Maybe I should host a rally at the National Mall...

Okay, not really, but I do get fired up about this stuff, and the New Year is upon us.  What a great time to get educated and make some changes!

Merry Christmas and Happy New Year! 

Wow, what a busy time of year.  I hope you were able to find the joy in the season amongst all the stresses.  If you've been following along in this blog the last few weeks, you know I'm wrapping up a three part series around debt management.  I will also admit that writing this is new to me and I'm learning on the fly.  A couple of things have become apparent to me.  First, I had intended on providing commentary around student loans in my last post.  I forgot.  I will include those thoughts in this post.  Second, it's clear to me I did not spend adequate time around mortgage debt management.  There are many other aspects of managing your mortgage that I just couldn't fit in the last post.  I will definitely come back to mortgages, likely many times, in the weeks ahead. 

Now, down to business.  I want to dive into "other" loans which can include personal loans and any sort of title based loan (car, ATV, snowmobile, RV, camper, etc.).  I want to be clear up front about something very important.  I don't advocate taking out any of these types of loans.  I think they should be avoided at all costs.  BUT, I recognize lots of you have them in some form or fashion so we might as well deal with your reality rather than my ideals!  So, my thoughts below will be based on the best way to manage those debts but are not meant to condone their use.

These "other" loans have many disadvantages.  They tend to have higher rates than mortgage debt, the interest is not tax deductible, and in the case of title based loans, you are paying interest on an asset that is constantly going down in value.  A $30,000 car with a 5 year loan at 5%, you'll have paid about $34,000 and have a car that worth about $15,000 after that 5 years.  On a positive note, they allow affordable payments with limited cash out of pocket.

So, what's the best way to manage your car loan debt?  In my opinion, if you have a car loan, or car loans, my encouragement is to pay them off as soon as possible.  Review the first several posts to my blog to find some practical ways to raise thousands of dollars that can be applied to your car loans.  Review every expense to see what can be trimmed down, cut back or eliminated. 

If that's not enough, sell your car and replace it with something cheaper.  Think I'm nuts?  Consider this: Used car values have been INCREASING for the last year.  Your car may be worth more than you think.  I sold a car this year for 30% more than I bought it for 2 years prior.  It's not likely this trend will continue for too much longer.  This may be the best time to sell a used car. I always prefer private car sales over trading in to a dealer.  It's not hard, it's free, and can bring much better prices than trading your car in.  Craigslist is a great place to sell your car.  If your uneasy or unsure, contact me and I'd be happy to help walk you through the process.

If you are considering buying a used car soon, do your very best to do so without taking on debt.  It might mean driving a junker.  Who cares?  It's worth it.  By the way, I will be dedicating an entire post sometime in the future of the economics of buying a new vs. used car.  You might be surprised at what I've found.


Student loans, on the other hand, have some inherent benefits.  Not only did those loans help provide you a higher education, thus hopefully higher paying work, the interest is also deductible (within certain limits).  I still advocate paying them off as soon as possible, but allocate extra cash to your debt that doesn't have deductible interest (credit cards, car loans, etc.) Here's how I would rank debt in terms of pay down importance:

1) Credit Cards / Personal Loans
2) Title-based loans (Car, snowmobile, RV, etc.)
3) Student Loans
4) Mortgage Loans

Managing your debt wisely can pay huge dividends for your future.  I can't stress enough how important it is to educate yourself in this area.  It starts with learning to live within your means.  It's shown that people will adjust their expenditures in close correlation to their income.  If ones income increases by 5%, so likely will their expenses.  Remember back to a time where you had very little.  Maybe that was during your early working career, or maybe that's right now.  Is/was your quality of life different during that time?  A great saying I often reflect on is, "The more you know, the less you need."  I often meet individuals that have lived lives of financial ignorance until they are ready to retire and those are the most difficult conversations to have.  

Do something about it.  Challenge yourself to become more financially fit in 2011!

Until we meet again...

Forget White or Blue. How About a Green Christmas?

Hello again!  For those who may have missed the inaugural post to this blog, one of the primary reasons I’m taking the time to write about various finance related topics is because people ask me financial questions all the time (which I love, by the way) so it occurred to me it may be beneficial if I start typing out responses to the questions I get most, or the areas I see people struggle in most.

