A Penny Saved

MoneyDummy at One Money dummy getting smarter says she’s convinced.  One should pay off his/her student loan debt before buying a house or concentrating on paying off a mortgage.

I couldn’t disagree more.  Certainly, there is something to be said about having no other debt except for your mortgage.  However, I think that this is more of a situational decision.  Take my situation for instance.  I pay 3.75% on my student loans.  I pay 6.75% on my mortgage.  By paying on my mortage first and foremost, I effectively earn 3% on my money.  That doesn’t even include the potential increase in value of my home.  If my home increases by 5% each year, that’s an extra 5% I make by paying(or having) a mortgage over just paying off my student loans.  It may not sound like much but when you start thinking about the total dollar amoun of a mortgage or the average total student loans, it can add up in a hurry.

I was told once that student loan money is the cheapest money you’ll ever borrow.  MoneyDummy refers to Dave Ramsey in her post.  Dave is the same person who pushes the “snowball” payoff method.  In that method, Dave almost always suggests putting the debt with the highest interest rate first for payoff.  I can’t see any logical reason why student loans would be an exception.

As further evidence for my arguement, I ask you, would you ever get a home equity loan or refinance your home to pay off a debt that had a lower interest rate?  Even if it were a credit card?  Student loans are also unsecured debt.  They cannot repossess your education if you default.  They can repossess your home.

It still comes down to a personal decision, but my opinion is that paying on the mortgage and other debt with higher interest rates makes better money sense.  Student loans truly are the cheapest money you can borrow.  Leave them for last on your payoff schedule.  You’ll be making money on the deal.

I should point out that I am not a financial professional and any thing that I write here should not be taken for financial gospel and the only advice I am legally qualified to dispense is this: Consult a financial professional.

Technorati Tags: mortgage, student loans, dave ramsey, dave, financial, interest rates

When I saw the post by Amanda at Young and Broke, I just couldn’t help but jump on the meme.  Who hasn’t thought about what they would do with a million dollars?

So, here goes:

Starting money: 1,000,000.00

Student Loans(wife and I): ~82,000

=  918,000

Current mortgage: ~42,000

=  876,000

Credit cards: ~11,000

= 865,000

Car Loans: ~ 13,000

= 852,000

Misc debt: ~ 12,000

= 840,000

New house: ~ 200,000

= 640,000

College savings for son: 100,000

= 540,000

College savings for future children: 250,000 (if no more children, this becomes investing/fun money)

= 290,000

fun money: 50,000 (vacations, fun toys, etc…)

=240,000

Invest the rest.  Once the debt is paid off, the rest is really gravy.  Potentially, the rest could be invested and given a nice enough return on investment, could become income for one or both of us to quit our jobs.  At 5%, the return on a cool mil would very nearly replace our current incomes.

Ah, dreams.  What would you do with $1,000,000?

Technorati Tags: million, what would you do with a million dollars, investment

This is the final article of a three part series on the book by David Bach “The Automatic Millionaire.”  In the first part, we discussed the “Latte Factor” and how to find the money to begin.  We followed that up in the second part with the essentials of making your finances automatic.  In this part, we’ll discuss a few of the finer points of the Automatic Millionaire plan.

Mortgage Miracle:

One of the best asset’s an Automatic Millionaire can have is his/her home.  Instead of throwing away mounds of cash on rent, you can be putting money into your home.  Some think of a home as a poor investment, but there are not many other investments that have exceeded a 10% growth in recent years.

