be one indicator that you need to tighten your belt and pay off some of that debt.

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As part of my work at the church, I do financial counseling. Right now, as you might imagine, that part is quite busy. Unfortunately, it seems to take a crisis – job loss, late notices, creditors calling, divorce – before people are motivated to do something about their financial situation.

Twenty percent of what I do is teach. I educate them on how to do something financially ( i.e. set up a budget, start an IRA, snowball debt, etc.). The other 80% of what I do is motivating them to do the #1 basic principle for financial health – spend less than you make!

Most people who come to me, deep down inside, know what they need to do. They just need motivation to do it. That is kind of the whole principal behind the Dave Ramsey approach. He knows people need motivation more than anything else, so his whole book is a motivational tool. And although people quarrel with his debt snowball approach of paying the smallest debt first (rather than the one with the highest interest rate), he knows what I know. Motivation is the biggest obstacle.

People will know their financial boat is heading for the waterfall, and yet they will not “paddle” to safety. Inertia, bad habits, are hard to overcome. And hopelessness is a constant companion.

So in my counseling, I set simple goals that can be achieved and give small victories – a sense of accomplishment, of empowerment. Even if they don’t make the most financial sense. Because my goal is motivation – getting people to do what they don’t want to do (budget, spend less) in order to achieve what they want to achieve (financial health).

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I am changing the credit cards I use. Before, I would try to find the card that had the best cash back. But that soon can become just chasing after the wind. Everytime you open a new credit line or close one, you can get a ding in your credit score. Plus all the hassle of setting up automatic payments, etc. So I am simplifying.

What I am doing now is focusing on using just two cards. The first pays 5% back when using it for groceries, gas, or at the drug store – up to $300 a year.  So that is all I use it for. The second card doesn’t give you any cash back. At a rate of 1%, once you get a reward amount of over $25, it is applied directly to your mortgage principle. I use this card for everything other than gas and groceries, or once I have maxed out the other card.

At first glance, 1% is pretty pitiful. But then I realized I am also saving interest. So if can get even just $100 a year toward my mortgage (which is easily doable), not only will that save me $3000 in principal mortgage payments, but I will also have saved about another $600 in interest!

I like the idea of automatic payments toward the mortgage. Let’s face it, for me, I just tend to fritter the credit card rewards away. Not that that is all necessarily bad. But now I know that the reward is going to pay off debt.

So at least now when I send my oldest child to the orthodontist, I am also helping to pay down the mortgate!

Any of you have a credit card strategy you would like to share?

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Yes, I did it. Several weeks ago I pulled the trigger and refinanced our home mortgage. Our previous mortgage was only 5 years old (fixed, 30 yr), but with a discount for refinancing with the same lender, and with interest rates at that time at historic lows, I went for it. At the same time, I rolled over my Home Equity loan (which was at 6.8%), so now I only have one loan. I ended up with a 4.75% fixed rate for 30 years. By doing so, my cash flow increased by almost $300 a month. I am putting an extra $110 a month toward the mortgage (should decrease the loan length by about 7 years and save me $33,000 in interest), putting another $125 a month toward my emergency fund, and the rest is helping to ease some budgets that weren’t quite working out.

One big diference between now and five years ago is how much they are checking everything. Last time, I don’t think they checked anything! This time, everything got checked, which is the way it should be. Some good news for me is that my appriasal came in very strong – our house is still worth a lot more than what we paid for it five years ago, so I am thankful for that.

What stories do you have out there about refinancing, good or bad?

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How we all want more! It can be so hard to be content with what we have. We see our neighbors and friends with things – a new car, a nice house, a beautiful garden, a great vacation. And a little bit of envy creeps in. It’s hard to stay in budget when everyone around us isn’t staying within theirs! But envy or covetousness is a cruel master – it is never satisfied. It always wants more, and in the end, it can consume us. The news is filled with individuals who all wanted a little bit more and now it is destroying them (think Ed Mcmahon among many others). Contentment is priceless.

