Archive for July, 2009

Is Now the Time to Refinance?
July 30, 2009

The radio is full of commercials offering 4% interest rates, no closing costs, and many other dream offers. But there are some things you should know. First of all, not surprisingly about 90% of advertised lending offers are only for those with PERFECT credit, PERFECT home values, etc. The reality is that we all know if it sounds too good to be true, it is.

So, where should you start?

Do the Math. Figure closing costs and overall savings. There are always closing costs and someone has to pay for them, most likely you. This will be several thousand dollars. If a new loan is going to make sense, then you need to be in the house longer than it takes to break even on those costs. For example, you are initiating a new loan, which will save you $200 a month, and your closing costs are $3000. It will take you 15 months to break even on those costs. Does that make sense? If you finance those costs into the loan, it will take even longer due to the interest you will pay. Click here for a refinance breakeven calculator.

What is your real savings? Your lender should be able show you what your real interest totals. Compare this to what you have left on your current loan.

Are you extending the term of your loan? If you only have ten years left on your mortgage, and you are refinancing for another thirty years, is this your best option? If you are close to retirement age, then extending the loan may not make sense. Take a look at your overall financial goals.

Are you financing old debt into the new loan? While rolling credit card debt into your mortgage can help with short term cash flow, are you committed to making the changes in your life to make sure that the credit card debt doesn’t accumulate again? Over 70% of the people who consolidate their debt end up replacing that with new debt.

Do you trust your lender? There is a huge increase in refinance and loan modification scams. In fact, the FDIC has new literature out just to address this issue. You can find out about the common scams here. At the end of the day, you should understand your new loan so well that you could explain it to someone else. When you do, you may realize that a refinance just doesn’t make sense right now.

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Are You in a DEBT CYCLE?
July 27, 2009

“I don’t need any help with my finances, I am getting by just fine.” That may be true. For many, however, the simple act of getting by can very easily fall into a cycle of debt that can lead to bankruptcy, foreclosure and more.

Sherry attended one of our workshop classes with a desire to improve her finances, but also an attitude of defensiveness about her situation. She waited until after the class, to convince our presenter that my presentation didn’t apply to her. Five months later, we saw her again. This time she waited to talk to us for a different reason … she had gotten sick, and had gone through several rounds of antibiotics. The doctor visits and prescriptions that she had to pay meant that other bills had to be neglected. After several months she was still trying to catch up, only now, she was dodging creditors, and in danger of losing her vehicle. She was using credit cards to get by, but now was maxed out and had no options.

What is a debt cycle? It is a pattern in spending and debt that occurs when expenses exceed monthly income. Credit is used to cover the difference. The new payment of additional debt even further exceeds income. The individual continues to borrow money until the entire thing implodes.

Here are the warning signs that you are susceptible to the debt cycle:

  1. You have no Emergency Fund or Savings
  2. You are unclear about your financial situation
  3. You struggle each month to make ends meet

The two largest contributors to the cycle of debt are the lack of an emergency fund, and spending in excess of income. Things do come up. You will have unanticipated expenses (emergencies) that occur like medical co-pays, car repairs, school projects, etc. It is vital to have the money set aside to pay for those things when they happen. Without an emergency fund, you are forced to sacrifice payment on another bill, starting the cycle of debt.

So, what can you do to protect yourself?  First of all, make a budget. If you don’t have one, please use our free budget calculator or worksheet.  Second, make sure that you are spending less than you make. Next, make sure that you have an Emergency Fund in place. To begin with, work hard to get your emergency fund to $500. To find out how much your total emergency fund should be for your household, click here for an online calculator.

Sherry’s situation can be avoided. Take care of yourself first, by saving. When you do have an emergency fund, it feels like less of an issue when you can pay for it and move on with your life.

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Is Your Relationship Dealing with “Financial Cheating”?
July 23, 2009

Money is the number one reason for divorce. How does that happen? Typically, relationships are eroded through financial infidelity. Cheating with money occurs in 1 out of 3 marriages, destroying trust in its wake. This can have just as much of an impact on your relationship as any other type of infidelity. A lie unravels the emotional connection, which is the foundation of a relationship. In the 2005 Harris poll, 96% of those surveyed stated that it was the obligation of each partner to be honest about expenditures.

Is this impacting your relationship? Here are some of the signs. Do you (or your spouse):
– Hide new clothes in the back of the closet, or the trunk of the car
– Lie about purchases, and how much money was spent
– Use shopping as a form of therapy
– Have a secret credit card

Recognize where this behavior comes from. Was this a part of your childhood? How did this behavior impact your parents and family? What were some of the long term effects? What can you do to prevent this in your home?

One of our program users recently had several “aha” moments about her childhood. Her parents always fought about money. Her mother is a spender, who frequently used credit cards to their limit. It is hard to say whether the arguments started because of the credit card use, or the credit card use started because of the arguments. Typically, her mother would hide those purchases, hide credit card statements, and was evasive about spending. Their marriage was always on the brink of divorce and financial ruin. As an adult, Jennifer fights the urge to spend when she is unhappy. What keeps her on track, is remembering those arguments, and how hurtful they were to her father. She is motivated to stay on track as a commitment to her husband.