David gives us a simple and easy way to not only own our own home, but to do it sooner.  He introduces the concept of every other week mortgage payments.  The math on this is simple.  If you’re making monthly payments on a mortgage, you make 12 payments.  If you begin making half of your payment every other week, you will have made 26 payments.  26 half payments amount to 13 regular payments.  You will have paid one extra payment in a year.  It may not sound like much, but if that extra payment goes to principal, it could mean a savings of over $100,000 on your mortgage.  Consider a $200,000 mortgage.  If you pay it off as the bank expects you to, it will take you 30 years to own the house outright.  The average homeowner in the U.S. only lives in any one home for 10 years.  Another interesting fact is that for the first 10 years, nearly every payment you make to your mortgage is almost entirely interest.   If you only live in your home for 10 years, you will have built up almost no equity.  If you cannot afford to make that extra payment, David suggests adding 10% to your payment each month.  Doing so will end up at nearly the same place.  Following this plan could pay off a 30 year mortgage in as little as 7 years.

Tithe:

When most of us think of Millionaire’s, we don’t necessarily think of giving money away.  But David points out that a vast majority of the millionaires throughout history have been dedicated tithers.  Not necessarily to a church, but to some non-profit charity.

Debt Reduction:

If you’re in debt, maxing out your 401(k) might not be the best idea.  Save as much as possible to your retirement plan, but make sure and start paying as much as you can to your debt.  And make it Automatic!  When you get rid of your debt, you can make even larger contributions to your retirement than you already are.

I don’t want to cover every point that David makes in “The Automatic Millionaire” because I really think that if you’re interested, you should pick up a copy.  Read it through.  Maybe do it again.  Learn the methods that David teaches and begin applying them immediately.  The sooner you get on the Automatic road, the richer you will be.  It’s not an instant thing and  you’ll have to work at it, but it will all be worth it in the end.

Pick up a copy of “The Automatic Millionaire” at Amazon.

Technorati Tags: the automatic millionaire, automatic millionaire, david bach

This is part two of three articles on the book “The Automatic Millionaire” by David Bach.

In the first article, we discussed finding the money, via the “Latte Factor”, to make yourself an Automatic Millionaire.  Today, we’ll discuss how to turn that money into an Automatic wealth maker.

Make it Automatic.

David makes one of the best analogies in his book.  It’s a comparison between a budget and a diet.  If you’ve ever dieted, you’ll immediately understand.  People on diets “budget” their calories in an effort to reduce their intake and trim fat.  People on budgets do something very similar where they budget their money in an effort to reduce spending and trim debt.  In a majority of the cases, both end up the same way.  People on diets go on a eating spree and people on budgets go on a spending spree.

Budgets are inefficient for many people.  If you can keep to one, all the more power to you.  David’s arguement is that most people cannot.

So, if we can’t trust ourselves to control our money via a budget, how do we control our money?  We make it automatic.  Take advantage of every ability to save and spend automatically.

First the saving.  If you work for someone, chances are that you have the ability to have payroll deductions made.  You are even better off if you have a retirement account that can be funded by payroll deductions.

If you do, set it up and forget it.  It’s a bit like a Ron Popeil oven.  “Set it and Forget it!”  Begin putting as much as you can into your retirement accounts.  Each and every dime you don’t will cost you exponentially down the road.  David suggests that you should take the percentage of your salary that you think you can spare and then add half again to it.  So if you think you can save 10%, you should save 15%.

Do the same for your emergency fund and any savings that you plan on having.  Try and keep 3-6 months or more in your emergency fund.  And, once again, Set it and Forget it.  A super sale on clothes does not an emergency make.

Now for the second bit.  The debt payments.  Again, our aim is to make things as automatic as possible.  If you have the ability to have your payments taken out of your account through either a bill payment or eft service, do so.  If you don’t have to write the check, there is less chance that you will cut the payment back or forget to send it altogether.  While you’re at it, see if you can add 10% to all of your payments.  Start with your mortgage.  It could save you hundreds of thousands of dollars.

So now we’ve talked about where to find the money (Latte Factor) and the first step in what to do with it once we find it. (Make it Automatic)  In the next part, we’ll talk more in depth about the different thing that David writes about that can further you’re journey to becoming an Automatic Millionaire.

