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Personal Finance By The Book http://personalfinancebythebook.com Personal Finance By The Book (Bible) Tue, 25 Nov 2014 15:55:04 +0000 en-US hourly 1 http://wordpress.org/?v=4.1 Your Small Business Doesn’t Need A Loan http://personalfinancebythebook.com/your-small-business-doesnt-need-a-loan/ http://personalfinancebythebook.com/your-small-business-doesnt-need-a-loan/#comments Tue, 25 Nov 2014 15:00:08 +0000 http://personalfinancebythebook.com/?p=7469

Something like 90% of small businesses fail. That’s a pretty pathetic statistic.

I know this is a personal finance website, but (surprisingly?) small business loans are a personal finance issue. Let me explain.

Business Debt = Personal Debt

I’ve heard it too many times, “My only debt is a little bit of business debt, but that won’t affect anything.”

If only that were true! It turns out that business debt is personal debt unless you’re on the fortune five hundred list.

No, your blog isn’t a fortune five hundred company; neither is your contracting business. I don’t care that it’s an LLC; it’s still not separate from you.

Lenders aren’t stupid. They know that selling the assets in your business won’t cover the costs of most small business loans. So they won’t take it as collateral. Instead, they’ll make your personal assets (your house, car, etc) collateral for the loan.

So the first thing you need to understand is that business debt is personal debt. It’s on your credit report and it’s going to follow you no matter what happens to your business. You signed on the loan and you (not your business) are responsible for it

Why It’s A Bad Idea

So why is it such a bad idea to take out personal loans on a business? I’m glad you asked!

First, it starts you in the negative. When you pay cash to start a business you’re able to start day one at $0. That means you can profit from your first sale without any issues. The money you spent to start the business is called sunk costs and it stops counting after you’ve spent it.

Debt, on the other hand, stays with you. When you take out a $30,000 dollar small business loan you’ve got to earn a $30,000 dollar before you can make a profit. Not fun.

Second, it increases your risk. Starting a small business is risky enough. Remember that $30,000 dollar loan? If you can’t make enough money to pay for it, you’ll have to find the money from your own pocket. That may mean finding another job, losing your house, or closing your business to earn enough money somewhere else. The risk involved is huge!

With cash, there isn’t as much risk. When something goes wrong or money gets tights you don’t have to worry about a huge debt payment hanging over your head. You can make more mistakes and recover more quickly.

Third, it isn’t necessary. With the internet, the playing field has changed. Advertising is free through social media. Developing and launching a website can be done for under $100 dollars. It’s no longer necessary to have tens or hundreds of thousands of dollars to get your business off the ground. Maybe the old guard still needs that stuff, but your business can thrive without the weight of debt or huge start up costs.

Stay Away

Starting a business is hard enough without debt hanging around your neck. Your business needs the freedom to have problems, to make mistakes, and to develop into something successful. Debt may seem like a good idea at first, but when you consider the liability it adds to your family and the risks and limitations it adds to your career, it doesn’t end up being worth it.

Alex Humphrey is a personal finance writer and coach at EntrepreLife a personal finance blog that teaches easy ways to dominate money by dropping debt, investing well, and saving for the things you love to do. When he’s not blogging he leads a youth group, spends time with his wife, and figures out new ways to teach people personal finances. You can follow him on Twitter and Facebook and subscribe to the EntrepreLife mailing list.

 

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Being Satisfied With What We Have http://personalfinancebythebook.com/being-satisfied-with-what-we-have/ http://personalfinancebythebook.com/being-satisfied-with-what-we-have/#comments Mon, 17 Nov 2014 18:00:06 +0000 http://personalfinancebythebook.com/?p=7251

How does the phrase “be satisfied with what you have” strike you? I confess that it bothers me. I might be a pretty content guy, but the idea of being satisfied with what I have implies that I shouldn’t be hoping for more . . . a nicer house or a more dependable car or even a fancier cell phone. Could this satisfaction be an indictment against ambition or a mandate for lethargy? I wonder.

Yet scripture speaks clearly:

Don’t love money; be satisfied with what you have. – Hebrews 13:5 NLT

Because I believe that God’s word is always true whether I like it or not, I have been digging to better understand the “whys” and “hows” of this command. Follow along for what I have been learning:

Why We Should Be Satisfied

1. It’s an antidote to loving money.

If you are struggling with this concept, let me ask you another question: “Do you think it is okay to love money?” I am guessing most of you are saying, “Of course not! We should love God and each other . . . not money!”

Read Hebrews 13:5 (NLT) again: “Don’t love money; be satisfied with what you have.”

