Archives for July 2010

Three Steps You Can Take To Turn Your Financial Life Around

After we got married just over 8 years ago, my wife and I entered the marriage with more debt than we would have liked. My wife had zero debt, and I came in with student loans, credit card debt (for our honeymoon) and a loan for my car. We weren't happy with having so much debt, and after a couple of years of slowly paying off the obligations, we decided to take things a bit more seriously. We wanted to get out of debt and get on track for an increased net worth as fast as possible.

Here we are several years later and we're now back on track. We have no debt (except a mortgage) and we're slowly building up a nice nest egg that includes savings, retirement accounts and insurance.

Here's are three things that we did that had the greatest impact in helping us to turn things around.

Start Tracking What You Spend And Set Up A Budget

The biggest change that we made was to actually start tracking what we were spending. When we got to the end of the month normally we would be at the end of our bank account – with not much left over to save or pay extra on debts. The money was just gone and we didn't really know where it had gone.

After reading Dave Ramsey's Total Money Makeover we started actually tracking where our money was going for a couple of months. What we found was that we were overspending by huge amounts of money in our eating out category and in our entertainment spending. There was a lot of room for making cuts.

Once we had tracked our spending for 2-3 months we actually set up a budget and cash flow plan at our house. We started working on a zero based budget suggested by Ramsey where you allocate every dollar to either a spending, saving, investing or giving category before the money even hits the account. You allocate every dollar, and if you have money left over at the end of the month – it needs to be re-allocated to a category. If the money isn't given a name and given a job – that money has a way of disappearing.

We quickly found that once we started using our budget, and not spending more than had been allocated in different categories (using a cash envelope system), we ended up having several hundred dollars a month left over that we hadn't had before. And it wasn't like we ended up making any painful cuts or hard decisions. That's quite a turn around!

Set Up An Emergency Fund

Another thing that made a huge difference for us, while we were paying off debt – and once we had it all paid off – was having an emergency fund. According to a Gallup poll a few years back, Only 10% say they have $1,000 in cash available in case of an emergency. That's not good!

In the past I had always thought that having a credit card was just as good as having a cash emergency fund. But what I realized later on was that using a credit card to pay for life's little “emergencies” just helps to continue a cycle of debt by creating new debt – when you could have instead planned ahead and had the cash to pay for it up front.

So how much should you save in an emergency fund? It depends on what you want your level of security to be, and the amount of risk you want to take on by not having an emergency fund. At our house, and in this economy, we currently have about a 10-11 month emergency fund (we can pay for 10-11 months of our expenses if we were to lose all income tomorrow). We just aren't optimistic about where our economy is heading, and we want to make sure we're prepared for the worst. While we were paying off debt we saved up $2000 in our emergency account because we figured that would cover most problems that could happen.

Try Living A Cash Only Lifestyle

The third thing that we did that had a huge impact was switching from a lifestyle financed by credit and loans, to one financed strictly by cash. If we want to buy something now, we pay for it with cash. Now that doesn't necessarily mean we pay for everything with crisp new $20 bills, but it does mean that we don't buy anything unless we have the cash on hand in our bank account to pay for it.

A couple of examples of how things changed in our life.

We needed some new furniture for our new house when we moved 4 years ago. In the past we probably would have financed the furniture at the store or put it on a credit card. Instead, this time we had planned ahead and saved the cash to pay for it up front.
Two years ago my car started having problems, and we knew we'd have to buy a new car to replace it. Instead of buying an expensive model financed at the dealership as we had in the past – this time we had saved up enough money every month in a “car fund” to buy a nice used car – that was new to us. A paid off car just drives so much nicer than one with a huge loan on it!

Paying cash and not having new debt is so much more freeing!

Planning Ahead, Saving Up And Living Within A Framework

When you look at the three points above, they all have something in common. They involve taking a look at your life, and making a decision to live with a plan, to thinking things through and making rational decisions that will pay off down the road. They involve living with delayed gratification, and deciding that you want to make sacrifices today so that tomorrow will be a brighter day. Making those types of decisions isn't always fun, but in the end it will pay off.

What other things would you suggest people do – or what are some things that you have done that have made you more successful? Tell us your thoughts -and your tips and tricks – in the comments!