I mention this because there may be some topics I cover that you find less interesting or you’re already quite knowledgeable in.  Either way, please consider forwarding this blog to other friends or family as there is a good chance there may be some resources they may benefit from.  The web address to send them (or to bookmark for yourself) is www.thelowdownreport.blogspot.com.  Please also consider “following” my blog.  I still don’t know what that means, but I suspect it means you’ll be aware of new posts as I put them up??  Also, the first person to read this post will be my 300th visitor!  

Alright, now back to business.  Part 2 of The Great Debt Debate will focus on what is called (excuse the jargon) deductible debt.  This means, for a majority of us, the interest we pay on this debt is deductible when we file our yearly taxes.  In short, if you qualify for the deduction you’ll receive back about $0.15 for every $1 you pay in interest.  Not a bad deal!  Deductible debt consists primarily of mortgage loans on your primary or secondary home, government sponsored student loans, and home equity lines of credit (HELOC).

My goal here is not to tell you how mortgages work, or where best to get a mortgage, or even how much of a mortgage you should consider taking (relative to your income, etc., which I will likely cover another time), but instead to focus on how best to manage the largest debt you’ll probably ever have, some pitfalls to watch for, and to challenge some conventional wisdom by suggesting that it rarely ever makes sense to have a 30 yr fixed mortgage.  I’ll also look at student loans and some best practices in managing them.

One thing everyone can agree on is that lower mortgage rates are better than higher mortgage rates.  For some, lower rates allow them to buy a bigger home than they would normally consider.  For others, lower rates simply mean they will have extra cash to put into savings each month.  Guess which view I take?  Lower rates mean lower monthly payments.  BUT, there are some other important things to consider when financing, or re-financing, your home. 

Interest-Only vs. Principal and Interest

The decision to pay down principal on your home is an important decision.  Should you pay principal?  Well, it depends.  Part of the decision is whether or not you are a disciplined saver.  Having an interest-only mortgage ONLY makes sense if you save the principal you would other wise be paying to the mortgage company.  Interest-only mortgages should not be used just to buy a bigger house.  This can be very dangerous.  I have paid $0 toward the principal of our home(s) in the last 10 years.  If you’re like most, your house value has decreased in the last few years.  By paying down principal, you are putting money into an investment that is decreasing in value.  Your $100 principal payment two years ago may only be worth $80 now.  By only paying the interest and putting the would-be principal payment into a savings account, your $100 savings deposit two years ago would be worth around $104 today.  This can be a big difference over time. 

Even in a more “normal” environment where home prices are increasing, there is still a tremendous benefit to only paying the interest.  Being disciplined by saving your would-be principal payment can mean thousands of dollars built up in a savings account over time.  If you ever move, and as you’ll read in a bit, you will several times in your life, you will have that extra cash in your hand ready for a down payment instead of locked up in your home and unusable until your home sells. 

I cannot stress enough – doing this requires discipline.  It would be VERY easy to just spend the money you should put into savings.  This will be a challenge for most.

The 30 Year Mortgage Myth

It’s what your parents did.  It’s what your friends do.  It’s the rate most quoted in ads, commercials, by banks, etc.  It might be one of the worst financial decisions you can make.  The 30 year fixed rate mortgage is the most widely used product in the lending community, therefore, it’s the most widely held mortgage among consumers.  On some levels, it makes sense.  It’s the easiest to understand, it provides an affordable payment, and it’s nice knowing that after 30 years of payments your house is paid off.  The reality is much different. 

The studies I’ve read, many by the Federal Reserve, suggest that the average person moves to a different home every 6-8 years.  There are very few people who stay in the same home for 30 years or more.  I, for example, have lived in 5 different homes in the last 10 years.  It would make more sense, then, to look at financing your home closer to the amount of time you’re likely to live in it.  The reasons are many.  The average 30 year mortgage rate today is around 5.10% (check local listings).  The average 5/1 ARM rate is 3.15%.  (What’s a 5/1 ARM you say?  It’s simply a 30 year loan, amortized over 30 years, that offers a fixed rate for the first 5 years.  After 5 years it becomes a variable rate.)

The savings are significant.  On a $200,000 home, you’ll pay about $4,000 less in interest each year (or $333 per month).  That’s $20,000 less interest over the 5 year period.  More importantly, that can be $20,000 in your savings account.  Plus, if you’re average, you may not live in your home more than 5 years.  There are also 7/1 ARMs available. 

