Monthly Archives: April 2010

The Pros and Cons of Pre-Paying a Mortgage

Posted on by  at  5:00 am
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You should know right up front that while my wife and I have a mortgage, one of our top financial goals is to have it paid off by the time our kids enter college (some seven or eight years away). To get there, we’ll have to invest a significant portion of our income towards pre-paying the mortgage, but the thought of owning our home outright is a huge motivator.

So I’m a huge proponent of truly owning one’s home mortgage-free.

That said, here are some pros and cons of paying off one’s mortgage before the terms of  your loan are satisfied (the usual 15 or 30-year mortgage):

Pros:

Most personal finance experts recommend owning your home mortgage-free before, or soon after, your retirement. The amount of money you’ll need in retirement goes down considerably as a result since you won’t have to pony up hundreds or thousands of dollars each month.

In addition, by paying off your house early, you save thousands of dollars in interest over the life of the loan. Take a $100K loan at 8 percent interest over 30 years: you’ll end up paying a bit more than $264K for the $100K loan. Pay the loan off in 15 years and your cost declines to $172K, a savings of $92K.

Many people claim the tax deduction is a great reason to carry a mortgage. Personally, I never really understood that. My wife and I look at it this way: why would we want to pay someone $1 in interest in order to receive 28 cents in a tax-write off?  (If we pay $10K in mortgage interest in a year and we’re in the 28 percent tax bracket, we may deduct $2,800 from our taxes.)

Plus, as we pay off the mortgage, more and more of our payments go toward the principal, thus lowering the amount we pay in interest and thus lowering the amount of our tax deduction each year.

Cons:

Using extra cash each month to pay more on your home loan means you can’t use that money for other, important things. Things such as:

Also, you’d more than likely earn a better rate of return on your money if you invest it in mutual funds or the stock market rather than in pre-paying your mortgage.

Take the example of a homeowner at year five of a 30-year $200K loan at 6 percent who takes $1,000 she normally would have saved and instead pays it toward her mortgage. This homeowner adds $1,000 in equity to her home and saves $3,400 in interest. However, had she placed that grand in an investment vehicle that earned her an average of 8 percent over the next 25 years, her $1,000 would have grown to $6,800.

In addition, if she places that $1,000 in a tax-deferred savings vehicle such as a traditional IRA or 401(k), she’ll reduce her tax liability for that year.

Regardless of your personal feelings toward pre-paying your mortgage, you may want to consult with a tax advisor/investment advisor to determine if pre-payment is a good course of action for your situation. But a word of caution: don’t allow them to persuade you to keep a mortgage around so they can sell you a hot “investment.” The future financial security of your family may be at stake, and that is far more important than the chance to strike it big.

Don’t Become a Personal Finance Bully

Posted on by  at  6:00 am
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This article is by Adam from Money Relationship. He recently paid off about $2,100 of his personal debt.

Most of you probably read personal finance blogs on a regular basis. By reading them, you are increasing your knowledge about money and probably turning your finances around. Doesn’t that make you want to spread your knowledge all over the world? I know I want to.

However, there is a difference between sharing your knowledge and forcing your knowledge on people. For example, I am surrounded by family members that don’t handle their money well. Some of them are unemployed and don’t seem to care while others enable their children’s bad money habits. Seeing them struggle makes me want to teach them how to handle their money properly. But, is it right for me to say something without being asked?

Bully

You're Bad With Money!

Personally, I don’t think it’s right to force personal finance down the throats of people who don’t want to learn about it. I mean, it’s their life. As much as it hurts me to see them struggle, I feel it would damage their finances even more if I flat out tell them they suck at handling money. I mean, I would have been a little perturbed if someone told me I sucked at handling money (which I obviously did). So, how can you help someone without ticking them off?

Be a Role Model

This is something my wife and I are working on. We are paying off our debt to show all of our relatives and close friends that it can be done rather painlessly. Being a good role model is a subtle way of letting people know that it’s cool to be financially savvy.

Eventually, your friends and family are going to approach you about how you did it. They will see how you no longer have financial stress and how it’s making your marriage better. The ball will be in their court and hopefully they will start asking you questions.