How To Sell Your House Fast In A Tough Real Estate Market

By Mr. Money 4 Comments

A few years back my wife and I were selling our townhouse, and the market was at it's height. Sellers were easily getting the asking price for their homes, and some were even getting more than one offer – sometimes above the asking price. Times were good if you were a seller, however, the problem was that if you were selling your home, you are also probably looking to buy a new home. We ended up selling our house for the asking price – and then we turned around and probably overpaid for our new home. If only we had known what the market would do, we could have waited a few years after selling – and bought a new home at a bargain. What's that they say about hindsight?

The market has now been going down for a couple of years, and homesellers are having a tough time selling their homes. For many homeowners they bought their homes with little or no money down, and they're now finding themselves underwater on their mortgage – they owe more than the house is worth. From bloomberg.com

Almost one-quarter of U.S. mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30 percent by mid-2010 as job losses and foreclosures climb, Zillow.com said.

With so many underwater mortgages many people are just walking away from their homes. When those people walk away the banks end up foreclosing. That means the market now has a glut of foreclosed homes on the market. In fact accordingto RealtyTrac.com there has already been 1,654,634 foreclosures so far in 2010!

With all those foreclosures in addition to all the short sales, your competition is stiff. You need to make sure to give yourself every possible advantage. Here are some tips that will hopefully help you to sell your house fast.

9 Tips To Help You Sell Your Home

To help you sell your house in a down market, here are some things you can do.

Your pricing is extremely important: If you want to sell quickly when the market is bad, you might have to make some leeway when it comes to your price. Many areas (including mine) have been hurt by all the foreclosures and short sales, and prices are depressed. While you don't have to price your home like a foreclosure, you'll still want to figure out what a reasonable price in your area is, and try to undercut your competition if you can. The price you give your house is one of the more important pieces – so try not to get emotionally stuck on a certain price you were “hoping to get”.
Make sure it looks nice from the street: While you can't always beat all the foreclosure and short sale homes on price, you can usually make sure your house has better curb appeal. The foreclosure home may have an un-cut lawn, scraggly plants and garbage in the driveway – while yours should be spotless. Get the home power washed, paint the trim and the doors, put on new exterior lights and/or knockers, and put in some nice new plants. If the buyers don't like how your house looks on the outside, you might not even get them through the door. If it does look nice, you'll give them a great first impression!
Put all your junk away!: When you’re living in a home, you end up having bills on the counters, photos of your family on the wall and all sorts of other personal clutter that has grown over the years. But when you’re selling a home you want the people walking through the door to picture themselves being at home in your house. Take down Billy's class photos for the past 10 years off of your living room wall, and replace them with a nice piece of neutral wall art. Clean off your kitchen counters. Take extra furniture and put it in storage. Remove unnecessary items from the house in general and put them in storage to make the house feel bigger.
Fix problems big and small: If your house has a big problem of some sort that is glaringly obvious, get it fixed. Broken window? Put in a replacement. Dirty carpeting? Put in some new carpet. Sometimes you can also have smaller problems that might not be so obvious, but that could still make a bad impression. For example, when we sold our house we went around and repainted several rooms because of small marks and scratches on the wall. The result was that our house almost looked brand new!
Stage your house to give a better impression: We staged our home with my mother in law's help when we sold our home. It made our home feel more spacious, made it feel less cluttered and allowed buyers to picture themselves in the home. We removed several larger pieces of furniture, and put some smaller plusher pieces from our parent’s houses in the living room. We took our personal photos down and put up framed art pieces. We removed all the magnets and photos from the fridge, and put some strategic accessories around. We watched a lot of HGTV and picked up tips from the experts on how to stage our home.
Give a bonus to buyers or agents: You might want to think about offering to pay the closing costs for a homebuyer, or offering a signing bonus for an agent who brings in a full price offer. Some folks have even thought to offer things like pre-paying homeowner's association fees for a year or two. Put your thinking cap on to think of bonuses, it doesn't have to cost a ton if you don't want it to.
Use non-traditional means to market your house: While listing your house with your agent is a good first step, try other online and offline venues to market your house. Put up a craigslist ad and use sites like zillow.com or trulia.com. Try buying a domain name using your house's address (1500ParkAve.com), and put up a wordpress site to post pictures and details about your house. Let people you know that the house is for sale and post it to Twitter, Facebook and other social media outlets. Put up flyers at the local supermarket!
Find a good agent who will help you sell: Selling your house is one of the biggest financial transactions you'll have. It's not a good time to do your crazy uncle Bob who just got his real estate license a favor and let him sell your house, especially if he's not a good agent. Call some agencies and ask for their top salesperson. Get a good word of mouth recommendation and interview a few agents and ask them what their marketing plan for your home would be. Use someone who knows how to market on the internet, the importance of good wide angle interior photos, and someone who understands your particular market.
Keep your house clean for when it shows -and don't be there!: One of the things I hated doing while we were selling our house was keeping the house clean at all times in case there was a showing. It stunk, but it paid off. We also made sure not to be at home when the house was showing, because buyers hate nothing more than feeling like the owners are staring at them as they check out the house. Finally, consider doing some baking before a showing, or light one of those cinnamon roll candles. Anything you can do to make people feel at home is a plus.

