Debt Free Adventure

Refinance Home Loans – How One Call Saved Us $41,123.16

Matt Jabs — Tue, 09 Mar 2010 17:09:15 +0000

I refinanced our first mortgage

It all started when someone on Twitter mentioned the possibility of refinancing home mortgages using the making home affordable program. I had always assumed because we are upside on our home that it wasn’t possible… well I was wrong. From start to finish I was able to successfully refinance our 1st home mortgage with little more than a few hours of research and a simple phone call.

This article summarizes the simple steps I took and aims to outline a mortgage refinance strategy you can use.

Our first and second mortgages

To give you an idea of where we are in comparison to where you are, here is our mortgage and home value information.

1st mortgage = $119,000 at 5.875% interest rate
2nd mortgage = $39,700 at 8.8% interest rate
Total owed = $158,700
Total borrowed = $165,000 three years ago
Appraised value at purchase = $175,000
Appraised value at present = $120,000 (according to our 1st mortgage lender)

As you can see, according to the present value of our home, we are upside down by nearly $40,000! The good news is that our first mortgage lender sees the value of our home as enough to repay the amount we owe them. Therefore our 2nd mortgage lender has much more risk than our 1st mortgage lender.

Refinance the 1st or 2nd mortgage?

Although refinancing our 2nd mortgage was most attractive to me (because of the higher rate,) I knew our lack of equity would make this option impossible… so I didn’t even try. Why impossible? Our home is currently valued at just enough to cover the 1st mortgage. In the event that we could no longer make our mortgage payments, our 2nd mortgage lender would not be able to recoup any of their investment. This essentially makes our 2nd mortgage an unsecured loan that cannot be refinanced because no lender in their right mind would touch it. Even if a lender would, they could not offer us a rate lower than our current 8.8%, so we were better off focusing on refinancing our 1st mortgage.

How did refinancing benefit our home loan?

I’m glad you asked… this if my favorite part to talk about! Here are the ways refinancing benefited our 1st mortgage situation:

Shorter term – We refinanced from a 30 year fixed (with 27 years remaining) into a 20 year fixed.
Lower interest rate – Our rate before refinancing was 5.875% and our new rate is 5.5%
Zero closing costs, zero points, zero fees – It did not cost us a penny to refinance. I explored other options with our lender that offered better rates with closing costs, but the option we chose was best for our situation.
Greater principal reduction – Before refinancing we were only reducing mortgage principal by $150 each month. After refinancing we will be putting $275 toward principal each month which will greatly reduce the interest we pay over the life of the loan.
Interest savings of $41,123.16 – By refinancing into a shorter term and increasing our monthly principal paid we have set ourselves up for massive savings in interest paid over the life of the mortgage. For those interested, check out our amortization schedules before refinancing and then after refinancing.
Minimal monthly payment increase – Even though refinancing will save us more than $41,000 our monthly mortgage payments only increased by $71, which is a virtually unnoticeable change in our budget.

My wife and I are crazy excited about how much our refinance is saving us… and REALLY want to help you move yourself in the same direction. It is much easier than you might think, here are the simple steps we took that resulted in such an enormous savings.

Simple Steps to Refinance Mortgages

Step 1: Does Fannie Mae or Freddie Mac own your loan?

Only loans owned or guaranteed by Fannie Mae or Freddie Mac are eligible for refinancing according to the Making Home Affordable government program.

Use these resources to decipher if Frannie Mae or Freddie Mac own your loan… or you can call and ask your current mortgage lender.

Fannie Mae

1-800-7FANNIE (8am to 8pm EST)
www.FannieMae.com/loanlookup

Freddie Mac

1-800-FREDDIE (8am to 8pm EST)
www.FreddieMac.com/mymortgage

If either Fannie or Freddie own your loan then your current mortgage lender most likely has a program set up related to the Making Home Affordable government program. Make sure you mention this program when you call your lender.

Step 2: Gather your mortgage information

Here is a list of the information you’ll want to collect before calling your bank:

Information about your mortgage, such as your monthly mortgage statements
Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources.
Your most recent income tax return.
Information about any second mortgage or home equity line of credit on the house.
Account balances and minimum monthly payments due on all of your credit cards.
Account balances and monthly payments on all of your other debts such as student loans and car loans

Step 3: Make the call to the mortgage lender

This is the most critical step because this is where you will make or break your deal. You can secure a “good” refinance, or you can secure a “better” refinance… it is all up to how you handle this call.

Use these tips when talking to the mortgage lender agent:

Call your existing lender first

By all accounts, you should start with your current lender first because they will be able to give you the best bang for your buck. To find the contact information for your lender, look on your mortgage statement.

I actually called ING Direct first because I would have preferred to move my 1st mortgage to them. The ING rep told me they could only offer me a refinance if I had at least 25% equity in the home, and suggested I contact my current lender… which I did.

Your lenders phone menu will probably have an option for refinancing under the Making Home Affordable program so just follow the prompts. If they do not then just keep going through the menu until you get a rep on the line.

Do not settle for their first few refinance offers

Know what type of refinance will satisfy you before you call.

You have to remember that the better deal your mortgage lender gives you on a refinance, the more they stand to lose in interest income over the life of the mortgage. Because of this they will offer you the least attractive options first to try and appease you without giving you the best deal. Don’t fall for this trick. Keep chipping away at their offers until you get something that makes sense.

Befriend the mortgage rep

You catch more flies with honey than with vinegar. Period. When you talk with the rep make sure you separate the agent from the lending company itself by never referring to them as one in the same. If you separate them from the company, it is MUCH easier to get them on your side. Once you have them on your side they will be much more willing to help you find a solution most beneficial to you.

Be willing to walk away

Depending on the lender and the rep you talk to, you may have to be prepared to walk away. Many times they will not offer you the best deal until you are ready to hang up. While offering you a decent refinance can hurt their bottom line, having you refinance with a different lender would hurt them even more… and they know this.

Step 4: Follow through with the paper work

Once you secure the deal with the mortgage lender agent the process is mostly over. Now you just have to wait for the paper work to get to you. Keep in mind that they may make the process a little more difficult than necessary… this is possibly another effort to keep you in your current mortgage that will pay them more interest. Do not become frustrated, just wait patiently and take care of the paper work as it comes.

If you start to loose motivation or you become angry and annoyed with the process, just focus on the amount of money this paper work will save you in the end!

In my case, I was able to save over $41,000 by doing just a few hours of leg work. I don’t know about you, but I can convince myself to jump through a lot of hoops and maneuver through a lot of red tape for $41,000!

Leave us a comment with your mortgage refinance story

Your story will help others just as mine helped you so be sure to let us know how your experience went by leaving a comment. Was it easy? Was it hard? Do you have any tips for others that I may have glossed over? Let us know, and Godspeed on your mortgage refinancing efforts!

Huge Food Recall – Are You Tired of Contaminated Food?

Matt Jabs — Mon, 08 Mar 2010 19:29:06 +0000

Personal finance isn’t my only passion…

In case you were unaware, I’m a big proponent of healthy and sustainable food production and supporting local economy. Local farms that seek to produce food enough for local communities – without the use of chemical pesticides, growth hormones, or other questionable practices – makes plain sense on many levels. I don’t write more about this topic because Debt Free Adventure is about personal finance… not organic and sustainable food production. That said, I am very passionate about these issues and like to touch on it occasionally here at DFA.

Note: If you are interested in learning more about this topic, I highly recommend you watch the movie Food, Inc. (also on blu-ray)

Recall products containing hydrolyzed vegetable protein

Thanks to Wisebread for tipping me off to this recall.

Today the FDA announced yet another food recall… this time it includes nearly 100 different products containing hydrolyzed vegetable protein. The list is growing and will be updated as more contaminated products are found. Here is a snippet from the FDA page:

This list includes products subject to recall in the United States since February 2010 related to hydrolyzed vegetable protein (HVP) paste and powder distributed by Basic Food Flavors, Inc. This list will be updated with publicly available information as received. The information is current as of the date indicated. Once included, recalls will remain listed. If we learn that any information is not accurate, we will revise the list as soon as possible. When available, this database also includes photos of recalled products that have been voluntarily submitted by recalling firms to the FDA to assist the public in identifying those products that are subject to recall.

Keep an eye on this FDA recall page for any future updates.

International corporate farms

Today’s FDA announcement does not surprise me, in fact… this sort of thing is one of the main reasons we try to limit our consumption to unprocessed foods from local suppliers.

The contamination driving the recalls is a result of unsustainable farming practices that permeate enormous corporate farms. I won’t get into details… but wanted to let DFA readers know about the recall, and encourage everyone to eat well and support local growers above huge international food industry conglomerates.

Support local economy and eat healthy

My wife and I are very passionate about healthy eating, self-reliance, and local economy. Cooking from scratch with local organic ingredients help us voice our preference for the foods we want grown.

Every time you shop you vote for what type of food you want. Every time you cook you vote for what type of food you want. Every time you eat you vote for what type of food you want. What type of food do you want? Do your shopping, cooking, and eating habits support those wants? It is never to late to make a change.

When it comes to our choice for public office we can vote once every couple of years. When it comes to our choice for food we can vote three times a day… or more! That is exciting to me… what about you?

How do you feel about the food recalls?

Have you been wanting to change your consumption habits to reflect more of a local and healthy approach to food and economy? How do you plan to get started?

Note: If you are interested in learning more about this topic, I highly recommend you watch the movie Food, Inc. (also on blu-ray)

DFA Weekly Link Rally: What is your favorite bank?

Matt Jabs — Sat, 06 Mar 2010 08:31:46 +0000

ING Direct changed my view of personal banking

You may have heard me mention this before… but I am a total ING Direct fanboy. Before making the switch to ING back in February, 2009 I hated banking. I didn’t like buying checks, I didn’t like writing checks, I didn’t like going to the bank, but most of all… I didn’t like how banks tried to charge me fees every time I turned around!