If you see this problem in your own relationship, talk with your spouse. Before you can change your bad habits you must first identify them clearly. Make a commitment to be completely honest about all income and expenses. Just like any other issue, communication is the key to overcoming this issue and building a strong relationship with a successful financial future.

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How to Pay off Debt: Comparing Popular Debt Reduction Methods
July 16, 2009

We all want to pay off credit card debt, and ideally be debt free. However, what is the best way to get there? I will compare two methods, and give you some feedback so that you can decide which debt plan works for you. Both of these scenarios assume that you are already paying the minimum for all cards, and can afford to pay additional money each month. I probably don’t need to mention this, but if you are struggling to pay the minimums, then that should be your primary focus.

1. The Snowball method works this way:

  • List your debts from the smallest balance to the largest balance.
  • Apply extra money to the smallest balance until it is paid off. For instance, if you have a debt of $150, with a minimum of $10, pay the minimum plus extra payments ($50 for example) until it is paid in full.
  • Use that missing payment amount (the minimum of $10 plus the additional $50 you were paying) to apply to the debt with the next largest balance.
  • When the second debt is paid, use the missing payments from those two debts toward the third.
  • Continue that process to continue to pay more and more towards the largest debts until the last one is paid.

2. The alternate method is to attack the debts with the highest interest this way:

  • List your debts from the highest interest rate to the lowest interest rate.
  • Pay extra money to the first debt until it is gone.
  • Use that missing payment toward the next debt on the list.

Take a look at the calculator I used for an actual comparison between the two approaches:

So, which method is right for you? Obviously, you can save more money by paying off the highest interest rate first. However, if you know that you struggle to stay motivated in your plan to pay off debt, the Snowball method will give you the personal satisfaction of accomplishing smaller goals. Either way, the fact that you are tackling your debt will be your ultimate reward. Click here to use my free calculator to compare these two debt strategies for your situation.

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Overcome Budgeting Obstacles
July 9, 2009

We have all heard the old quote: “Success is a journey, not a destination”. This definitely applies to budgeting. When we teach people how to budget, our team often gets the same question … “I have tried to budget in the past, but it didn’t work. What am I doing wrong?” Many people have tried different types of budgeting techniques, only to abandon them quickly.

Use discipline. A budget does mean prioritizing your spending. For some, this is very difficult at first. You will find that it gets easier as you do it often. When you find yourself tempted to purchase something you don’t necessarily need, but you decide against buying it and instead pad your emergency savings account, you will have succeeded with this step.

Be patient. Just like a diet, don’t expect to get it right the first time. Setbacks are normal. I recommend that you set up a monthly budget, and create a spending plan for each week of that month. If you find that you can’t stick to it weekly, then create a daily plan. Click here for these resources, or click on the resource tab of this blog.

Play as a team. If you are married, then expect the process to take longer than if you were single. You each have your own spending personalities and needs that will affect your decisions. With a new household budget, you should have weekly meetings to discuss the budget. This may seem like a lot, but it is important to get into the habit. Once you find that your budget runs on auto pilot, fewer meetings are needed.

Depending on the goals and objectives you set, your journey will actually not end for many years. Managing your finances is a lifelong commitment. Remember to enjoy it, keeping your eyes on the horizon because, believe it or not, you will get there. It may not be easy, but (get ready for another cliche) … nothing worth having ever is.

Start A Budget
July 7, 2009

At Essential Knowledge, we actually don’t use the word “budget”. We think spending plan is more appropriate. It seems less confining, and more empowering. Whichever term you use, the result is the same. A budget is a plan for your money. And the amount of money you have is not important  whether your bank account has millions of dollars or tens of dollars, having a workable solution for spending is critical.

How do I start? Well, you can’t know where you are going, unless you know where you have been. You can do this one of two ways … you can start tracking your expenses for thirty days; or, you can pull up your most recent bank history online, and do a thirty day review. Use this expense worksheet for free. List every expense in the right category. Total each category to see your total spending. You probably know the exact amount of your car payment and housing, but you will probably be surprised what you spent in other areas.

Does your income exceed your expenses? This seems like a silly question, but it is vital. If it does not exceed your expenses, then you are probably using credit to cover the difference. Your immediate goal should be to cut your expenses in order to cash flow each month.

If your income does exceed your expenses, then decide what you want to accomplish. Do you want to save more money? Do you want to be more disciplined each month? Are you starting a retirement account, or adding to one? Determine what you want to save each month, based on the goal.

Evaluate your spending. You will see some things that you absolutely need, such as food, healthcare, housing and transportation. You will also see things that you just wanted, such as 150 channels of digital cable. The key is to find what you really need, and compare that to what you really want. Obviously, you need to eat, and have a roof over your head. But, could you live somewhere less expensive, or take your lunch to work?

Start with the easy things. Accomplishing small steps is satisfying and will motivate you to do more.

Each month, look for ways to save money in your budget. You will be amazed what you can do, regardless of your monthly income. Check back with me, too, for other ways to save.