The problem is this: being content with our current circumstances is directly linked to not loving money. Stated differently, if we are not satisfied with what we have, we evidently have a love for money. But, the good news is this: When we develop a satisfied mindset, we are liberated from loving money. It is the antidote.

2. We will learn to trust God.

The full verse reads, “Don’t love money; be satisfied with what you have. For God has said, ‘I will never fail you. I will never abandon you.’” – Hebrews 13:5 NLT

What a promise! But do we believe it? Do I believe it? Am I willing to transfer my love of money to a trust in God? Great question, and here we are getting to the crux of the issue: being satisfied with what we have requires a deep trust in God. That is a good thing.

3. We will live without fear.

The very next verse in this passage reads, “So we can say with confidence, ‘The LORD is my helper, so I will have no fear. What can mere people do to me?’”

What do we fear? Losing our jobs? Not getting that next promotion? As long we trust in ourselves or in other people, we are perpetually living on the verge of failure and disappointment. However, if we can learn to trust God, who promises to never fail us or leave us, we have absolutely nothing to fear.

How to Be Satisfied

Remembering that I am writing this to myself as well as to you, here are some bullet point thoughts:

  • Be intentional about living with less instead of wanting more.
  • When you accumulate more, give more.
  • Be thankful for what you already have instead of resenting what you don’t have.
  • Know the difference between needs and wants.
  • Be satisfied with God’s sufficiency for your needs.
  • Distinguish between temporal and eternal. All of our money and possession in this life will pass away. God’s provisions last forever.

You know . . . this idea of being satisfied with what we have is sounding pretty good to me. Doing so will break me free from a love of money, help me develop a deeper trust in God and purge fear from my life.

I am going to go for it. How about you? Leave a comment!

This article was originally published on Personal Finance by the Book on January 6th, 2012.

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Are Christians Supposed to Help EVERYONE Who Has Needs? http://personalfinancebythebook.com/is-a-christian-supposed-to-help-everyone-who-has-a-need/ http://personalfinancebythebook.com/is-a-christian-supposed-to-help-everyone-who-has-a-need/#comments Mon, 10 Nov 2014 09:00:30 +0000 http://personalfinancebythebook.com/?p=6914

It helps to know the difference between “burden” and “load”

If you, like me, have read these words from 1 John 3:17 “But if anyone has the world’s goods and sees his brother in need, yet closes his heart against him, how does God’s love abide in him?”, then you, like me, may be asking yourself this question: “Does God really expect me to help everyone I encounter who has a need?”

Obviously, this is an impossible task. It seems to me that if we try to help everyone, we will be so overwhelmed that we will succumb to guilt, frustration and exhaustion. But the flip side (helping no one) leads to selfishness and a calloused heart. What are we to do?

A helpful guideline for keeping this balance is what I call the “burden/load” principle.

Understand the difference between a “burden” and a “load”.

Paul tells the Galatians to “bear one another’s burdens, and so fulfill the law of Christ”. (Gal. 6:2) Three verses later he says “For each will have to bear his own load.” (Gal. 6:5)

Is he speaking riddles here? Which is it? Do we step in and help or do we let the person do it himself? The key is understanding the words “burden” and “load”. The burden is comparable to a boulder – something that is impossible for the person to carry on his own. In this text, it is used to describe someone who is overwhelmed with sin, but it could also be used to describe a financial, emotional or physical struggle.

The “load” in verse five is like a small backpack; something that can be easily carried.

The lesson in these two verses is that we should not do for a person what he can do for himself; it is a healthy thing to “bear his own load”. However, when someone is so weighted down that they simply can’t handle the burden, we who are able should step up and help.

Setting boundaries

Drs. Henry Cloud and John Townsend, in their “Boundaries” book series, stress that when we haven’t established healthy relational boundaries, we often act as a result of guilt, obligation or manipulation…not love. Clearly understanding this burden/load dynamic will allow us to say “no” gracefully to helping with a load while choosing to say “yes” when the need is indeed a burden. The difference is huge, for we able to love only when we are free to choose to do so.

Learn from Jesus

Think of this principle in Jesus’ life: he chose to raise Lazarus from the dead (burden), but he commanded others to roll the stone away and unbind his strips (loads). He fed the 5000 (burden) but had his disciples distribute the food and pick up the abundance (loads). Jesus did not do everything for everyone; he did and does do what we can’t do.

The problem with principles

The burden/load principle is a great one, but, like many principles, it will miss the mark if applied legalistically. Paul said, “If I give away all I have, and if I deliver up my body to be burned, but have not love, I gain nothing.” 1 Co 13:3. Giving is a quality of someone who loves, but never a substitute for love.