Even though I was not the most responsible manager of money, it was obvious to me that banks dedicated 10 times more resources developing new fees than they did attempting to create satisfied customers. Back in the early 2000’s I set out in search of “the perfect bank.” Six years and four banks later I was more tainted than when I began. Honestly… by the end of that banking marathon I had given up and had resigned to the fact that I would never actually like my bank. Then I started Debt Free Adventure.

After starting my blog I saw a lot of the personal finance bloggers talking about ING Direct, and what a great bank they were. At first I thought they were just pushing affiliate links… but the more I looked into the bank itself, and the more I began talked with the bloggers I was getting to know, the more hopeful I became. In February of last year (2009,) I decided to take the leap and open an ING Direct Orange Savings account – and I never looked back.

Now-a-days we use ING for our one joint checking along with eight savings accounts (ING makes it easy to break your savings goals down into separate accounts.) After a year banking with ING, I have nothing but positive things to say… and recommend you make the switch if you’re in the market for a new bank.

What is your favorite bank?

Do you have a favorite bank? Do you still hate banks, like I did a few years back? Or are you indifferent?

And now on to our Weekly DFA Link Rally!

Link rally for this week

Financial Samurai offers up The Curse Of Making Too Much Money And Not Pursuing Your Dreams

Peter offers up Ways To Make Extra Money Series: Guide To Diversifying Your Sources Of Income

Paul @ FiscalGeek offers up Quicken Essentials Review

Brad Chaffee offers up Manage Your Money: Wants Versus Needs

MD @ Studenomics offers up Interesting Findings From a Time Management Experiment

Patrenia Spears offers up What Can We All Learn About Financial Contentment?

Tom @ Canadian Finance Blog offers up How I Got $8 Glasses

Ryan offers up How to Organize Small Business Finances

PT from PT Money offers up You Need a Budget 3: A Principles-Based, Powerful Budgeting Tool

Elle offers up Check Your Bills!

Craig offers up New Credit Card Rules Take Effect

Jeff Rose, CFP® offers up How to pay quarterly income tax payments

Consumer Boomer offers up Don’t Miss The IRA Contribution Deadline For 2010

Joe Plemon offers up People Are Begging for Financial Help. Five Things You Can Do

Madison offers up How to File an Amended Tax Return

Saving Money – An American Virtue Reborn

Robert Espe — Fri, 05 Mar 2010 17:01:49 +0000

Saving money is trendy again

I recently read a magazine article talking about how the recession has brought saving money back into style as people found themselves short on disposable income and easy credit. The article went on to explain that part of the “new” saving trend was buying more expensive clothes that don’t wear out quickly, and I agree in principle, but would steer clear of “name brands” found in many magazines advertising sport watches in excess of $300. While the article had some great info, it felt like they were mostly trying to sell overpriced goods and convince customers they deserved a pat on the back for “saving money.”

What really captured my attention was the article’s focus on how this saving trend was “new”, “fresh”, “exciting”, and not “cheap” like saving money has been viewed in the past. Apparently people believe that for any idea to be good, it has to be new. Saving money has never meant “cheap,” and there is nothing wrong with saving… however one may view it.

Saving money is virtuous and logical

Saving is a synonym of the word frugal which comes from the Latin root frugalis and is closely related to the words for both fruit and enjoyment. Nothing cheap about those terms! Saving money was actually one of the old Roman Virtues, and in times past was also an American virtue. Somehow, over time, the modern American virtue regarding money has been closer to irresponsible spending than saving. For many years in America it seemed anyone who paused to think before spending was quickly characterized as a penny-pinching cheapskate. Thankfully, that trend has reversed again due mostly to the recent financial crisis.

While not buying stuff you cannot afford is part of of what it means to be a saver, it is only half the meaning.

Webster tells us that saving money is about economy and the use of one’s resources. A mindset of saving will often lead you to avoid spending even if you have the money saved, perhaps because you are saving for something else or you just feel the purchase would not be worth your life energy. The essence of saving is simply spending less than is necessary to get what you want, which is hard to do if we are unaware of exactly what we want. As strange as that may sound, most people never set savings goals for themselves. Have you set savings goals for yourself? What are they?

Saving money for specific goals helps you avoid pitfalls

What do you really want in exchange for your life energy? I’m not referring to the general stuff like food, a roof, some wheels, and a few vacations… I’m more interested in the specifics. Where exactly do you want to live and in what type of home? What toys do you want most? What is most important to you in a vehicle? Where do you want to go on vacation and when? Do you want to retire and at what standard of living? No one can have everything, so we all must decide which things we want most. If you never ask yourself such questions, there are a couple of financial pitfalls we tend to run into.

First, without focus on what we really want we tend to buy whatever we see… simply because buying new stuff is fun. We might even buy good stuff, but if it is not what we really wanted, it runs the risk of sitting unused and the life energy we spent to attain the stuff gets wasted. Without specific savings goals our resources may get unnecessarily consumed, and we eventually miss out on something we would have enjoyed more. That is not very wise, but most of us have done it more than once… myself included!

Another common pitfall… not saving as much as we could have had we set specific savings goals. Without specific financial goals we become comfortable with the status quo. If our bills are paid and we have some savings… we may never think to save more. Absent any definitive goals (and the sacrifice necessary to reach them) it is much easier for careless spending to rob us of the things we actually wanted the most but never took the time to define. The difference between deprivation and sacrifice has been described as the presence of the goal which a sacrifice is made to attain. Visualizing the purpose of your sacrifice will give you the strength to see it through, to save for it, and is likely to make others wonder how you are able to accomplish so much with the amount of money you earn.

I’m bringing saving back

Finance writer Joe Dominguez looked forward to a time when we would speak of savers with awe and respect (hey, he was writing in the 70’s.) I think now is the perfect time to bring back the saving trend, but without the $300 watches the magazines are pushing! People focused on saving money are typically willing to make sacrifices to meet specific goals. I set a high goal to save $22,000 towards a house this year. For me it is attainable, but requires having to say no to some of the fun things we like to do. My wife and I stick with it knowing that every penny we save brings us that much closer to the house we both want.

Are you bringing saving back?

Have you made a list of which things you want most, and thought about what things might be getting in the way? Where could you save more and what sacrifices could you make for the things that matter most to you and the things that will help you meet your savings goals without feeling deprived? We would love to hear about any goals you have set for yourself, or that you have recently achieved.

SEP IRA Contribution Question: AJ Answered

Matt Jabs — Wed, 03 Mar 2010 11:00:00 +0000

Need help with your situation? I offer free personal finance advice.

Visit the Ask Matt Jabs page and fill in the form to ask your question for free.

SEP IRA contribution dilemma

DFA reader AJ asked:

Hi, Matt – Just a quick question (I think.) I am a self-employed contractor receiving a 1099 from my contracting company where I provide marketing services. This represents 100% of my income. I have an SEP IRA which I contribute to. Do I set it up to contribute to my SEP IRA as an employee or an employer? Does it matter?

SEP IRA contributions as employee or employer?

If you are looking for more a more in depth information on this topic check out our article on SEP IRA contribution limits and deadlines.

When I received this question from AJ I immediately emailed her back to ask a few questions that needed to be cleared up. Here is the conversation that ensued and what we came up with as an answer:

Me to AJ: Hi AJ, who is asking you to differentiate between your status as an employee or an employer? Are you filling out a tax form that asks this info? Are you being asked by a brokerage firm to supply this info?
AJ to Me: Hi Matt, when going in to make the contribution with my brokerage firm, the firm asked me whether it was an employee, employer, or individual contribution. I actually talked to someone at the brokerage firm and they said that when you contribute as an individual it’s like contributing $5K to any type of IRA. And that contributing as an employee only applies to SAR/SEP IRAs and so the answer is that I should contribute as an employer. Hopefully that is in line with what you thought as well. Thanks.
Me to AJ: Right, that makes sense… but remember that when you make employer contributions, you must also make contributions to the SEP of all eligible employees. If you’re the only employee (Sole Proprietor) then it doesn’t matter.
AJ to Me: Yes, right. Luckily, it’s just me! Thanks for responding. Hopefully this will help others.

In summary…

AJ is a sole proprietor so she must contribute as an employer. This is also correct if the business had employees and business income, but if she did have employees she would need to contribute to the SEP IRA of all employees along with her own. As I understand it, her brokerage firm was looking to decipher whether or not AJ’s business had employees.

Do you have an SEP IRA?

Is there any other advice you would give to AJ other than to keep saving?

If you need personal finance advice… ask Matt Jabs.

*Disclaimer*
We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship. We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

How To Make Money Blogging

Matt Jabs — Tue, 02 Mar 2010 11:00:12 +0000

My Side Hustle

Every so often I make mention of my “side hustle” here on DFA and how it earns money that enables us to repay debt much faster. Recently several DFA readers have contacted me wanting to know exactly what my “side hustle” is and how I earn money with it.

Well, you’re reading my side hustle now… DebtFreeAdventure.com is the side hustle that is brings in our extra income. How much extra? I don’t really want to list specific numbers but suffice to say that it earned enough this month to cover our 1st and 2nd mortgage payments!

Make money blogging

Luckily it is not necessary for me to write a detailed run down of how to start a blog or how to earn money with a blog because others have already done it. In fact, I would be remiss if I didn’t point you to an awesome new resource to help you do this yourself… if you so desire.

For the last several months Pete over at BibleMoneyMatters.com has been busting his butt to compile a guide that aims to help people make money blogging. Why listen to Pete? In just 2 short years he catapulted himself from blogging beginner to a blogger earning enough to replace his wife’s full-time job.