Read Part One: Find the Money

You can pick up a copy of The Automatic Millionaire at Amazon

Technorati Tags: automatic millionaire, make it automatic, debt reduction, save money, save, retirement, bill payment

This is the first of three short articles based upon the principles and plans in the book “The Automatic Millionaire by David Bach.  Read my full review of the book!

Everybody want’s to be a Millionaire right?  So, besides winning the lottery or having wealthy aunt Harriet die, how do we accomplish that?

David Bach has a few ideas in The Automatic Millionaire.  His simple plan can be broken down into three easy sections.  This is the first.

Find the Money.

You can’t be a Millionaire with out a million dollars. Sure you have to save money.  You have to make your money work for you too.  But where does the money come from?

David introduces the readers to “The Latte Factor” early on in the book.  “The Latte Factor” is a really, really simple premise.  There is something in your daily routine that you spend money on that can easily be cut out.  For some, it’s a morning Latte.  A normal Latte can cost upwards of $4 each.  If you buy one 5 days a week, that’s $20 a week.  $80 a month.  So, David says, if we merely cut the Latte out of the daily routine we free up $80 a month for investment.

It’s not just Lattes either.  If you don’t drink a Latte every day, maybe it’s a pack of cigarettes.  Or a donut.  No matter the vice, cutting it from your daily routine could get you on the right track to becoming an Automatic Millionaire.

What’s your “Latte Factor”?  How much is it costing you?  If you account for growth, $80 a month could add up to hundreds of thousands of dollars over 20+ years.  Is that Latte that important to you?

Come back Monday, July 10th 2006 for part 2: Make it Automatic.

Read my full review of the book, The Automatic Millionaire.  Pick a copy of it up at Amazon.

Technorati Tags: The automatic millionaire, save, retire rich, retirement, david bach, the latte factor, millionaire

Every once in a while, I receive emails that I just don’t know how to answer.  Below is an excerpt from one such email:

I’ve cut corners everywhere I can. Today I cancelled my Cable TV. I cancelled my contributions to my retirement accounts. I’ve spent <$100 in the last month on anything other than food and bills. And still I lose ground. Is it time for me to consider bankruptcy?  What other options do I have?  Can you suggest something?

If my reader’s situation sounds similar to one that you’re in or have found yourself in, what did you do? What are you doing? Have any wonderful advice?

Technorati Tags: debt, debt landslide, Big B

It’s your money started a meme today and it seems to be getting some legs.  The meme?  What five things would you hate to give up if money got tight?  Mine?

1. Internet.  I simply could not give it up.  How else would I get to blog?  Do eBay?
2. Meat.  I’ll try and find the cheapest meat around, but give it up? Not a chance.
3. Books.  Again, Amazon and eBay are my friends, but not gonna give em up.
4. Soda.  I dunno why, but I just can’t seem to get rid of it.
5. Garage Sale shopping.  Mostly because I use it for product for eBay.

There’s my five things.  I have a completely new question though.  What would you give up first?  What expenses would you remove immediately?  And I’m not asking for the obvious credit cards and other such debt.  That’s what we all want regardless.  I’m talking things like Cable TV, Cigarettes, etc…  The only reason I ask is because I’m considering a major cut back and want to know what you all think are expendable expenses.

Technorati Tags: cutback, hate to give up, expendable expenses, savings, expenses

My wife and I finally decided that if we didn’t replace the fridge that came with our house, that it would fail at the most inopportune moment. Since we live in an extremely limited town and only really had one choice for appliance shopping, we headed up to Sears to make the purchase. Another good reason for going to Sears was that we had a Sears Mastercard that we could use to make the purchase. I hate adding on Debt, but sometimes you have to do what you have to do.