“You shall not covet your neighbor’s house; you shall not covet your neighbor’s wife or his male servant or his female servant or his ox or his donkey or anything that belongs to your neighbor.” (Bible, Exodus 20:17)

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I read a number of financial blogs. And most, if not all of them, will tell you the secret to wealth is to spend less than you make. Pretty much common sense. If your’re single, it’s up to you to make the decisions that will help you financially. Or if you are part of a “couple”, decisions need to be made together. But what happens when the couple is not on the same page?

A few years ago I was giving financial advice to a couple, who we will call the Smith’s (I will also change a few other facts to protect everyone involved). They called me to set up a meeting because they felt things were not quite right financially and they heard through the grapevine that I did financial counseling.

I met them at their house and took a look at their finances, asked a few questions, plotted things out and discovered that they were spending about a $1000 more per month than they were making. They were shocked.

The husband wanted to reign in the spending and set up a budget to get their house in financial order. The wife had no interest. And she was the problem.

As I went through their finances, it soon became apparent that she was wasting money. She would just spend money, usually claiming that it was for “her business”. She had just bought a new expensive vehicle for “the business,” was buying all kinds of computer hardware, software, and other business “tools” for “this business.” She would buy herself clothes for ”business purposes”, and eat meals out because of ”business”. Unfortunately – there was no business. She had maybe one or two customers, spent maybe 15 hours a week “working,” but everything else was play. This was an expensive hobby, not a business. She could have made more money by working at a fast-food restaurant, and saved thousands of dollars in unnecessary expenses.

I counseled them to quit this business. He was in agreement. She was not. Her parents did not help matters – they encouraged the couple to move in with them on the farm. The Smith’s were in their late 30’s!

The wife refused to meet with me again, and refused to see any financial counselor – she did not have a problem, everyone was just picking on her. A few months later I got a call from the desperate husband. They were sinking faster and faster…

So what would you tell this man?

I told him that he probably needed to take drastic measures. The credit cards were in his name, so he should call the credit card company and take her name off as an approved user. He should also cut up the current credit cards (he didn’t use them). The bank account was also in his name and I told him to cut up her ATM card. Then he should set up a budget, give her an allowance, and stop feeding the problem. If she could not restrain herself, he needed to help her by cutting off her access to money.

He wasn’t sure if he could do it. I said it was his choice. But if he wanted to get out of this financial Titanic he needed to take action.

I never did hear from them again. I still wonder what has become of them. It is tough enough to manage your money when you are on the same page. But when you are on different pages financially, it is a nightmare. Which is why I guess finances, or should I say disagreement over finances, is one of the leading causes of divorce.

If you are in a relationship, how do you get on the same page financially?

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I was at a seminar on Tuesday evening and the speaker, Tim Suloff, a Stewardship Representative from a local college, shared the 3 laws of the Least. With his permission, I thought I would share it with you:

1. Borrow the LEAST AMOUNT of money possible.
2. Borrow for the LEAST TIME possible.
3. Borrow at the LEAST PERCENTAGE RATE possible.

The laws of the least are also purposely put in the order of effectiveness (2 is more effective than 3, 1 more effective than 2). I thought it was a very succint way of putting it. A good reminder that borrowing costs, and if we have to do it, ways to minimize expense.

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We have had a lot of wind storms in our area this winter. During one of them, our roof TV antenna was blown down and is hanging by a thread on our roof. We now only receive about half the TV stations we used too. So my wife and I discussed our options:

1. Pay someone to put it back up. We decided against this since the wind is so strong in our area – it would probably end up being an annual occurance. Plus it was kind of an eyesore up there on the roof.
2. Sign up for a satellite provider (we cannot get cable in our area so that is not an option). This would cost us an extra 25-35 dollars a month, money that we would have to pull from making extra payments on our debt.
3. Take the antenna down and live with fewer channels. This is the option we are going with.

Now, this is not a huge sacrafice. Sure, we will miss some of the channels we used to get. But the idea of paying $35 a month for satellite bugs me – especially when we think that by not doing it we can put an extra $420 a year toward debt.

What small sacrifices are you doing to save more, invest more, or reduce debt?

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