In his own words,

“Over the past 2 years I’ve been blogging 5-6 days a week, generating over 800 pages of content, 6000+ comments and over 1.5 million page views. My site has become more popular than I ever dreamed it could be, and I feel blessed that the site has grown to a point where it is now able to replace my wife’s day job income. That means we’ll be able to afford for her to stay home with our children, which is even more important now that we have our first child on the way!“

Benefits from of earning money blogging

Earning money from blogging is not easy, but it affords you some very rewarding benefits… like:

Freedom to work from anywhere – I can work from anywhere, as long as I have a computer (or even a smartphone) with an Internet connection.
Control over your own income – The amount I earn is in direct proportion to how hard I work… this is not the case with my full-time job where I earn the same amount regardless of effort.
Income diversification – The alternate income acts as a hedge against possible job loss… losing your current job will hurt less if you have developed alternate sources of income.
Build savings and/or repay debt faster – Our debt is disappearing much faster thanks to the earnings from DebtFreeAdventure.com.

Another non-monetary benefit is that DFA also allows me to write about my passions. Even if the site was earning nothing I would continue to write… the money is just a bonus. Writing about personal finances helps me learn more, stay focused and accountable to our debt reduction plan, and help others along the way.

How can you get started?

Have you been wanting to do what Pete has done, and what I’m doing? Are you passionate about a subject, eager to learn more, help others, and earn money along the way? If so then buy Pete’s ebook and learn in one day what it took Pete 2 years to nail down.

If you want to get started blogging for money, check out Pete’s Blueprint For How to Make Money with a Blog.

I have read the ebook myself and highly recommend it to people looking to start an earning blog of their own.

How Much Our Debt Costs – February 2010

Matt Jabs — Mon, 01 Mar 2010 17:14:09 +0000

February 2010 Update – How much our debt cost

Over the course of February our debt cost us $1,189 – which is $42.46/day. That does NOT include the principal costs… that is just the cost of the interest on our debt. The good news is, one year ago we were paying $1,328 – which was $47.43/day. Our debt reduction efforts over the course of the last year are saving us nearly $5 every day! That may not sound like much, but if I were to put $5/day into my orange savings account, by this time next year I would have $1,825 plus any interest earned!

One of my least favorite things to think about is the amount of interest we pay toward debt each month. The good news is that it is shrinking with each passing month. Pretty soon all the money we line others pockets with will become our own… it’s just a matter of time, sacrifice, and hard work. What a concept eh… being able to keep the money that we earn rather than paying it toward interest on debt!

Here is the comparison between the last two months:

January 2009 Interest Paid	February 2010 Interest Paid
Mortgage 1 – $585	Mortgage 1 – $584 = +1
Mortgage 2 – $293	Mortgage 2 – $292 = +1
Student Loan 1 – $160	Student Loan 1 – $160 = 0
Student Loan 2 – $117	Student Loan 2 – $120 = -3
Lending Club – $51	Lending Club – $33 = +18

Total Interest Paid – $1,206	Total Interest Paid – $1,189 = +17

A few notes about the details of the numbers…

Lending Club will be GONE next month! Unless something unforeseen happens we will have this debt paid off with our March payment! That will mean we repaid this $11,000 loan in just 7 months! We reduced this debt by $2,300 in January 2010 and by $2,318 more in February 2010 – because of this, the interest we pay to Lending Club decreases significantly every month.
Student loan interest amounts vary month to month. As promised last month, I wrote a post detailing how student loan interest is calculated to better explain why the amounts vary so much each month.
Side hustle earnings continue to fund large debt payments. Once again this month, the earnings from our side hustle have enabled us to make huge strides in repaying our debt.
Killing debt creates great motivation. I hope this article makes you think… and if you are not currently tracking how much your debt costs you each month hopefully it motivates you to do so. Think about it – right now we are paying nearly $1,200 just in interest on our debt. This makes me sick to my stomach, but it also lights a fire under my britches to keep going full-speed-ahead!

The “How Much Your Debt Costs” Spreadsheet & Graph

A few months back I released a spreadsheet that does all the above calculations for you and also gives you the nifty little graph allowing you to track your progress. I call it the How Much Your Debt Costs Spreadsheet… check it out.

The spreadsheet will also give you the interest amounts paid for each month in HUGE BOLD numbers for you to print off and stick on your fridge.

Simple Family Budget Spreadsheet

Matt Jabs — Sat, 27 Feb 2010 21:20:11 +0000

Help to get you budgeting your money!

“Do you wonder where your money goes, or do you tell it where to go?” – self quote

Over the course of the last year I found that a creating a handwritten budget from scratch before attempting to use an existing software or spreadsheet gave me that extra flexibility I needed in forming our first budgets. Fitting our financial picture into something that someone else created always ended in road blocks and bits of confusion. I had to throw away any preconceived notions I had with what a budget should or shouldn’t be, wipe the slate clean, and create a handwritten budget from the ground up. No spreadsheet… no software.

I have finally turned my budget into a spreadsheet – and today I am releasing it to the public for all to use and enjoy!

Here is a little run down of the history of my budget followed by sectional instructions for using the budget spreadsheet.

From handwritten to electronic

I did handwritten, and it worked – in fact, it worked great. Manually forming the structure of my budget was necessary, but now that the foundation is built it is time to move to a system that enables me to easily and quickly fill in each and every month.

Throughout November and December I began developing our simple family budget spreadsheet as a way to capture the simplicity and function of our handwritten budget, yet deliver the added bonus of auto-calculations and ease of monthly budget reproduction. After all, it is easier to fill in the numbers for each month, save them, and print them out than it is to rewrite the handwritten format every 30 days or so!

Download this, use it, tweak it, and share it FOR FREE. Just make sure you use it!

Looking to buy software?

If you want no part of the handwritten or spreadsheet solutions, and prefer a software budgeting solution… I recommend You Need A Budget.

Introducing the Simple Family Budget Spreadsheet

If you just want to grab it and go… here is the spreadsheet. If you want or need explanations of sections, please scroll down to the explanation section of this post.
I have included 3 versions: Google docs version, Microsoft Excel version, and OpenOffice version.

Google Docs version

Microsoft Excel version – get budget spreadsheet
OpenOffice version – get budget spreadsheet

Budget spreadsheet explained

Generic information

A budget is a living document, constantly changing, adapting, and growing to better reflect where and how you spend and save your money. Do not try to make everything perfect… just get it done, then work on tweaking it from month to month. If you think it will be perfect in one month you will likely work yourself into a tizzy and soon stop budgeting altogether. Sound familiar? Patience young budgeting Jedi… I was once in your shoes too. You can master this budget – just be patient and faithfully work it month in and month out. I promise the rewards are worth the time and effort.

All sections have 3 fields – Projected, Actual, and Difference – they are what they are.

Projected = the amount you input in each category at the beginning of the month. Remember, don’t try to be perfect here – if you are unsure of an amount, make an educated guess and move on to the next category.
Actual = the amount you enter at the end of each month… after the money is spent. This should be exact and based on actual hard numbers. To better keep track of what you spend consider keeping a spending journal – we do – it is an essential way to track discretionary spending.
Difference = the amount your projected amounts differ from the actual amounts. We use the information in these fields to continually tweak how much money goes where.

I have put input some “example numbers” and have only created one sheet labeled “January.” I encourage you to tweak your fields and numbers then duplicate the sheets to include every month of the year. I could have included 12 sheets, one for every month, but then you would just be faced with changing all the fields on each sheet manually anyway… so make your changes to January then duplicate the sheet for each month of the year. To do this, look at the bottom of the spreadsheet screen and find where it says “January.” Now click on that and choose “Duplicate.” Once you have duplicated the sheet now click that new tab and choose “Rename.” You can either create all 12 tabs for the year in advance or just do them as each new month is beginning… I choose to do the latter in an effort to avoid having to change all future sheets if I make a simple field adjustment.

Income

This section is pretty self explanatory – just make sure you include all sources of income including monthly bank interest, dividends, gifts of money, and money you make working any side jobs (a.k.a. “side hustle”.)

Savings

This is where you record all accounts you currently have as savings for the future including, bank accounts, CDs, mutual funds, etc. Your projected and actual amounts in this category are easier to nail down because you have direct control over how much you are saving each month. I advise you to set savings goals, create multiple savings accounts (either on paper for tracking purposes or literally as I do in my ING Direct account) and then set up monthly auto transfers of specific amounts to each account. Automation is key when it comes to saving money! Remember… it’s your money – pay yourself first!

Fixed Non-Monthly Savings

This is an awesome section of the spreadsheet and one you are not likely to find anywhere else. To populate the fields in this section, do the following:

Make a list of all your non-monthly expenses that are fixed amounts. For example, auto insurance, auto plates and registration, association dues, professional dues (like union dues), 1/4 of beef, magazine subscriptions, etc.
Calculate the yearly amount each of these expenses costs you, add them together and divide by 12. For example: if the combined yearly total of all your non-monthly expenses is $3,300 – your monthly amount to save will be $225.
Do the calculation for each expense (or group of expenses) and enter that as a field in this section of the spreadsheet, like the sample data I put in the spreadsheet template.

Later in the spreadsheet you will find the Fixed Non-Monthly Expenses section.

Expenses Section – This is where this spreadsheet is unique and powerful. Rather than setting up a simple “expenses” category, I broke expenses down into five different categories to better track and manage them. Auto pay, manual pay, fixed non-monthly, cash envelopes, and other (or left overs.)

Auto Pay Bills

The first section of expenses is auto pay bills. I encourage you to use the power of automation for as many financial transactions as possible – when it comes to personal finances… automation = success. Bills that are friendly to automation are bills that have static amounts and static due dates each month. If the amounts are not changing and the due dates are not changing… then set up automation. Look at it this way – every automated bill is one less bill you have to worry about!

Note - always set up automation through your bank… not through your debtor. I never give a debtor direct access to my accounts - if at all possible, neither should you.

Manual Pay Bills

Here you will enter monthly expenses with fluctuating payment amounts. You know that you have to pay it every month… you just don’t know exactly what the amount will be. Examples that fit into this category are gas and electric, sewer, water, etc. Don’t worry about getting these projection amounts perfect, just enter in an average. What I did was to go back 12 months for each expense, found the average, then entered that as my projection amount. Some months it is too high, and some months it is too low, but this way I always have the extra money in my account when needed.