An interesting side effect of doing this was that the card hadn’t been used in so long that it had been turned off. We then had to turn it back on. Several days later we received the official “welcome back” letter from the card along with several convienence checks to use to transfer balances. With the extra credit on this card we could transfer balances and pay only 3.99% on the life of the transfer. We took the opportunity to transfer two balances from debts that we were currently paying 24.99% on. Effectively saving ourselves 20% over the remainder of the life of the credit loan. If we were to only pay the minimum payment to pay off that balance, the savings alone would pay for the fridge many times over.

Just goes to show that sometimes things go the right way.

Technorati Tags: debt, fridge, savings, credit, loans, sears

I happened over to pfblogs.org and happened to notice a post by Mighty Bargain Hunter( who has recently joined the Money Blog network) entitled “Why is being debt-free so unpopular?”. I just couldn’t resist commenting. At the end of the post, MBH asks a question and that is what I will address here. The question?

If you are trying to become debt-free, why? If you’re not, why not?

Well, I am far from debt-free. I have 5 figure college loans hanging around and low 5 figure credit card debt. Add that all together with a mortgage and everyday expenses and you have one very not debt-free scenario. Short of it is that I am trying to become debt-free. As hard as I can. There are days that it seems impossible.

So why do I want to become debt-free? One of the tenets of this site has been to learn as much as possible about personal finance and how to improve the way we all operate our finances. I began rather poorly early in my financial life and as a result, I have a mountain of debt that I must get rid of. When I add up all the interest that I pay on a monthly basis, it could very nearly pay my mortgage payment. That makes me sick. Slowly but surely it will go away and as each debt goes, my available cash for investment and true wealth growth increases. That is why I want to become debt-free.

Thanks for the topic Mighty Bargain Hunter!

Technorati Tags: Debt, debt-free, interest, credit card

Officially launched on February 5th, 2006, Prosper.com is the U.S. sister site of London, U.K. based Zopa.com. Prosper can be defined as a Social Lending Marketplace.
A snippet from the Techcrunch Review:

It generally takes 2-4 days to close a loan, according to Prosper. However, a borrower can request an expedited loan, which will take the first lenders who meet the minimum requirements for amount and interest rate.

Prosper charges a number of fees, including a 1% closing fee to the borrower and a 0.5% annual loan maintenance fee for lenders.

Benchmark has funded both Zopa and Prosper. Other Prosper investors include Accel, Fidelity and Omidyar.

I’ve done a little exploring and it really is quite the novel idea. Basically, you sign up for the site and can choose to either become a Lender or a Borrower or Both. The beauty of it all is that there really isn’t much for a middle man. Prosper tries to stay behind the scenes, but they do an excellent job of keeping everything, including the money, under control.

Lenders find that they have to set up an account and transfer money to a Prosper.com account in order to lend the money. I believe that one of the chief reasons for this is a guarantee of the money for lending. If you said you’d lend $20,000 to someone and then when prosper tried to transfer the money out of your personal account to find that there was really only $200… well, you get the picture.

Borrowers have an even easier time of it all. Sign up, verify a bank account(Paypal like verification) and consent to a credit check. There may be a little bit more when actually posting a loan request as I haven’t gone all the way through that yet.

One of the best parts of the site is the group function. Say you belong to a specific group of people. Firefighters is the group that is used as an example on the site. So say you are a Firefighter. A group is either set up already or you set up a Firefighter group. Then other Firefighters join the group. As more people join the group, and take loans out and loan money out, the group gets “Group Rewards“. These group rewards are then shared out among the group members. Depending on how the group is set up, the rewards are split in one of 5 ways. 0%, 25%, 50%, 75% or 100%. The percent tells you how much of the reward goes to the group’s benefit. The group benefits from these rewards through a lowered interest rate on all loans made to group members. The Rewards are accumulated by being a “good” borrower. Make you payment’s on time and pay off your loans and the rewards begin piling up.

Swing on over and check it out. I’ve set up a group called Young Professionals. Click on the “join group” link on the right hand side and lets grow our wealth together.

Technorati Tags: Prosper, Zopa, Borrow, Loan, Young Professionals