Getting your house sold when the market is this tough isn't going to be an easy prospect – but it can still be done. Just follow the tips above, have a little bit of patience, and you'll be well on your way to putting that sold sign in your front yard.

Have a tip for something you did that helped your home sell fast? Tell us about it in the comments!

Do I Qualify For The Making Home Affordable Home Refinance And Modification Program?

By Mr. Money 1 Comment

Over the past year and a half millions of people have attempted to refinance or modify their home mortgages in order to help them stay in their home. Others have just taken advantage of the program in order to be able to refinance their home under better terms than might otherwise have been available. Our family is one of the latter, we were able to refinance our home mortgage and drop over a full point off of the interest rate. We saved over $200 a month off of our mortgage, and while we did have closing costs, they're already paid back 1 year later.

Since the program is still available, I thought I would briefly cover the details of who is eligible for each program – the refinance and modification programs.

Who Is Eligible For Home Affordable Refinance Program (HARP)

So who is eligible for the Home Affordable Refinance Program? According to the government site, people who meet these criteria:

Own a one- to four-unit home that is your primary residence;
Have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac
Are current on your mortgage payments and have not been more than 30 days late making a payment within the past 12 months
Have a first mortgage not exceeding 125 percent of the current market value of your home;
Have income sufficient to support the new mortgage payments; and
Can improve the long-term affordability or stability of your loan with the refinance.

Want to figure out if you're eligible? Go through this questionnaire and it will let you know. Eligible For A Refinance.

Who Is Eligible For Home Affordable Modification Program (HAMP)?

Others may be in more dire straights, and find that they need a loan modification. So who is eligible? According to the government site, to qualify for HAMP, you must:

Own a one- to four-unit home that is your primary residence
Have received your mortgage on or before January 1, 2009;
Have a mortgage payment (including taxes, insurance, and homeowners association dues) that is more than 31 percent of your gross (pre-tax) monthly income; and
Owe an amount that is less than or equal to $729,750 on your first mortgage for a one-unit property (there are higher limits for two- to four-unit properties).

MakingHomeAffordable.gov expands on the requirements:

Homeowners who qualify must complete a trial period of three or four months to demonstrate that they will be able to make their reduced payments on time before their mortgage will be permanently modified. To create an affordable payment, your mortgage servicer can lower your interest rate to as low as two percent, as well as extend your mortgage term up to 40 years, or forbear (defer) payments on your principal. A portion of the principal can also be forgiven, although that is optional on the part of the servicer.

So if you believe you can make the payments on your reduced and modified mortgage, the program may help you.

Several States Get Extra Help To Avoid Foreclosure

As of June 2010 several states that had greater than normal declines in average housing prices (greater than 20%) will see funding in the new “Hardest Hit Fund” of foreclosure prevention funding. Details:

State Housing Finance Agencies (HFAs) in Arizona, California, Florida, Michigan, and Nevada can begin to use $1.5 billion in “Hardest Hit Fund” foreclosure-prevention funding under plans approved today by the Obama Administration. This aid will support innovative local initiatives to assist struggling homeowners in those states, as part of the first round of funding available under this new program.