Fixed Non-Monthly Expenses

This section is directly related to the Fixed Non-Monthly Savings section detailed above. In these fields simply record each fixed non-monthly expense as it comes due. This is a GREAT way to keep track of – and stay on top of – bills that are due at irregular intervals. Without using this system you risk being hit with “surprise” expenses that can ruin your budget. Using this system provides you with a solid solution to those budget busting problems!

Cash Envelopes

This is one of our new favorite categories! You can take this section and really make it your own. My advice is to use cash envelopes for spending categories that constitute random spending… like groceries, dining out, entertainment (like movies, etc), clothing, and the biggest one… miscellaneous. The power of using cash envelopes cannot be readily explained… it is something you cannot understand until you implement it into your own life. Want my advice? Do it… and do it now. From the very fist day we started using cash for specific purchase categories we saw an immediate change in how we felt about the purchases. There is just something painful about seeing the cash slip out of your wallet and into the hands of another! This concept is especially powerful for your random spending habits – when implemented properly, it will help you reign them in quickly… I promise!

Other Expenses

Last but not least, the infamous “other expenses” category. This is where you will lump together any expenses that do not readily fit into any of the previous categories. Make sure you try to put expenses in one of the above categories first, but if the do not fit, put them here as a last option. Most of the time, but not always, the expenses that end up with here will be non-monthly and non-fixed expenses. A lot of times you will have no way of knowing when the expenses will come due, nor how much they will be. Some examples are, doctor, gifts, house expenses, gas, etc. You will basically take any left over categories, put them here, and project their costs as closely as you can based on past experience.

The Summary

This is what it is… just a big summary of your income, savings, and expenses in one quick view. I’m not sure how useful it is, but I know some people like to see it so I included it.

Make the budget spreadsheet your own

Remember… your budget is a living document – expect it to change over time. Do not focus on making every calculation perfect… your accuracy will improve over time. For now just focus on using the spreadsheet faithfully each month and don’t be afraid to make it your own. The categories and amounts I put in are just examples… if you customize it to your situation you increase sustainability of future use.

If budgeting is a problematic behavior for you… using this spreadsheet will give you a fresh perspective and hopefully help you finally nail down a solid spending plan for your unique situation.

Remember… you can wonder where your money goes, or you can tell it where to go!

How Much Money is Your Life Energy Worth?

Robert Espe — Fri, 26 Feb 2010 16:06:41 +0000

Today I visited The Death Clock – a website that estimates how much life we have left. After giving it my gender, age, height, weight, and smoking status, it informed me that I have about 1.5 billion seconds left. Try it; it is rather sobering, even if it lacks precision.

What does this have to do with personal finance? Well… very much because it helps reveal how I think of money.

Defining Money

Money is rather dryly defined as, “a medium of exchange for the payment of debts.” To some, money is power. To others it is a comfort or a source of security. It has taken the form of precious metals, paper, and digital numbers in electronic accounts. However, the best definition of money I have ever heard, and the reason for including a link to death clock is this:

“Money is something for which you trade your life energy.”

Think about it. The majority of us get money by giving up part of our lives. You get up early, you spend time away from your family, you earn by the sweat of your brow, and the whole time your death clock is ticking down. When you are young, and have energy to spare, it is wise to convert some of this excess into money, for as you age you have less energy to spare. The unfortunate part is that it is a conversion, not a storehouse. Life, once traded for money, cannot be changed back if you discover you have more than you need. Our goal then should be to strike a balance: to convert sufficient life energy into the money needed for an enjoyable life, but as much as is possible, to spend our lives actually living.

Counting the Cost

In order to apply this principle, you first calculate your real hourly wage. You will then see exactly how much your life energy is worth, and you will be able to measure the cost of money spent in terms of valuable life energy lost, instead of just dollars. I find this is helpful when trying to learn to live more frugally.

Back in my article on using time well I blocked out how I spend my time. I spend so many hours at work each week, but also spend a lot of time preparing for work and commuting… for which I am not paid. Since my life energy is draining away during this time, it only makes sense to include that time in my workday. A little division, and I have my real hourly wage. Use this handy calculator to discover yours (it includes other variables that can be factored in.)

Once you have finished, you can do some eye-opening conversions. For example:

How much life energy do you spend at convenience stores/restaurants daily? Could you spend less and still be happy if you made your coffee and lunches at home?

How much life energy will it cost if you buy that new toy you are thinking about getting? Is it something you know you will use, or are you simply shopping for the thrill of something new?

Matt has written several times about how much debt costs that also illustrate my point beautifully. With your real hourly wage, you can now see how fast your debt is literally draining you of your life energy. That knowledge should provide you with the strength to run from debt with gazelle intensity.

This is not to say that you should never spend money, but rather to find the point at which spending more brings no additional joy, then learn to say… “I have enough.” It is impossible to truly enjoy financial success if you believe you still need, “just a bit more.” This idea of a finish line will help protect us from spending so much of our lives accumulating things… things that we may not have enough life left to enjoy!

Try it yourself

First, go try out the DeathClock Calculator. Then check out the real wage calculator to get your own numbers. Then, next time you spend money ask yourself how many hours this purchase is costing you, and most importantly, if it is really worth it. Then come back here and tell us about it.

Orange Savings Account – Free $25 Bonus

Matt Jabs — Thu, 25 Feb 2010 18:56:08 +0000

ING Direct Orange savings accounts present us with a very solid and useful savings platform. In fact… I liked it so much I opened and account and have all our savings with ING Direct. My advice is for you to do the same.

Free $25 Bonus Links!

Orange savings account – Use the links below to open an Orange savings account with at least $250… and receive a free $25 bonus!

Electric Orange Checking – If you would like to open an Electric Orange Checking account, contact me with your email address and I will have the links sent to you. If you don’t care about getting the $25 bonus or don’t want wait for me then open an Electric Orange Checking here.

Link 1 Orange Savings $25 bonus (expired)
Link 2 Orange Savings $25 bonus (expired)
Link 3 Orange Savings $25 bonus (expired)
Link 4 Orange Savings $25 bonus (expired)
Link 5 Orange Savings $25 bonus (expired)
Link 6 Orange Savings $25 bonus (expired)
Link 7 Orange Savings $25 bonus (expired)
Link 8 Orange Savings $25 bonus (expired)
Link 9 Orange Savings $25 bonus (expired)
Link 10 Orange Savings $25 bonus (expired)
Link 11 Orange Savings $25 bonus (expired)
Link 12 Orange Savings $25 bonus (expired)
Link 13 Orange Savings $25 bonus (expired)
Link 14 Orange Savings $25 bonus (expired)
Link 15 Orange Savings $25 bonus (expired)
Link 16 Orange Savings $25 bonus (expired)
Link 17 Orange Savings $25 bonus (expired)
Link 18 Orange Savings $25 bonus (expired)
Link 19 Orange Savings $25 bonus (expired)
Link 20 Orange Savings $25 bonus (expired)
Link 21 Orange Savings $25 bonus (expired)
Link 22 Orange Savings $25 bonus (expired)
Link 23 Orange Savings $25 bonus (expired)
Link 24 Orange Savings $25 bonus (expired)
Link 25 Orange Savings $25 bonus (expired)
Link 26 Orange Savings $25 bonus
Link 27 Orange Savings $25 bonus
Link 28 Orange Savings $25 bonus
Link 29 Orange Savings $25 bonus
Link 30 Orange Savings $25 bonus

If one link does not work… try, try again. I will cross links out as I receive notification from ING that they have been used, then I’ll replace them with new links! I will do this until I use all 50 invites.

My Orange savings accounts

Use the Orange account savings for setting up savings goals for yourself and/or family.

Here are screenshots of my Orange account savings:

My Orange automatic savings plans

Another benefit you will want to take advantage of is the ING Direct Orange automatic savings plan. Use this feature to set up automatic monthly contributions to each of your Orange savings accounts to put funding your savings goals on autopilot.

Here are screenshots of my Orange automatic savings plan contributions:

The ING Direct Orange account savings is awesome.

My wife and I use accounts very actively and advise you to do the same… you will be happy with how much it helps you save!

Use the links above to open an Orange savings account with at least $250… and receive a free $25 bonus!

The Plutus Awards – Vote for Debt Free Adventure

Matt Jabs — Wed, 24 Feb 2010 13:00:22 +0000

The Plutus Awards

What the heck are they? Good question…

For the past few months Flexo of Consumerism Commentary has been engineering “The Plutus Awards,” an awards ceremony designed to celebrate the best in personal finance.

In ancient Greek mythology, Plutus was the god of wealth. Much like wealth itself, Plutus was blind, offering his virtues without regard for the virtuosity or merit of the recipient. He was lame but winged, leaving much more quickly than he could arrive.

Debt Free Adventure chosen as a finalist

Much to my delight, Debt Free Adventure was chosen as a finalist for 5 of the 27 categories, including “Blog of the Year!” Thank you very much to everyone who nominated myself and DFA for the awards.

If you want to skip all the niceties and head straight over to the voting both then Go Vote Now. I really appreciate all of your support!

Here are the 5 finalist categories DFA will be competing in for the final votes:

Best New Personal Finance Blog
Best Debt Blog
Best Religious Finance Blog
Best Microblog (Twitter)
BLOG OF THE YEAR!

And now I will list each category along with all the finalist so you can see everyone, pick your favorite (:-)), and go vote for your favorites.

Best New Personal Finance Blog

Blogs that were new to the personal finance blogosphere starting in 2009!

Vote Now

Best Debt Blog

We all love these… blogs focused on getting out of debt!

Vote Now

Best Religious Finance Blog

All five of these blogs are Christian personal finance blogs striving to run their advice through the wisdom of Scripture whenever possible… which is your favorite?

Vote Now

Best Microblog

This is basically for the best “Twitterer.”

Vote Now

Blog of the Year

If I were only to win one of these 5 I would be honored, but winning this particular award would blow my mind… I appreciate your vote.