Leave Hints

Another good approach would to leave very small hints. You need to make them so small that they really have no idea that you were trying to get them to notice.

A good example would be to leave a copy of something like The Total Money Makeover lying around you house in plain view. All you do is invite them over and hang out around where the book is located. Chances are good that they will bring it up and then you can talk to them about it in a very non-confrontational manner.

You could even leave the webpage for Frugal Dad or Get Rich Slowly on your computer. Heck, you could even have Money Relationship on the screen! ;-) It might spark a conversation like, “who is this great one they call The Frugal Dad and why do I need to learn about him”? You know, things like that. You can then talk about how these websites have helped you get a grip on your finances and live a more frugal lifestyle.

* * *

So there you have it. How NOT to talk to your friends about money. What do you think? I imagine there are some emergency situations where you need to step in. I mean, if one of my family members was on the verge of bankruptcy, I would certainly do something. Wouldn’t you?

But, let’s say someone isn’t on the verge of bankruptcy. How would you subtly talk to them about money? Have you been blunt with someone in financial trouble? Did it work?

Weekly Roundup: Tax Lessons Learned

Posted on by  at  5:00 am
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Last weekend I finally bit the bullet and paid taxes…twice. First I had to pay additional money for 2009 (more on this lesson learned later). Then I had to pay quarterly estimates on 2010 self employment income. Needless to say, it put me in a pretty foul mood. But, I did learn a couple lessons to carry forward to this tax year.

Since starting my side hustle here at Frugal Dad (and the occasional freelance writing gigs), I’ve been setting aside about a quarter of my income to pay taxes. Unfortunately, without any extra deductions (we just recently bought our home) or credits, saving 25% of my side income was not enough to cover self employment taxes. From now on, I’ll be saving one-third of my income and making higher quarterly estimates.

Enough about taxes, let’s move on to a more positive subject.

The Frugal Roundup

Paying Off Your Student Loans While Carrying a Mortgage. This is a guest post from Green Panda Treehouse. They make some great points on why it may be beneficial to save up for a house while paying off student loans. Personally, I would pay off the loans first. (@The Digerati Life)

Struggling With Time Debt. A lot of us have (or had) debt at one point. What about your time? Do you need to declare bankruptcy on your schedule? (@Get Rich Slowly)

26 Life Lessons I’ve Learned in 26 Years of Living. Baker provides some wisdom from his life. (@Man Vs Debt)

Why Do We Work So Much? Here is an excellent post by a rather new blog.  (@Pop Economics)

Best of the Rest

Your Coupons Are Making You Poor

Posted on by  at  5:00 am
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The following guest post is from Neal Frankle of Wealth Pilgrim. Wealth Pilgrim is a fantastic resource, and on my list of daily reads. After reading the post, head over to Neal’s site and sign up to receive his posts.

If you love clipping coupons, you may not enjoy this post or agree with my premise. But I am convinced that coupons are a huge contributor to overspending.

Coupons by Matt McGee on Flickr

In fact, let me ask you a question: When you spend time thumbing through the paper or surfing the net for great coupons…aren’t you really just thinking about spending money?

Of course you are.

Coupons are directly tied to spending.. You don’t collect them for those amazing graphics. Right?

In fact, for many people, browsing for coupons is part of an overspending ritual. This may not describe you, but I’ll guarantee that people who spend lots of time looking for coupons spend much more time thinking about spending than they spend time thinking about saving and investing.

Ever heard someone tell you they bought something just because it was on sale?
That’s almost as bad as someone saying they spend a ton of dough and tried to justify it because “it’s deductible”.

Coupons weren’t developed by Debtors Anonymous. Coupons were created by the Retailers Association of America probably. They did it to give you a reason to get into their store and spend money. That’s it. They know that once you’re there, you’ll keep spending. You might get a deal on toilet paper, but they’ll get you on the breakfast cereal.

Coupons were not created to save you money or help you save for your retirement.

And you know what…..it works.

If it didn’t, you wouldn’t find any coupons in the mailbox, newspaper or on the internet.