The savings are so significant that Alan Greenspan, the prior Fed president, commissioned a study to research whether 30 year mortgages should be discontinued because they can be so financially disadvantageous to consumers.  My research also shows that interest rates tend to run in 5-7 year cycles, so if you found yourself staying in your home longer than 5-7 years, you’ll likely have a good opportunity to re-finance before your 5/1 ARM would change to a variable rate. 

This won’t be the best choice for everyone.  Like most financial things, one size does not fit all.  Some may still benefit from a traditional 30 year mortgage, but if you spend the time and do that math in context of what your future living plans might be, you may be surprised at what you find.  There are other considerations to make that I won’t discuss here (future income potential, credit scores, age, etc.)

Wow, I feel like there is a lot I didn’t cover, but this post is getting lengthy.  What are your thoughts?  I know I have a couple of Loan Officers who read this blog.  Am I crazy?  Disagree with me?  Please share.  I’ve got a lot of material and spreadsheets to help analyze the best way to manage your mortgage, so if you have questions, please feel free to ask me privately or publicly.  These are just my thoughts and opinions, so take them as such!  Next time.....CAR LOANS.

Until we meet again…

The Great Debt Debate: Part 1 of 3

Welcome back!  I have to say, I've been very encouraged by all the positive feedback I've received after my first few posts.  This has been fun for me (so far!) and I've learned a lot from your thoughts and comments as well.  To this point, I've been sharing ideas that revolve mainly around ways to save money, or reduce complications or stresses in your life.  I'm taking a diversion from that for the next few weeks and will try to dive into a topic very near and dear to my heart.

There are many great things we learn through our primary and secondary education years.  We learn reading, writing, math, music, art, science, history, literature, etc.  However, the most crucial oversight within our education system, in my opinion, is the lack of education around how to handle money.  I recall a class in high school that taught me how to write a check correctly but gave no education on how to best manage the money in that checking account.  Even further, there is ZERO education on how to manage debt.  It should come as no surprise that the average citizen handles debt very poorly.  Without access to good information, isn't that the outcome we should expect? 

To make matters worse, even after our critical education years, we are left with almost no resources.  You can hire an insurance agent to help manage your insurance policies, a financial advisor to help manage your assets, a CPA to help with your taxes, or an attorney for help in legal matters, but there is no one you can hire to help manage your debt.  It should be noted that the 800-number credit help agencies are NOT there to help you manage debt.  They exist to make money, many times at your expense.  It should also be noted that mortgage loan officers are not debt managers either.  They can be very helpful in obtaining good loan terms, but that's where it ends.

So, making educated and calculated decisions about your debt is entirely up to you.  For some it will come more naturally.  For most, it requires education, budgeting, knowledge of credit products, etc.  You can't afford to simply be ignorant.  Good luck!!

I will break this topic down into a 3 part series (maybe more).  I will start with credit card debt.  Part 2 will be deductible debt (mortgages, student loans, HELOCs), and part 3 will be all other debt.

Credit Cards

Credit cards, if used properly, can be very powerful financial tools.  If not used properly, they can cause great financial harm.  I will have a future post dedicated solely to my research on the best credit cards available, but for now, I'll focus on some caveats to be aware of when considering whether to use them or not. 

There is one basic and simple rule with credit cards.  If you pay your balance in full each month, get rewarded for it, and if you carry a balance, make sure you DO NOT have a rewards card.  Typically, if a credit card offers 1% cash back, the interest rate is 1% higher than a card that offers no cash back.  However, if you pay off your balance each month, make sure you're rewarded for it (I'll explore the best reward cards another time).  Rewards aren't as generous now as they were a few years ago, but I can still typically get between 1-3% cash back.

Cash back is always my preference.  I can get a check every month and put it right into my savings account.  Airline miles tend to accumulate and be forgotten about, plus the rules can change any time on those miles.  Lastly, you might spend 25,000 miles on a $150 airline ticket.  Earning $150 in cash back would only take 15,000 points.  Which makes more sense?

Rewards are great, but I specifically want to focus on those who carry a balance each month.  While I can't offer specific advice that would cover every variable, I hope I can offer some ideas to encourage you to be disciplined to get your balance paid off.  Credit card debt is what I consider "bad debt" because the interest rates are very high, the interest is not tax deductible, and the minimum payments required can leave you paying on the debt for years and years.