The following tips will help us apply the burden/load principle in love:

  • Deciding not to help is not license for becoming judgmental.

Have you ever become judgmental of a person who doesn’t carry the load she is capable of carrying? Don’t. While we probably shouldn’t enable that person by doing for her what she can do for herself, we nevertheless need to be a friend and have an open heart toward her. One can’t do this and also be judgmental.

  • We shouldn’t attempt to carry every burden.

I may not be qualified, for example, to counsel a man who is abusing his wife. But, assuming that he wants help, I can put him in contact with a pastor or counselor who can. At any rate, I should not close my heart toward him.

We are called first and foremost to love. Our opening verse (1 Jn 3:17) was written to remind us that love isn’t love unless action takes place. By establishing guidelines, we free ourselves up to take those actions because we choose to.

This is love.

 

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Three Ways to Minimize Your Vehicle Depreciation Expenses http://personalfinancebythebook.com/three-ways-to-minimize-your-vehicle-depreciation-expenses/ http://personalfinancebythebook.com/three-ways-to-minimize-your-vehicle-depreciation-expenses/#comments Mon, 27 Oct 2014 09:00:46 +0000 http://personalfinancebythebook.com/?p=6906

Vehicle depreciation will silently gnaw away at your financial foundation

If you are going to own a vehicle, you will pay for depreciation.  It is one of those unavoidable expenses which, like termites, will quietly and secretly gnaw away at your financial foundation.  Depreciation expenses are especially sinister because they remain in the background (who actually writes “vehicle depreciation” into his budget?) and are therefore all too often shoved ignored.   If you are ready to tackle this silent parasite, these three tips will help:

1. Buy used instead of new.

Research found at Edmonds.com indicates that new cars will lose 60% of their value in the first five years of ownership. A $30,000 car, therefore, will be worth $12,000 in five years — a depreciation of $18,000. However, by opting for a used car, a savvy buyer can allow the original owner to throw that $18,000 down the black hole. Assuming that the five year old car depreciates 40% over five years, the depreciation expense will only be $4,800 … a savings of $13,200, or $220 a month. I realize that new versus used is not comparing apples to apples, but $220 a month is worth considering.

2. Buy new, but drive it till it drops.

The more years you drive that new car, the less depreciation you will pay per year. With our example above, buying a new car every five years will continue to cost you $18,000 every five years ($300/month) forever. However, if you were to drive that same car for 15 years (and it is worth $5,000 at that point), your depreciation cost would only be $140 a month.

3. Compare before buying.

All vehicles depreciate, but not at the same rate. Therefore, if you insist on buying new, compare depreciation costs of different models before buying. If vehicle A costs less up front, but depreciates faster than vehicle B, you may be better off buying vehicle B.

Bonus tip: never buy a car you can’t pay cash for. If you are like me, that one principle will limit you to buying used cars. The good news? You will not only be saving in depreciation costs, but also interest charges. A car with no payments is the best one you can buy.

Readers:  How do you minimize your vehicle depreciation?  Any additional tips?

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Do YOU Have the Spiritual Gift of Giving? Read This Before Answering. http://personalfinancebythebook.com/do-you-have-the-spiritual-gift-of-giving-read-this-before-answering/ http://personalfinancebythebook.com/do-you-have-the-spiritual-gift-of-giving-read-this-before-answering/#comments Sat, 18 Oct 2014 15:00:32 +0000 http://personalfinancebythebook.com/?p=6997