Bargaineering
Budgets Are Sexy
Consumerism Commentary
Debt Free Adventure – - ooh… ooh, pick me, pick me!
Financial Highway
Frugal Dad
Get Rich Slowly
Good Financial Cents
Man Vs. Debt
The Simple Dollar

Vote Now

Thank you all!

Thank you again for all who nominated and voted for DFA… this site may not have been here if it weren’t for you. Also, let’s send a big thank you to Flexo for putting it all together – you da man Flexo.

Now Go Vote for Matt Jabs and Debt Free Adventure!

Is It Better to Buy or Rent?

Matt Jabs — Tue, 23 Feb 2010 12:00:20 +0000

Over the last few weeks we have had some good discussions regarding the buy vs. rent debate. Robert gave us a few solid articles and many of you chimed in with great thought provoking comments.

But who is right? Does the fact that 30 year mortgages double home prices really make renting a better option than buying?

Is It Better to Buy or Rent?

The question is anything but simple, so it’s only logical to assume we’ll wind up with guys-n-dolls going to bat for both teams.

What are others saying? Thanks to help from a couple dinosaur comics and several atrocious years in the housing market, Get Rich Slowly founder JD had a change of heart on the matter. In his own words,

“One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.”

A few years back he felt home ownership was always the way of the dragon but now perceives the best reasons to buy are actually non-financial and/or personal, since the numbers often favor renting. I agree.

If you’re interested in reading more of JD’s take on this topic and many others be sure to grab a copy of his soon to be released book, Your Money: The Missing Manual.

Aside from JD’s point of view I also checked out several other takes on this topic. The wise consensus seems to be… neither option is best for everyone. I agree.

What about the numbers?

We’ll start by shooting a hole in the argument that “homes appreciate over the long term.” The truth of the matter is that home prices over the last 80+ years beat the inflation rate by a mere one percent. Sheesh, I get better rates in my Orange savings account.

Laying aside emotional factors, let’s see if we can help you determine which option is best for your unique situation according to the numbers. After all… numbers don’t lie right?

This is where the bottomless pockets of big companies come in handy. They pay really smart programmers to dev really cool calculators that make really complicated formulas look really sexy. Check it out…

Is It Better to Buy or Rent Calculator – Wall Street Journal

I used this awesome WSJ calculator to discover if it would be better for us to rent or buy (for the record, we bought nearly 3 years ago.) Here are the details of my calculation, complete with a screenshot:

Monthly rent = $800 – this would be the maximum amount we would ever spend on an apartment in Lansing, MI.
Home price = $165,000 – this was the cost of our home.
Down payment = $0 – yeah I know… real smart eh?
Mortgage rate = 6% – the combination of our 1st and 2nd mortgage rates would actually be a bit higher.
Annual property taxes = $3,200 – which is about 2% of the cost of our property each year.
Annual home appreciation = 1% – despite our currently depreciated asset, I chose to go with the long term trend here.
Annual rent increase = 3% – to factor in increasing yearly rent costs.

We have owned our home for only 3 years so we are still on the really expensive end of our mortgages, which made my self-audit especially hard to swallow… but I knew that going in.

Renting an $800 apartment for the last three years instead of purchasing our home would have saved my wife and I approximately $24,000.

Another factor worth mentioning, but not covered by the calculator, is the current value of our home. We’re upside down on our home by an approximate measure of $20,000 which leaves us unable to sell until that deficit is wiped out (either by us or by the markets, but likely by us.) Adding in the cost of our depreciated asset, home ownership, over the course of the last 3 years has cost us approximately $44,000 more than renting.

*sigh* Oh well… this just stokes my motivation to soldier on in passionate debt-slayer mode!

Try placing your numbers into the calculator to audit your own housing situation.

Conclusion

Does the joy of home ownership outweigh the higher cost? Is sacrificing home ownership more than you can stand to do, or are you one of the few who have chosen sacrifice immediate wants choosing instead to rent, save up, and pay cash for your a home?

Ultimately, you are the only one who can answer that question… according to your unique situation.

If you are currently contemplating home ownership, I recommend being careful not to make partially educated decisions based mostly on emotion. Instead, run the numbers for yourself and be sure you have a full understanding of both the short and long term financial ramifications before making your move.

IRS Tax Debt Help

Guest Author — Mon, 22 Feb 2010 11:00:06 +0000

Hopefully you do not find yourself in the position of owing income tax, but for those who do I wanted to provide this helpful tax debt information from guest author and tax expert, Matt Robinson.

Will you owe income tax this year?

With April 15th on the horizon, you may find yourself with an inability to pay your taxes. This happens not only to individuals who make estimated payments, but also W2 employees with other sources of income.

Avoid tax penalties

Do not be paralyzed by an inability to pay. Even if you cannot afford the tax owed, file a tax return! Failure to do so will trigger unnecessary penalties that will only increase your tax debt. The “failure to file penalty” is 5% per month on any balance due (up to 25%). If you cannot file by April 15th, request a filing extension using IRS Form 4868 which gives you until October 15th to file (not pay). When you file, it is best to pay as much as possible without sacrificing basic living necessities, as this will not only reduce the total amount you owe, but it will also reduce the failure to pay penalty. There are many different ways to become compliant with the IRS, with some options being a better fit for certain financial situations. Some of the most popular ways taxpayers resolve tax debt is through the use of a credit card, a personal loan, a home equity loan, or an IRS Installment Agreement. As you read the options below, understand that a credit card is a last resort long-term option.

Tax debt help – Situation 1

You only need a few weeks to come up with the money

If you need a few weeks to pay your taxes, it is best to send in a tax return with a small payment and wait for an IRS letter requesting the balance, which is normally 45 days after the due date. Although you may be charged a failure to pay penalty, 5% per month, and interest of, 4% compounded daily, it is a better alternative then the interest on a credit card. This additional time can also be useful in order to tap equity in your home, which will allow you to pay off your tax bill, or to get a personal loan; the interest is tax deductible. Many of us, with this economic downturn, may not have any home equity, or we cannot easily get a bank loan. If this is the case, keep reading.

Tax debt help – Situation 2

You need a lot more time and a home equity or personal loan is not possible or not for you

If you need more than a few weeks, the IRS can give you up to a 120 day temporary extension, if that is all you need, call them at 1-800-829-1040. If you think you may need more time, it is best to request an Installment Agreement from the IRS, which will allow you to pay your tax debt over time, which is generally over the time span of 3-5 years depending on the agreement. In order to request an Installment Agreement (IA), fill out IRS Form 9465 or use the Online Payment Agreement (OPA). If you owe $10k or less, you are “guaranteed” an IA by right of law. If you owe more than $10k but less than $25k, you can use the OPA, and normally, the IRS will not request a Collection Information Statement (CIS) from you to verify your financial situation. This type of agreement is referred to as a Streamlined IA. If you owe over $25k you cannot utilize the OPA and you will need to complete a CIS; you will need to use Form 9465. Regardless of the IA, you will have to state the amount you are able to pay each month, which must be more than the monthly minimum payment. To calculate the minimum monthly payment, take the total amount owed, plus interest and penalties, and divide by 30 for a guaranteed IA, or divide by 50 for a Streamlined or IA over $25k. In summary, look at this Installment Agreement like a loan as it will carry a .25% per month underpayment penalty and interest, which is currently at 4% compounded daily. Therefore, the faster you pay off your installment agreement, the less penalties and interest you will pay over the long-term.

Tax debt help – Situation 3

You need a lot more time and an installment agreement is not possible or is not a good fit

If your Installment Agreement is rejected or not a good fit you can apply for an Offer In Compromise (OIC). An OIC can be accepted if:

Your tax liability is not correct
The IRS feels they will not recoup the taxes by other means (doubt as to collectible)
You are under severe financial hardship (which must be proven to the IRS).

The benefit from an Offer In Compromise is that you end up paying less than you owe, but it is only for taxpayers with extreme circumstances. Moreover, only 10-12% of OICs are accepted. You will start by completing IRS Form 656 and a Collection Information Statement. It is highly recommended with an OIC to use a tax professional, due to the simple fact that they are rarely accepted. If you know you will not be able to pay your taxes, the best advice I can give you is to be proactive and communicate with the IRS on a resolution. Failure to do so will trigger various tax penalties and additional interest that will add to your total tax bill. If you fail to pay after a series of IRS notices, you could be facing a tax lien and/or levies, which will only exacerbate the financial situation.

Will you owe income tax?

If you do owe income tax hopefully you have no trouble paying ASAP… but if you cannot afford immediate payment be sure to utilize the advice that works best for your unique situation.

Matt Robinson is a tax accountant and author for TaxDebtHelp.com. His firm provides IRS tax debt help for major tax problems like tax liens, wage garnishment, bank levies, excessive penalties, tax audits, and more.

A Home Mortgage Means You Pay Double – Limited Income and Wise Spending

Robert Espe — Fri, 19 Feb 2010 11:00:30 +0000

Home mortgage and home ownership

I came out strong enough against home mortgage in last weeks renting vs. mortgage article that I errantly gave some the impression I was opposed to home ownership; that could not be farther from the truth. What I am opposed to is the home mortgage. This is because a home mortgage will cost the average homeowner more than twice the asking price of their home over the life of the mortgage. Some feel this is no big deal – as long as the monthly payment is manageable – and that quality of life issues outweigh concerns of being in debt. My biggest concern is how much a home mortgage will steal from your future standard of living; which is true of most forms of debt although mortgages deserve special attention since they tend to be our largest debts.

Cash flow and earning potential

Most people think in terms of monthly cash flow because they pay their bills monthly – nothing wrong with that. However, something many people fail to consider is the limit to how much money they can make in their lifetime. This is especially true of young people – for whom retirement and cessation of work is a far off – who like to think they will make more money “some day” but may never actually see the growth they might first imagine.

For the most part what we choose to do for a living decides our wages and we can usually estimate those wage with some variation for job experience and cost of living. Our earnings scale will be similar with others who share our occupation so using current wages and demographic data we can estimate what our income will be each year from now until we retire.