Of course, some people use coupons to stop spending money they don’t have — and I hope that describes you. But most people get sucked in. Coupons get you to buy stuff you really don’t need.

Don’t believe me?

Look at your trash can.

It’s full…right?

That means you are buying more than you need.

That’s why I don’t spend any time looking for coupons. I don’t want a “spending” mindset.

I want an investor mindset.

When I need something I go out and get it. I don’t clip coupons and then find a reason to need something. Maybe I pay more for the stuff I need than you do. But I don’t buy anything I don’t really need. At the end of the day, I spend less money as a result of not collecting coupons.

So if you’re looking for a good personal finance or a great small business idea, just say no to coupons from today on.

Am I wrong? Do you only buy stuff that you absolutely need or do coupons get you to bring home more than you intended to?

Note from Frugal Dad: When I read Neal’s title my immediate reaction was, “Are you nuts? You want me to run this post on Frugal Dad?” But after reading the guest post, I must say Neal makes a good point.

Looking back on my own experience with coupons, I remember making some impractical decisions in the name of “saving money” because I had a coupon. Honestly, how many squeezable mayonnaise bottles does one family really need? With the exception of stockpiling a few essentials using coupons, our family has found that we generally come out ahead by skipping the coupon and simply buying the store brand.

What Happens to the Money We Don’t Spend?

Posted on by  at  5:00 am
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Ever had one of those moments when you are in a store poised to make a spontaneous purchase, but stayed strong, put the item back on the shelf and pocketed the savings? I recently had this same experience and wondered how I could better track that “saved” money.

clearing out by schizoform on Flickr

For the last several weeks I have been saving the money in my “Fun” category. Instead of having fun, I had my eyes on a different kind of prize – a new Xbox 360 video game. I’m not much of a gamer, but after receiving the game system as a gift last year I have found myself enjoying the occasional game. My son likes to play along, too.

Back to my shopping experience. I found the game I wanted while strolling through the electronics section of our local Target store (this is where my son and I often kill time while my wife does other shopping). Armed with enough cash to pay for the game ($49.99 plus tax – ouch!), I stopped to perform my usual pre-purchase routine:

  • How often will I really play this game?
  • Is this adding to the quality of my life, or those around me?
  • Is there something more important I could spend this money on?

After some internal reflection, I decided that I didn’t really want the game. There were other things I wanted to do around the house that I could put that money towards – things that would add value to our home and provide a more lasting benefit. I walked away.

These types of “I’ll pass” transactions, as I like to call them, really add up! And we perform them all the time. Every time we skip take out and go home to cook a meal, or share a meal with a spouse instead of ordering two entrees, we are forgoing an expense we would have otherwise incurred.

Tracking the Value of “I’ll Pass” Transactions

We spend a lot of time (and money) finding ways to track our expenses, from elaborate home-made budgets to fancy personal finance software. However, we often fail to account for the money we don’t spend, something I think is more important when trying to become more financially mature. The money we don’t spend becomes money available to help get out of debt, save for retirement, and give to others. The money we do spend, well, it is just gone.

I am not very good at tracking the money I don’t spend, because often it is the result of a seemingly insignificant decision (like taking leftovers for lunch instead of grabbing fast food). Fortunately, a new service called Piggymojo (free trial info below) is now available to help you keep track of that money you don’t spend.

Piggymojo allows users to text (you can also use Twitter, or enter directly on their website) the details of their every day savings to an account that tracks the total amount saved, and allows you to save towards specific goals. I recently created a goal for a “Family Mountain Vacation” we’d like to take this fall. To fund this trip, I plan to use these everyday savings. I’ll transfer the money Piggymojo states I “saved” from my checking account into our Vacation targeted savings account each week.

Whether you sign up to use a service like Piggymojo, or you opt to try to keep up with the savings in your head, the idea is to find a way to capture these little savings each day. It becomes sort of a game. “If I put this game back, that’s $50 saved towards our vacation this fall! If we cancel the cable for the next few months, that’s another $45 a month that can go towards vacation.”

*Piggmojo has offered readers a free, 6-month trial of their service. Redeem the gift code “springpiggy” when creating your account.