“These states have identified a number of innovative programs that will make a real difference in the lives of many homeowners facing foreclosure,” said Treasury Assistant Secretary for Financial Stability Herbert M. Allison, Jr. “While we've made important progress stabilizing the housing market and keeping responsible families in their homes, the Obama Administration will continue to do everything it can to help those who are struggling the most during this difficult time. Today marks an important milestone for delivering relief to homeowners through the Hardest Hit Fund program.”

If you live in one of the states above and are interested in the programs they now have available, check out this post for details.

Have you done a refinance or home loan modification under the Making Home Affordable Program? If so, did it go through, or have you experienced problems? Tell us about it in the comments!

Personal Finance Basics: Live Below Your Means

By Mr. Money 6 Comments

Last week I started a series called “Personal Finance Basics“. In the series I plan on talking about basic concepts of personal finance, going back to the simple concepts that we sometimes forget or ignore. Last time I talked about the idea of paying yourself first in order to ensure that your savings grow – instead of having your money mysteriously disappear.

This time I want to talk about another important concept – living below your means.

The Lure Of Easy Credit

One thing that this generation has done is to forget the basic concept of how you create and grow wealth. The ideas of easy credit and buying things before you have the cash have taken hold. Whereas our parents would save up and pay cash for the things they bought, when we have a whim and desire something – we just buy it.

The average age at which a U.S. consumer under the age of 35 first adopted a credit card is 20.8 years. The average age of credit card adoption for a consumer over the age of 65 is 40.6 years. (Source: “The 2008 Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston)

The average age that we started using credit has dropped as time has gone on. Using credit and going in debt has become more acceptable. Millions of people have acquired debt and gone thousands of dollars in debt.

Total U.S. revolving debt (98 percent of which is made up of credit card debt): $852.6 billion, as of March 2010 (Source: Federal Reserve's G.19 report on consumer credit, March 2010)

So revolving debt in the U.S. has grown to near 1 trillion dollars. That can't be a good thing!

So what can you do about it?

Spend Less Than You Earn And Live Below Your Means

Thomas J. Stanley in his book “The Millionaire Next Door” talked about millionaires and what the greatest factors were that lead to their creation of wealth. Contrary to the picture that many people hold of the wealthy, the picture of the lavish spending, expensive cars and expensive homes, most millionaires that he interviewed were rather frugal. They lived well within their means – and most lived below their means.

He said that the average millionaire doesn't have material things just to have them:

We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles. Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.

Millionaires don't feel the need to display their wealth, or show off by living in fancy neighborhoods and drive a fancy car. They live below their means, make thoughtful homemade gifts, buy quality things, and don't focus on brand names or status symbols. They enjoy the good things in life, but also know good value. They know how to live on less than they make. In fact, for many of them, their frugality and living below their means is one of the primary reasons why they have created their wealth.

So what do you think – is living below your means an important piece of creating and growing wealth? Tell us your thoughts in the comments!

Unemployment Benefits Extended And Are Available Again For Up To 99 Weeks

By Mr. Money 1 Comment

In early June millions of people who were without a job ran out of jobless benefits as congress failed to push back the deadline for people to apply for unemployment. It is estimated that over 2 million people have had their benefits lapse.

Unemployment Benefits Law Passed

Today President Obama signed an extension of the unemployment package meaning many people will once again be eligible for benefits.

From CNN Money:

Millions of jobless Americans are getting their unemployment benefits back.

Hours after the House voted Thursday to push back the deadline to file for extended unemployment benefits until the end of November, President Obama signed the measure into law.

The approval came a day after the Senate voted 59 to 39 to restore the payments, ending a seven-week stalemate.

Benefits will now be available again for up to 99 weeks for some unemployed persons:

Federal unemployment payments, which last up to 73 weeks, kick in after the state-funded 26 weeks of coverage expire. These federal benefits are divided into tiers, and the jobless must apply each time they move into a new tier.

The payments will be retroactive to the previous deadline of June 2. But it could take up to a month for states to start sending the checks again, experts said.

Benefits May Be Delayed

Even though the benefits have now been extended, many people may not receive their extended unemployment checks for weeks to come.

even if a final bill is approved soon, it could take weeks for workers to collect benefits that they have missed since the extensions started phasing out, said Judy Conti, federal advocacy coordinator with the National Employment Law Project, a New York-based advocate for workers' rights.

“Even the best states will probably have a week or so of lag time, and it wouldn't surprise me if in some states the lag time were a month,” Conti said.