Annual income example

Let’s use me as an example. I made about $50,000 this year. I am on a pay scale that starts at about $40,000 but with hard work can quickly jump to about $80,000 over the next 5 years. Then that is it. In good years I might receive a cost of living adjustment (1.7% this year) and if I want more, I either have to have the aptitude for competitive management positions, or try to work as much overtime as I can (which has limits.) If I wanted to make a heavy six figures, I probably should have done something else. My little side hustle writing for DFA is nice, but it is not about to bump me over the $100,000 mark. Even investing, as wonderful a tool as it is for preserving savings against inflation is not going to skyrocket me to new financial heights.

Future wealth example

Using my salary and an example closer to the national average salary, I created a simple spreadsheet that shows projected salary with some cost of living adjustments after 30 years of work for me and average Joe. Before taxes, I stand to earn around $3.3 million, and Joe will earn about $1.4 million. That looks like a lot. After some rough adjustments for taxes however, (and who knows what those will do in the future) I am left with $2.4 million, and Joe still has about $1.1 million. More staggering, an average inflation rate of 3%/yr results in 100% inflation every 18 years (that’s a 50% loss.) That means after 36 years I would have just under $620,000 and Joe $298,000 of today’s dollars. These calculations include salary increases that outpace inflation, and have not yet factored in spending any money.

Consider income limitation with home mortgage

This analysis is far from exact. There are many variables, and it is difficult to precisely value currency, investments, and income across time. What I wanted to demonstrate is that none of us have unlimited supplies of money, and are therefore limited in the number of things we can buy in a lifetime.

Before entering into a home mortgage make sure you roughly consider how much money you stand to earn over the course of your life.

Because most of us cannot make significant changes to our income, we can better affect our future wealth and standard of living by limiting how much we buy and spend. The more informed we are about our earning potential, the more apt we are to use our money wisely. These considerations are especially important when making a large purchase such as a home. With all the other things we do to save money and get good deals, it does not make sense to turn around and spend double the price tag on a house by using a home mortgage. I mean, does it really make sense to rate chase for savings accounts only to end up spending twice the purchase price for our homes? No, it doesn’t. It makes mathematical sense to parlay our wants by saving for a few years… and paying cash – if at all possible.

Financial decisions always catch up with us

Whenever we overspend, at some point in time we will have to give something up to pay for it, even if that time doesn’t come for decades… it will come nonetheless. Consider this a plea to take greater care when making purchases. We work very hard to earn what we have so let’s make sure we spend as wisely as possible!

How To Spend My Tax Refund? C.L. Haddon Answered

Matt Jabs — Thu, 18 Feb 2010 20:32:55 +0000

Need help with your situation? I offer free personal finance advice.

Visit the Ask Matt Jabs page and fill in the form to ask your question for free.

How should I spend my tax refund?

DFA reader C.L. Haddon asked:

Hi, Matt – I am receiving approximately $1,000 back from taxes this year and want to make the best decision as to how to use it. Should I pay down credit card debt, payoff a small installment loan or put it in savings for an emergency fund? I have a personal loan of $1075 at 18%, a credit card with a balance of $3,500 at 14.99%, a credit card with a $1,000 balance at 0% (until June, 2010), another credit card with $4,500 at 9.99%, and lastly a Sears card with a balance of $650 at 22%. I live on SS and income from a part-time job. I commonly have some difficulty making ends each month, primarily due to one-time events like medical co-pays, prescription co-pays, auto repairs, etc. I am 65, female, and the sole wage earner. What is the best use of the $1,000 refund?

Always pay yourself first

Hi CL, thank you for your question.

If I were in your situation there would be no question as to what I would do with the $1,000 tax refund – I would start an emergency fund and save the entire amount as a buffer against the “one-time events” you mention.

Here are some other ways you can a turn your financial situation around:

Increase your cash flow

The reason you have credit card debt is because it sounds as if you are living pay-check-to-paycheck. You need to increase your cash flow. This does not mean that you have to increase your income (although that is a solid idea if it is possible) instead you may want to focus on decreasing your expenses so you have more money available for savings at the end of each month.

Other ways to increase your cash flow:

Create and live by a written monthly budget
Implement the cash envelope system.

Doing these two things help make my wife and I much more efficient in our spending. Now we tell our money where to go instead of wondering where it went.

Decrease expenses

After seeing your income sources and your debt amounts I am assuming that a good portion of your cash flow goes toward debt repayment; but are their any expenses you could cut, at least for awhile?

Some possible expenses to cut:

Cable TV – we just plain do not need television, if cutting this helps you get on your feet financially, then cut it.
Cell phone – cut back your plan or consider getting a land line with limited or no long-distance service.
Eating out – we were spending $6,000/year on dining out and have since all but eliminated this expense.
Unnecessary groceries – pop, snacks, etc. Instead focus on beans and buying in bulk, here are a few ways to save money on groceries.

Pay down debt

Another reason you have no cash flow is because so much of your monthly income is going toward the interest on your debt. I am willing to bet that your debt stacked up slowly over time as one emergency after another hit your pocketbook when you were without savings. If you have that $1,000 emergency fund then you have some solid ground to stand on next time something comes up.

Build your savings

Beyond creating your emergency fund you should also continue to fund it each month, even if you can only do so a little at a time. I have debt too, so I cannot save everything I make. What I have decided to do is attribute 75% of my available cash flow to debt repayment and 25% toward savings. This allows me to pay down my debt and save at the same time – I call it the 75/25 method.

What do you think?

Do you think that C.L. should use her $1,000 to start an emergency fund, pay down some of her debt, or toward something else entirely?

If you need personal finance advice… ask Matt Jabs.

One World Currency – New World Order

Matt Jabs — Wed, 17 Feb 2010 11:00:33 +0000

A one world currency?

Many people, including the president of Russia, have an interest in debasing the U.S. dollar as a currency and eliminating it as a global standard currency. This is not a Democratic idea, a Republican idea, or even an American idea… it is an international idea.

It would be wise for you to educate yourself concerning the interest in and implementation of… a one world currency. This is not the rambling of a conspiracy theorist, as many would have you to believe, but simply a cry for awareness to my fellow man… specifically my fellow Americans.

I do not wish to delve into apologetics concerning the gross errors and corruption in monetary policy of my government. Rather I wish to point out a few necessary and powerful critiques of a centralized one world currency. I am also looking to raise awareness in my readership, because I care and want you to be informed.

CNN Money sees the writing on the wall.

The Washing Times sees the writing on the wall:

“Treasury Secretary Timothy F. Geithner and Austan Goolsbee, member of the Council of Economic Advisers, have refused to rule out a global currency. Such views by top policymakers cause the dollar to drop. Even worse, this shows that the Obama administration supports dramatically greater centralization on a national and international scale.”

Here are a few of the reasons a one world currency is abhorrent:

“Unlimited power is apt to corrupt the minds of those who possess it”

Lack of competition – No currency is void of the possibility of becoming debased. Competition between differing national currencies the globe over is healthy. It allows citizens and businesses to choose opposing currencies if they do not agree with the direction of their government’s monetary policy. If there is a one world currency, there is no more room for debate, choice, or alternatives. It empowers government and removes power from people… which brings us to our next point.
Centralized Power – Consider again the unification of world banks all having common interest in one currency and one currency alone. Of a certainty in this world, money is power. If the richest and most powerful people on earth share a common goal for their money… where will that ultimate power lead the nations of this world?

Here is one reason why none of this scares the spiritual man within me:

Biblical Prophesy – The bible predicts the adoption of a one world currency and aligns its adoption with periods of incredible famine, disease, brutality, and enslavement. The concept of a one world government — and with it a one world economy — is prophesied in both Daniel and Revelations… there is nothing new under the sun.

“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.” – John “Lord” Acton

So What’s The Answer?

Thomas Jefferson knew that the power of government, if left unabated, would always follow its natural course of corruption and power grasping.

“God forbid we should ever be twenty years without such a rebellion. The people cannot be all, and always, well informed. The part which is wrong will be discontented, in proportion to the importance of the facts they misconceive. If they remain quiet under such misconceptions, it is lethargy, the forerunner of death to the public liberty. And what country can preserve its liberties, if it’s rulers are not warned from time to time, that this people preserve the spirit of resistance? Let them take arms. The remedy is to set them right as to the facts, pardon and pacify them. What signify a few lives lost in a century or two? The tree of liberty must be refreshed from time to time, with the blood of patriots and tyrants. It is its natural manure.” - Thomas Jefferson in reference to the 1st American Revolution

The ultimate answer lies with faith in the God of the bible, faith in the truth of His Word, and faith in the death, burial, and resurrection of His Son… Jesus of Nazareth – indeed the Christ. The answer lies in loving God, submitting ourselves to Him and thus enabling ourselves to love our fellow man as ourselves.

Earthly action and answers lie in the people empowering themselves with knowledge and courage. Begging God for increased spiritual faith and courage. The complacency, apathy, moral decay, and increased social dependence on government of our day are frighteningly reminiscent of so many other societies throughout world history.

Here are the typical stages of society as history teaches:

From bondage to spiritual faith
From spiritual faith to great courage
From great courage to liberty
From liberty to abundance
From abundance to selfishness
From selfishness to complacency
From complacency to apathy
From apathy to moral decay
From moral decay to dependence
From dependence to bondage

Where do you see our nation?

I see our nation as having just surpassed the crest of number five and heading downward into steps 6 – 10. I believe we are currently immersed in step 6, 7, 8, and 9. I believe only a return to spiritual faith, morality, and charity can reverse the current course we are on.

I will leave you with a few informative videos where Lou Dobbs of CNN goes off on the current events that seem to be sweeping over us at an ever increasing rate.

Lou Dobbs on “The New World Order”

Lou Dobbs on “The North American Union”

Lending Club Review – Peer to Peer Lending

Matt Jabs — Tue, 16 Feb 2010 11:00:26 +0000

In this article I will review in detail the subject of borrowing from Lending Club and then provide perspective from several individuals who have experience investing with Lending Club. Enjoy.