In my 40 plus years as a Christian, I have observed that most discussions of spiritual gifts tend to focus on the more sensational gifts listed in 1 Corinthians 12: 8-10: gifts such as working miracles, tongues, prophecy, special knowledge and healing.  However, I have rarely heard believers dig into the more ordinary gifts of service, encouragement, giving, kindness and leadership described Romans 12: 6-8.  I wonder why.  Could it be that we prefer being zapped with some supernatural manifestation of God’s spirit to simply doing what we already know we should be doing?  Are we more intrigued by a spiritual experience than we are in serving others?  Is it all about us?  I wonder. Because we overlook the Romans gift list, and because God is a generous gift giver, it is quite likely that many of us have spiritual gifts that we do not acknowledge.  Think about it: servers are faithful and loyal; encouragers know how to motivate others; givers are generous and trusting;  leaders are good organizers and managers; and those who show kindness are caring people who are happy to give their time to others.  If any of these attributes describe you, it is time to recognize that your Heavenly Father has singled you out and bestowed the accompanying gift on you.  By doing so, we not only take focus off of ourselves, but we reflect it to God, the giver of all gifts.  Therefore, if you are generous and trusting, you can be sure that you have been given the gift of giving.  “But…is it possible to have the gift of giving even if I don’t feel generous and trusting?” I believe it is.  For most of my life, I have not been a big spender (some call me “tight”).  During my working years, I always carried a lunch from home instead of blowing money at a restaurant.   Even now, I order water with a meal because I cringe at the thought of paying $1.75 for a glass of tea.  You get the idea.  This frugality has helped me be a decent money manager, but that same trait has, without me realizing it, prevented me from being as generous as I could be or should be.  However, in recent years, something has been changing inside me — something that can’t be explained apart from God’s sovereignty: I have been feeling more generous.  Furthermore, when I act on that feeling of generosity, I find that I feel even more generous, which brings on even more giving and results in a deep inner peace and contentment. Does all this mean I have the gift of giving?  It certainly seems to. God isn’t limited to giving us gifts when we are young.  If He decides to give an old guy like me a gift, I am not going to fight it.  Yes, I wish I would have been more giving in my younger days, but that didn’t happen and I can’t turn back time.  However, I am at a time in my life when I am enthused about the giving opportunities He is providing me with.  I am excited, as I enter my sunset years, to see how the Lord stretches me to be a better and better giver.

 How about you?

All of us, of course, are called by God to be givers.  However, not all of us are specially gifted by God to be extraordinary givers.  I do not write this to guilt you into a mold you don’t fit.  However, I challenge you to keep your options open.  The gift of giving could be lying dormant within you.  Or, whatever your age, God may choose to bestow this gift on you.

 The greatest gift

In my opinion, giving is the greatest spiritual gift any of us could ever have.  Why?  Because God himself is a giver…He gave the world His only son.  By giving us a gift of giving, He is making us more and more like Himself.

 What could be better than that?

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What is the Difference Between Saving and Investing? http://personalfinancebythebook.com/what-is-the-difference-between-saving-and-investing/ http://personalfinancebythebook.com/what-is-the-difference-between-saving-and-investing/#comments Wed, 13 Aug 2014 15:00:24 +0000 http://personalfinancebythebook.com/?p=2399

Most of us innately know that saving and investing are not the same, but do we understand the difference? Because clarity in this distinction can greatly impact one’s financial well being, realizing these difference is vital. The key is in two words: risk and liquidity.

Savings are low risk funds that must be liquid (available) when you need them. The purpose of saving money is so you can have it for a specific purpose within a short time frame.

Investments, on the other hand, are for wealth building, and will not be needed for many years. Yes, investments do involve greater risk, but, investments also yield much greater returns when left alone long enough to ride out the turbulence of the stock market.

Examples of savings

Emergency Fund

When an emergency happens, the money is needed immediately. The emergency fund, therefore, should be in a very boring account, such as a Savings Account or Money Market Account. One could also consider an online high interest account, as long as the funds are easily accessible. Its purpose is not to make a bunch of money; it is there for emergencies.

Car Fund

You DO save up and pay cash for your cars, don’t you? This money should be saved, not invested. Why? Because you don’t want to take the risk of a market plunge just when you are ready to buy.

Anything else you will need to pay cash for

What are you saving for (notice the word “saving”)? A home improvement (or repair), a riding lawn mower or a new computer are all examples of saving: you will need a set amount on a set date.

College Funding (sort of)

Should college funding be an investment or saving? It depends on how soon Junior is going to be entering college. If college is 18 years away, the money should be invested (make sure you use an ESA or 529 plan to get all of the tax breaks). But what if college starts four years from now? You don’t want the risk of your investments tanking just when that first tuition payment comes due. The choice is yours, but I think you should be moving those funds to a less risky vehicle (maybe even a savings account) as the time of need approaches.

Examples of investments

Retirement

Yes, retirement is the big one and retirement funds should definitely be considered investments.  Such funds should be rebalanced annually or even bi-annually, but you basically leave them alone and don’t worry about checking the stock returns by month.  However, like college funding, the retirement nest egg should be made safer as the time of need draws closer.

Starting a business

If you have a long range plan to start up a business (say 10 to 20 years from now), you should be investing to achieve the nest egg needed.

Breaking it down

The difference between investing and savings is really quite simple. If you are going to need the money in the near future, save it. If you aren’t going to touch the money for a longer time frame, invest it. The trick is defining this time frame. Financial guru Dave Ramsey uses five years as his criteria. His rationale is that the stock market has historically made money in 93% of the five year rolling time frames and in 100% of the rolling ten year periods. Most of us are aware that the recent recession changed those percentages, and I heard Dave Ramsey recently say that the stock market has made money in 100% of all rolling fifteen (no longer ten) year periods. However, as far as I know, Dave still uses the five year criteria to distinguish saving from investing.