In most cases, people carry a balance simply because they don't have the funds available to pay it off.  This leaves you with two options: 1) Make more money or 2) reduce your spending to free up cash.  While there are things you can do to make more money, realistically, those opportunities may be limited.  Therefore, option two will offer the most flexibility.  There are many options for reducing spending to free up extra cash to apply to your credit card balance.  Look to my last post to find a way to generate a few thousand dollars every year to apply to your debt.  Many times it comes down to making tough choices in order to make significant headway toward your goal.  TV, newspapers, internet access, magazine subscriptions, gym memberships, eating out, cell phones, etc., are all luxuries that can be reviewed for their necessity.  I won't make many friends with that viewpoint, but you must be willing to make those tough choices.

Try this exercise: Inevitably, you've been in a store and noticed a pair of jeans, or a new tool that you would love to have, but was not the reason you were in that store.  Those jeans give you the butt you've always wanted, and they are on sale!  Mentally, you can already picture them hanging in your closet.  You've mentally committed to buying those jeans.  STOP!  You've decided you're going to part ways with $50 from your bank account.  Make the tough choice, put the jeans back, drive straight home and make a $50 payment towards your credit card.  You'll be glad you did.  Plus, let's be honest - you really don't NEED those jeans, do you?

Ultimately, if you carry a balance on your credit card(s), you must become disciplined both on the things you choose to buy and on how you pay it back.  It's not my opinion that all credit cards should be destroyed and you should deal in cash only, as credit cards can be a very powerful tool.  But if you're a crediholic, you have to face the reality of your situation and choose to do something about it. 


I've had clients who play the credit card game.  They will continually transfer a balance to new cards every few months to take advantage of 0% offers as a way to avoid interest charges.  The two reasons someone might do this are 1) they are leveraging the money as best possible but have the resources to pay off that balance anytime they choose, or 2) they transfer the balances out of necessity because they can't afford to pay it off.  I'm not particularly a fan of either option.  Balance transfers usually have a transfer fee attached to it and many times they essentially prevent you from using the card for anything else.  For example, if you transfer a $1,000 balance to card "A" at 0% interest and then use that card for your everyday purchases, many times any payments toward that card will be applied to the balance with the lowest rate (your $1,000 balance transfer) and none of your payments will get applied to your purchases until your $1,000 balance transfer is paid in full.  You'll be accruing interest on those purchases.  That's a rotten deal for you - don't do it.  


Playing this game can also negatively affect your credit score - sometimes substantially.  I had a client who made $43,000 per month but couldn't get a mortgage because their credit score had dipped so low as a result of playing this credit card game.


I am a believer in the debt snowball method.  This method essentially has you pay off your smallest debt first, and once paid off, add the payment you had been making on that debt to the payment you're already making on your next biggest debt.  This makes a lot of sense because it's encouraging when you actually pay off a debt and then see your other balances be reduced more quickly.  Plus, it doesn't require you to make more money or cut your spending.  


There are so many more avenues that I could discuss here, but I think I'll reserve that for another time.  If you have a specific situation that you'd like to discuss with me privately, I'd be happy to do so.  For some of you, this will not be easy, and it can seem hopeless.  Do not give up.  Life is full of choices and sometimes the most rewarding moments are the result of very difficult decisions. 


A great documentary to watch is called Maxed Out.  I own both the book and DVD and would be happy to lend out either to anyone interested.  The DVD is commonly found in many videos stores in the documentary section.  It's also available on Netflix.  It doesn't really explore ways to solve personal credit card issues, but it does shine a light on the credit card industry and highlights things to watch out for.  


http://www.amazon.com/Maxed-Out-Hard-Times-Credit/dp/B001PO64WI/ref=sr_1_3?ie=UTF8&qid=1292039177&sr=8-3

What advice can you share with others?  Had a good/bad experience?  Success story?  Please share your comments! 

My next post will focus on mortgage debt.  Think a standard 30 year mortgage is always the way to go?  Think again. 


Until we meet again...

$2,011 in 2011

I’ve found it hard to get into the Christmas spirit this year.  I attribute that mostly to the weather.  Apparently all it took was a nice blanket of snow the other day to turn me into a Jingle Bells singing fool.  It’s usually this time of year that people begin to think about what next year will bring.  Now that your Christmas will be less stressful – thanks to my last post – it’s a great time to get your affairs in order before 2011 is here.