How Lending Club Works

From the horses mouth…

Lending Club is a social lending network that brings together investors and creditworthy borrowers to offer value beyond traditional banks.

Borrowers with good credit can get personal loans from $1,000 to $25,000 at interest rates that are often significantly better than rates from conventional sources.

For lenders, money invested goes immediately to Lending Club’s approved borrower members. Most lender members spread their investment across tens or hundreds of qualified borrowers. Notes (that correspond to specific borrower loans) are offered only by means of a prospectus.

Is Lending Club right for me?

Those of you who read DFA on a regular basis know I am on a purpose driven mission to free myself and my family from the bondage of debt. For the last 7 months I have been trimming excess fat from every part of our budget and after making many positive changes have recently shifted my focus on getting a few big wins. That’s when I stumbled upon Lending Club…

A little background…

A while back I had the eye opening experience of calculating my interest amount paid, and ever since have been growing increasingly restless over the high interest rates on my auto loan and 3 remaining credit cards. The rates, already high enough to make a gangster blush… were recently pushed even higher by my big bank lenders. And that was the last straw for me… I was ready for a change.

Here are my current loans, banks, and corresponding rates:

Auto Loan – Capital One @ 10.5%
Credit Card 1 – JP Morgan Chase @ 14% (rate recently increased due to “bad economy”)
Credit Card 2 – Capital One @ 16.25% (rate recently increased due to “bad economy”)
Credit Card 3 – Citigroup @ 19% (rate recently increased due to “bad economy”)

I am almost never a proponent of borrowing money, but this is one exception where it is actually quite wise to in more than one way. It did not take much deliberation between me and my wife before drawing the conclusion that it was clearly in our best interest to go ahead and borrow from Lending Club in order to consolidate our high interest debt into one loan at a MUCH LOWER RATE.

Why Borrow with Lending Club?

Let’s be honest… nobody wants to borrow money… period. In fact — as I mentioned above — if you have been following my Debt Free Adventure then you know full well how adamant I am about paying off my debt and reaching financial freedom.

So why did I borrow?

I had heard about peer to peer lending, aka social lending, aka p2p lending before but had never really paid much attention or explored if it could be an option for me. Why? Because I am not looking to borrow money!

Then I had an idea…

Since I hate dealing with credit card companies and big banks in general I wondered… could I borrow from Lending Club to consolidate my high interest consumer debt and pay less interest in the process?

Once on the scent of a big win, some obvious questions racing through my head included:

Who is lending us the money and would we be repaying “regular Joe’s” instead of the Big Banks whose practices we have grown to abhor?
What kind of interest rate could we get?
Will they approve our loan?
How long will it take?
How much are the fees?
Is this a wise alternative to simple debt repayment of our numerous individual high interest debt accounts?
Can I prepay the loan early without penalty?

To better educate myself…

I started poking around on the Lending Club website… studying every inch of it, especially the fine print! All of my questions were answered rather quickly and directly. Here are the answers I found to the above questions:

Individual investors (regular Joe’s like you and me) were lending me the money. As a matter of fact, I ended up getting financed by many other personal finance bloggers I interact with on a daily basis. This story is covered in detail on FiveCentNickel.com and coined “Lending Club: Invest in Your Friends“
With our credit score we were able to secure a rate of 9.32%.
Our loan was approved in just a matter of hours.
An $11,000 loan cost us only $85 in fees.
Even after adding the $85 fee into the calculation, we stand to save $500+ over the life of the loan.
There are no prepayment penalties… so I could pay the entire loan off tomorrow if I so desire (although that may not make my investors the happiest campers!)

It was an awesome feeling to think I would be saving over $500 because of a much better rate, then also paying the necessary interest to friends and business associates rather than huge corporate banks in whom I have nothing short of anti-confidence.

While this was the best decision for my situation, make sure you evaluate your own situation strategically before proceeding — every situation is different and each will require careful attention to detail.

Use this calculator to help determine if consolidating your high interest debt through LC is the best mathematical option for you.

Why Invest with Lending Club?

“Our investors join LC for the opportunity to make above-average returns and to diversify their current holdings in the stock market and other traditional investment vehicles. As the economy starts showing signs of recovery, many investors are also moving away from “defensive” assets like CDs and high-yield savings accounts.
With a 9.61% net annualized returns since we opened back in June 2007 (net of fees and defaults, across all credit grades) despite the tough credit market, LC certainly is an attractive option to benefit from a recovery in consumer credit.”
– Rob Garcia, Director of Product Strategy at Lending Club

Although I am not currently in a position to invest with Lending Club, the system they have in place is fast becoming one of the best decisions to be made with investment dollars… especially in a down market. The alternatives available to the average investor pale in comparison to the several benefits offered when investing through LC.

Below I will list all the reasons to invest as found on the LC website, then deliver several testimonies from actual investors that I know personally. Several of which are my financial mentors, and all of which I trust.

On their website Lending Club gives us these 7 Lucrative Reasons to Become an Investor:

You can earn better returns – Since June 2007, LC investors have earned an average net annualized return of over 9%. Read the report by Javelin Research.
It’s straightforward – The money you invest funds loans made to creditworthy borrowers.
We’re selective – Many borrowers apply, but less than one in ten are accepted. LC approves only creditworthy borrowers as members.
It’s easy – We make it easy to build a portfolio based on your criteria. Most lending members spread their investment across tens or hundreds of qualified borrowers.
We set fair and fixed rates – Our rates are based on historical trends and the current economic climate. Borrowers pay a fixed rate for the 3-year life of the loan.
You get flexibility – You can reinvest any interest and principal payments each month or withdraw them like an annuity. You can also put your notes up for sale on the Note Trading Platform.
Do good while doing well – Many of our lender members find it rewarding to help others meet their financial goals. Especially in this economic environment, LC members come through when big banks do not.

Investor Testimonials…

Each of the following testimonials are from individuals in my own personal contact list. They are not paid by Lending Club to share their opinion, rather they simply wanted to share their story in an effort to help other investors — seeking stable opportunities — to plug into the lucrative option they have found.

Another great part of LC is the ability to invest in those you trust. Both Nickel and Erica invested in us and helped fund our loan. I believe Pete tried, but our loan was funded so fast that he didn’t get the chance!

All of these investors agree that the returns they are making on Lending Club far exceed that which the could be making in a high yield savings account

- Nickel of FiveCentNickel.com

Over the past few months, I’ve become a fan of investing through Lending Club. Prior to actually trying it out, I’d been pretty skeptical of peer-to-peer lending. After all, the idea of lending money more or less directly to other people is pretty “out there” nowadays. I finally decided to give it whirl with a bit of “fun money,” and I haven’t look back since.
It’s too soon for me to make any grand claims regarding investment performance, but things have been going great so far. LC is very easy to use, and the interest rates are great. The fact that you can invest as little as $25 per loan also means that you can really reduce your risk by spreading your money around.
While we haven’t abandoned more traditional investment vehicles, we’ve been gradually increasing our LC investments as we’ve become more comfortable with the concept. On top of everything else, it’s kind of fun to know that your loans are directly helping real people.

- Erica Douglas of Erica.Biz

I’m a high net worth investor, and I chose to invest through Lending Club over many alternatives. Here’s why:
The stock market is risky and could plummet
It’s easy to get started with as little as $25
LC handles all the payments, so I don’t have to worry about collecting money directly from people
There aren’t any mammoth trading fees that would eat up an entire small investment like mutual funds/the stock market.
Besides, even a “high-yield” savings accounts is only paying 1% right now. 1% should be pretty easy to beat.
I use LC the way many people would use a CD ladder. I can liquidate my positions easily if needed via their Note Trading Platform. And it has far better returns than a CD ladder would.

- Pete of BibleMoneyMatters.com

Over the past year or so I’ve heard a lot about the peer to peer lending market, and investing through Lending Club. For quite some time I’ve been pretty skeptical about the concept, and I just assumed that most of the people borrowing through Lending Club were big credit risks unable to get a loan elsewhere. I also didn’t want to be lending money to people for irresponsible reasons. After talking with other lenders and doing a bit of research I’ve found that while there certainly are some folks on there that are big credit risks, as a lender you’re able to choose who you loan your money to, and what you lend for. That allows me to be picky about who I’ll lend to, and how much risk I’m willing to take. Add to that the fact that LC registered with the SEC in 2008, and their credibility in my eyes has increased quite a bit. I’m finally taking the plunge because I believe my money can give help to others, and still make me a little bit of money in the process.

- Jacqui Pittenger of Twitter

I signed up in February 2009 through a free $25 referral link on one of my favorite blogs – Dual Income No Kids. I figured there’s nothing to lose when you invest free money. I enjoyed the experience so much, I soon added another $500 to my account.
While I would not consider peer to peer lending safe enough for an emergency fund, or even as a primary investment strategy, it’s a worthwhile addition to my investment portfolio. My mix of loans skews to the riskier side with rates ranging from 8% to 18%. My current Net Annualized Return is 13.55% and all payments are current (so far at least). Even a few defaults would still leave me with an acceptable return.
The promise of yields far in excess of a savings account or CD is very tempting. But my favorite feature is being able to fund loans to people I want to help – like those digging out of a mountain of medical debt, moving closer to their place of employment, or purchasing a motorcycle to reduce fuel consumption. If I have any doubt about person’s ability to repay the loan I move on. There are plenty of applications to choose from, so trust your instincts.
In the spring I signed up to automatically transfer $25 from my checking account to Lending Club each month, though I opted out of their automatic investment plan. I prefer to hand pick my loans each month. Soon I’ll reach the point where I can not only invest in a ‘new money’ loan each month, but will also have a ‘repayment reinvestment’ every month as well.