Conti said she expects workers to receive backed-up benefits in lump-sum distributions, rather than in dribs and drabs.

Personally I don't mind that people collect unemployment benefits, after all we all may end up losing a job one day and need some help. But now that we have unemployment benefits for almost 2 years, I think it's a bit much. If you can't find a job in 2 years, you're either not trying hard enough, or turning down jobs that aren't “up to your standards”. Time for some new job search strategies!

What do you think? Should the benefits have been extended? Are the benefits becoming too much, and continuing for too long? Tell us your thoughts.

Personal Finance Basics: Pay Yourself First

By Mr. Money 3 Comments

Personal finance can seem like such an amazingly complex topic at times. There are so many things to think about with financial management including budgeting, saving, investing, credit, debt, mortgages and so much more. Each topic has sub-topics – and it feels like it could take a lifetime to figure it all out. It can be overwhelming.

A few days ago I talked about how we as humans like to take things that are basically simple, and make them more complex. In that article I argued that we should “keep it simple stupid” and try to focus more on some of the basics, instead of trying to make things too complex.

In the spirit of going back to the basics, today I want to start a series of posts called “Personal Finance Basics” where I'll be talking about some of the simple concepts of personal finance that I believe you should focus on in order to be successful. Today, I'll be talking about saving and paying yourself first.

Pay Yourself First

One important piece of advice that you often see repeated, but not followed is the simple advice of paying yourself first. This advice has been around for ages, so sometimes it seems a little antiquated – something your grandfather might tell you. The thing is, it works.

JD from getrichslowly.org explains paying yourself first this way:

Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. The first bill you pay each month should be to yourself. This habit, developed early, can help a person build tremendous wealth. I wish I’d understood this when I graduated from college.

So to pay yourself first you make your saving a priority – and as soon as your paycheck comes in, you pay yourself, and fully fund your savings and investment goals.

The problem is that most people don't pay themselves first. They play the game backwards – and end up following a system where they pay all their bills, spend on entertainment and eating out and the last thing they do is fund their savings and investment goals. When they do that they often end up running out of money before they are able to fund their savings. Savings becomes a footnote and gets lost in the shuffle.

Why Should I Pay Myself First?

While most people agree that having some sort of savings and investment plans is important, not everyone agrees about how to get there. For many it just seems too hard to save their money first because they feel like they've got too many other spending and debt priorities.

Here are some of the reasons why I believe that it's important to pay yourself first.

Paying yourself first makes saving a priority: When you save last by default it means that all of your other bills, spending and other monetary obligations are more important that saving for your future. By paying yourself first it makes your saving and investment goals the priority.
Paying yourself first equals sound financial planning: When you pay yourself first it means that you're planning ahead – not just for the far future – 30 years down the line – but also for every day emergencies like medical issues, car troubles and so on. When you save first and have an emergency fund, you'll be ready when these problems crop up.
Paying yourself first can help motivate you to reach your goals: When you pay yourself first you'll see your savings and retirement accounts growing faster than if your savings goals came after your bills and entertainment expenses. Watching those savings can be very motivating to help move you towards reaching other goals as well!

How Should I Pay Myself Automatically?

Once you decide it's a good idea to pay yourself first, the next step to take is to put a plan in action in order to actually pay yourself first. For me the best thing you can do is make paying yourself first automatic.

Here are some ways that you can work towards reaching your savings and investment goals.

Set up automatic investments: Set it up with your company to automatically invest in your company's retirement savings plan, especially if they have a plan that matches your investments. If they do it's an automatic 100% return right away! If they don't match think about setting up a tax-free Roth IRA and maxing that out first. Then open one of the variety of pre-tax investments and maxing those out. If you have the money come out of your paycheck before you even see it, it makes it much easier to make a plan that doesn't include that money!
Open a high yield savings account: Open up a online savings account where you can set up an automatic savings goal – where money is withdrawn for your savings every month without you having to do anything. Again, making it automatic makes it much easier!
Come up with your own ways to trick yourself into saving: Doing things like saving coins and adding them to your savings, or saving every $10 bill that comes your way are examples of ways you can increase and add extra savings.

What are some ways that you can come up with to trick yourself into saving? Do you have thoughts on why it's important to pay yourself first? Tell us your thoughts in the comments.

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