I will admit upfront that many ideas I’ll share below could be quite challenging to you.  Some of you might think I’m nuts.  I can attest, however, that I’ve done all of these things, they all work, and they are absolutely worthy of your consideration.

But first, let’s cover some more practical, mainstream matters first.  Here’s a short list of a few practical end-of-year matters you need to take care of or at least consider:

1)    Fund your retirement plan.  I can’t stress enough how important this is.  Fund it until it hurts, and then fund it some more.  I’ve had several of you ask me about college planning/funding for kids or grandkids.  I will cover this more in-depth soon, but for now, your retirement account should always be fully funded for the year before you consider putting a dime toward your kids college education.  If you don’t have a retirement plan (IRA, 401K, 403b, etc.) start one.  Now.  It’s never too late.

2)    Give and give generously.  Church, food pantries, agencies, non-profits, foundations, scholarship funds, fundraisers, etc.  Clothes, food, money, whatever.  Most of these are tax deductible.  Whenever possible, write a check (for tax purposes).  If you have to give cash, ask for a receipt.

3)    If you have any Realized gains from any investments (you sold your investment at a higher price than you paid means you’ve realized that gain) take a look at what they are and, if necessary, consider selling any investments in which you have a loss to offset some or all of those gains.  This can minimize your tax obligation.

Okay, enough of that boring (but important) stuff.  Want to have some fun?  Let’s get into some ideas or challenges for you to consider as we get ready for 2011.  These are great ideas for saving some extra money, and at the same time even teach some good life lessons for yourself and any kids you might have.

I’ve done all of these things at some point.  They can be very fun, are quite practical, and make a lot of sense.  I challenge you to stretch yourself, and by doing so, it will stretch your dollars.  If you try any of these, please let me know how it went.

1)    No Food For You!  This one makes a lot of sense, especially on the heels of Thanksgiving.  The challenge is this: Take a week off from buying groceries and only use food that exists in the back of your fridge and pantry.  You’ll be surprised how easy this is.  With four kids, our weekly grocery bill is around $150.  Once to twice per year well skip buying our weekly groceries and get creative with the box of pasta that’s been in our pantry for 6 months and the muffin mix we had great intentions for last spring.  Not only does this save money, but it clears out your overstocked pantry!  BUT, here’s the most important part – put your savings in a savings account.  If I don’t take $150 and put it away, it’ll just be spent somewhere else.  Have fun with this, get creative, and share your adventures should you choose this challenge!

2)    You mean I have to talk to my spouse?  This challenge will be the most controversial, but I promise you it will be the best decision you can make.  The challenge is this: Get rid of your TV for one year.  That’s right, I said it.  Get rid of it.  Full disclosure – we have 2 TVs in our home currently.  That said, we’ve lived without TV for several years, and we miss those times dearly.  I cannot quantify for you the amount of life you waste watching TV.  You really have no idea – until you get rid of it.  You’ll rediscover your spouse, your kids, your neighbors, books, hobbies, family, etc.  It’s amazing the difference it will make in your life.  Another bonus?  No cable bills!  Here’s the important part – take the money you had been using to pay your cable bill and put it into a savings account.  In one year this can easily top $1,000 in savings.

3)    AND you want me to shop with my spouse?  This was one of the first challenges Jill and I took when we were first married.  To save our pennies, we wanted to spend as little as possible on food.  The challenge is this: Once a month, cut your grocery budget in half for the week and make it work.  Here’s the key: Prior to hitting the store, visit an ATM and take out CASH ($75 in our case) and leave your credit cards at home.  Take the whole family and make it an event.  Get creative, don’t succumb to buying junk food, and spend time planning it out before you go.  Your kids will learn the value of a dollar, and you will be forced to shop for the best deals and make the most with your money.  It’s rewarding to know that everything in your cart was purchased for a specific purpose.  Again, take the other ½ of your grocery budget you didn’t spend and put it into a savings account.

What happens if you take these challenges and implement each of them in 2011?  You will have a savings account with about $2,000 in it!  Wouldn’t that be nice?  Who’s going to take the challenge?  Report back how it goes, how much you’ve saved, and what you’ve learned.  I’d love to know!

Until we meet again...