Closing Thoughts…

For a long time we have bestowed great confidence upon our financial institutions; but with all the recent bail out money — that seemingly grows on trees — a rapidly increasing number of people, myself included, are turning to social lending providers like Lending Club for simplistic and transparent borrowing and investing. A lot of people are hungry for change, for the power of choice, and for greater control over their own financial destiny! And in my experienced opinion… LC seems to be answering that call quite nicely.

Using Lending Club has indeed been a big win for me and my wife and I do not hesitate to recommend their service.

What do you think?

Have you recently borrowed through Lending Club and want to share your experience? Are you an seasoned LC investor with a testimonial of your own? Maybe you simply have an opinion that just has to be voiced. Whatever it is… let us hear it!

My interview with Barry Moltz on borrowing from Lending Club.

Other Bloggers featuring Lending Club

Lending Club: Peer-to-Peer Lending @ MoneyFunk

Valentine’s Day – Was It Worth Celebrating?

Matt Jabs — Mon, 15 Feb 2010 16:59:06 +0000

Valentine’s Day is a Hallmark Holiday

For those unfamiliar, a “Hallmark Holiday” is a term used to describe a holiday created for commercial purposes that seeks to exploit the emotions of consumers for reasons of profit.

People may argue the legitimacy of this term, but for the intents and purposes of this article we will assume it true (mostly because I believe it… and I’m the author.)

Define your own celebrations

Despite popular cultural norms, we strive to choose our own celebration days rather than letting them be dictated to us by commercial entities or anyone else. While we do celebrate some traditional holidays, we still try to do so in a way that makes us happy rather than just following along with the spending culture we’re inundated with and surrounded by.

Per celebrating loved ones, I endeavor to celebrate my love for them daily rather than certain days of the year. I love my wife every day and hope to show her that as often as possible. I love my mom every day, and hope to show her that as often as possible. I love my sister every day and hope to show her that as often as possible. You get the point. Rather than picking days, I think it more fitting to try and make them feel special every time I come in contact with them.

Despite the aim to always honor loved ones, I still have particular days I like to focus on them but prefer to define these days according to the personal relationship, not popular culture.

Anniversaries

Anniversaries are a big one for me. I view them as special because they represent the loving and life long union of two people setting off to share their lives with one another. I like to show particular admiration for loved ones on these special days.

Birthdays

Celebrating the day people came into this world is another huge one for me. What better opportunity to focus on individuals than the anniversary of their birth.

Although both of these event types are very commercialized in popular culture, I enjoy placing the focus on the person and the relationship rather than focusing on gifts of high dollar amounts. I typically do this by expressing my appreciation for them through words, pictures, and memories, etc… or by meeting a specific need they have.

Valentine’s Day – What we did and how we saved

Since we do not celebrate this holiday in traditional fashion, we focused on making it a great day like we do with all other days. Initially we planned to split a meal at one of our favorite restaurants then visit the MSU planetarium, but chose to avoid the crowds and stay home instead. If you didn’t already know, we are in debt so we limit ourselves to a maximum of one night out per month. Also, we decided long ago that dinners out should be limited to occasions that are special to us, so we chose to save our special dinner for next week… our 5th wedding anniversary!

Rather than going out, spending money, and fighting crowds… we made our favorite dinner together – Indian Madras Chicken Curry – and cuddled up to a good movie afterward. We saved about $20 on the meal by cooking at home (which also provided us leftovers for the week ahead) and utilized our Netflix streaming subscription to watch a movie at no additional cost.

All said and done we saved about $30+ and spent a lovingly relaxing night at home eating our favorite dish and cuddling up to a great movie.

Valentine’s Day – What did you do and how did you save?

Do you believe in celebrating Valentine’s Day? Did you celebrate it traditionally by spending money to enjoy each others company, or did you celebrate it creatively without focusing on gifts and evenings out?

H&R Block At Home – Valentine’s Day Discount

Matt Jabs — Sun, 14 Feb 2010 17:00:53 +0000

Spreading discount love…

When I catch wind of a good deal on something useful – I love to pass it on!

Since it is tax season and many of us like to do our own taxes I figured I should pass this discount love on to you.

H&R Block At Home Discount

H&R Block contacted me today to offer a discount to readers who purchase H&R Block At Home tax preparation products through Debt Free Adventure. Savings will be as high as 7o%, which is super cool.

I cannot vouch for H&R Block software, since I have never used it, but figured I should present the opportunity so you can take advantage if you want. If you’re wondering what tax prep software I use then check out my TurboTax Online Review.

Here are the details of the H&R Block Valentine’s Day special:

Offer is valid February 12-14 of 2010 only
Purchase must be made through the links here on Debt Free Adventure

Use this banner link to receive the discount

Have any DFA readers used H&R Block?

If anyone has used H&R Block At Home software please share your experience with the rest of us – both positive and negative.

Renting vs. Mortgage and A Solution for Mortgage Free Home Ownership

Robert Espe — Fri, 12 Feb 2010 21:27:55 +0000

The Lie – Renting is throwing money away

Although I am currently debt free I do not own a home, have no immediate plans to buy one, and have been renting an apartment for nearly 3 years now.

You may remember a past discussion on the topic of renting before buying a home, and while there are many factors involved in the renting vs. mortgage debate, today let’s hone in on one common misconception that often drives people into the arms of mortgage lenders:

“Renting is just throwing money away”

Well intentioned friends like to remind hapless renters like myself how much we have “thrown away” in rents over the past several years. They are also quick to point out that had we only bought (a.k.a. mortgaged our lives for) a home, some of our rents paid would now be counted toward our net worth calculation as equity. In reality this is misleading at best. Actually, avoiding a mortgage has provided us an opportunity to build more equity while renting. To prove my point let’s compare a hypothetical mortgage against my current rental housing situation.

The Truth – Renting cost vs. mortgage cost

According to Bankrate.com borrowers in Laredo, TX with credit scores over 700 can borrow $165,000 on a 30 yr fixed note for about 5% – if they put 20% down. I don’t know a lot of first time, prospective mortgage slaves with $33,000 in their pocket. Heck, many may be hard pressed even to have credit scores of 700 or higher. So we will go with the default numbers in Bankrate’s payment calculator: $165,000, for 30 years, at 7%, with no down payment. That is enough to buy a house about twice the size of my current apartment in the same neighborhood.

I currently pay $700 for a 626 sq ft, 1 bedroom apartment in a gated community, with a pool and a gym. We are trading up to a larger house in this example, because that is what most people do. Few go looking for a 600 sq ft house, as they usually leave apartments for more space. Feel free to run these numbers with a more expensive apartment or cheaper house; the results should be similar.

Here is a snippet of the Amortization Schedule (click image to see the full amortization schedule.)

Our imagined loan results in monthly payments of $1,097.75. At the first payment, only $135.25 goes toward principal. After one year of payments the equity, according to amortization schedule, would be $1,676.09 not $13,173. As you can see… that’s not a whole lot of equity.

We THREW AWAY almost $12,000 in the first year with a mortgage; my apartment only costs $8,400!

Also, by the time the loan is paid off, $230,189.68 has been thrown away in interest paid to the bank. That is more than the price of the house! Mortgages steal from your future standard of living. Sure… you will get into a house sooner, but think of all the things you could buy with $230,000 if your house was already paid for!

The Solution – Build more equity while renting

The snippet amortization schedule above shows the initial & final payments on our imagined loan. It also shows the turning point where the money I through away on interest is less than the money through away on rent. Notice it is 15 years in the future. That means I could rent for 15 years before buying a house and still come out money ahead, and maybe save enough to buy a home with cash.

The loan payment is $397.75 more than my current rent. Instead of making the larger payment to a bank, I continue to pay my rent and put the difference into an ING Direct savings account labeled “Personal Equity.” At the end of one year, I will have $4,773. That is more than double the equity I would have with a mortgage, and it is also a liquid asset in MY bank account… accessible without having to sell my home or qualify for a HELOC loan. You build your personal equity faster as you save money, I like to think of this as mortgage pre-payment.

My own personal equity grows by $875 with every paycheck. I will have $22,000 by the end of the year. I am also looking for a cheaper apartment, and probably will spend less than $165,000 on a house. If I maintain my current standard of living, as my income increases so will my savings. Eventually I will be able to buy a house with cash in the time it takes most people to pay off a car.

Final Details

You might notice I didn’t account for the mortgage interest tax deduction. I wanted to keep the math simple, so I also left out costs for home maintenance, property taxes, or private mortgage insurance that more than offset the tax break. These forgotten expenses will only add to the savings a renter can accumulate while those paying mortgage continue to pay, pay, pay.

For this to work you will need to secure housing below your means while you save to afford something better a few years down the road. This concept of sacrificing now to benefit later is a fundamental building block of sound personal finance. Renting indefinitely without saving will never get you into a house, but paying a mortgage guarantees that you throw away money on interest.

There will always be a few areas with no available rental housing, but most people should be able to find a decent rental while they save for a home. However, most people choose a mortgage over renting because they refuse to live below/within their means for a few years… never realizing how much it actually costs them in the long run.

What Do You Think?

I encourage you to visit Bankrate.com and try out their amortization calculator with prices from your area. If you rent, take note of the difference between your current rent amount and a mortgage payment. How much personal equity could you build in a year? If you already own a home, try the pre-payment calculator to see if you can pay that bugger off early.

Do you believe people could ever be completely free from mortgages? If not, why?

Debt Free Adventure

Refinance Home Loans – How One Call Saved Us $41,123.16

I refinanced our first mortgage

Our first and second mortgages

Refinance the 1st or 2nd mortgage?

How did refinancing benefit our home loan?

Simple Steps to Refinance Mortgages

Step 1: Does Fannie Mae or Freddie Mac own your loan?

Fannie Mae

Freddie Mac

Step 2: Gather your mortgage information

Step 3: Make the call to the mortgage lender

Call your existing lender first

Do not settle for their first few refinance offers

Befriend the mortgage rep

Be willing to walk away

Step 4: Follow through with the paper work

Leave us a comment with your mortgage refinance story

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