What do I think about the five year guideline?

I am OK with it. If I know I will need to tap the money in five years or less, I consider it savings. Our emergency fund and car fund are both in Money Market Savings Accounts. On the other hand, if I am not planning to touch the money for longer than five years, I invest it. Our traditional and Roth IRA’s are examples of our investments.

I also have a sort of hybrid investment fund. I am currently involved in flipping a house. This is clearly an investment, with money tied up in the house. However, when we sell the house, I plan to keep this money quite liquid and available (like a savings account) so I can be poised to buy another flip house. I say hybrid, because I would at that time have an investment that I am treating like savings.

How about you? Do you have a clear guideline to distinguish saving from investing? What is that guideline?

Creative Commons License photo credit: Ken Wilcox.

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Am I a Rich Fool? http://personalfinancebythebook.com/am-i-a-rich-fool/ http://personalfinancebythebook.com/am-i-a-rich-fool/#comments Fri, 08 Aug 2014 10:00:18 +0000 http://personalfinancebythebook.com/?p=6318

I don’t know about you, but I have the knack for reading scripture through a filter which allows the truths to go to my head without touching my heart. This filter has enabled me to read Jesus’ story about the rich fool without ever considering if that fool might be me. However, I am now wondering if it is.

Here is the story:

Then He told them a story: “A rich man had a fertile farm that produced fine crops.
He said to himself, ‘What should I do? I don’t have room for all my crops.’ Then he said, ‘I know! I’ll tear down my barns and build bigger ones. Then I’ll have room enough to store all my wheat and other goods. And I’ll sit back and say to myself, “My friend, you have enough stored away for years to come. Now take it easy! Eat, drink, and be merry!”‘

“But God said to him, ‘You fool! You will die this very night. Then who will get everything you worked for?’ “Yes, a person is a fool to store up earthly wealth but not have a rich relationship with God.” (Luke 12: 16-21)

My filter at work:

As I have read this story over the years, I have always concluded, “I can’t be that guy. After all, he is rich and I am middle class. Furthermore, his mistake is that he hasn’t prepared for eternity. I have. I am a Christian and am therefore prepared, even if I was to die tonight. Nope. That rich fool is definitely someone else.”

But could I be that fool?

Let me assure you that I am not one of those people who goes around looking for reasons to feel guilty.  In fact,  I pretty much celebrate a guilt free existence. However, I believe that my filter has caused me to misconstrue two truths from this story:

1. I AM rich.

And, if you live in America, you are too. We tend to measure our “richness” by the standard of our friends, neighbors, and anyone who has a bit more than we have. However, the standard, from God’s eyes, is the world. According to the global rich list site,  I am in the top 0.78% of the wealthiest people in the world. Stated differently, I am richer than 99.22% of the people in the world. Go ahead…click that link to learn where you stand in a world ranking.  I am sure of this: In God’s eyes, I am rich.

2. My security is in my wealth.

Come on, Joe”, you may be thinking. “You give at least 10% of your income to the Lord’s work. Don’t be so tough on yourself.” My response is that doing so puts me in the same class as the religious people Jesus referred to who gave “a tiny part of their surplus”. (Mat 12:44). The unfiltered truth is that my retirement income (yes, I am retired) allows me to effectively live just like the rich fool. I can sit back and take it easy because my life time cash flow is more than adequate. Yes, I love God and appreciate all He has done for me, but, like the rich fool, I don’t need to look to Him for my daily needs because I am pretty much set for life.

OK. Now what?

My wife and I are currently making plans to incrementally increase our giving and, in the process, begin transferring our security from my retirement income to God. We recently decided to give more to our local church and we are investigating ways to keep bumping our giving. This, for us, is an adventure in faith. Fortunately, we are on the same page in that we both want to keep giving more and more and more. Wouldn’t it be wonderful to be able to give away more than half of our income? Maybe, just maybe, our twilight years will be the most exciting of our journey on planet earth.

I am looking forward to these years as we stretch our faith and see how God’s provisions will meet needs we never before dreamed of.

Am I a rich fool? I will let you decide. But this I know: I don’t want to be.

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A Prisoner Raises the “Serving Others” Bar http://personalfinancebythebook.com/a-prisoner-raises-the-%e2%80%9cserving-others%e2%80%9d-bar/ http://personalfinancebythebook.com/a-prisoner-raises-the-%e2%80%9cserving-others%e2%80%9d-bar/#comments Mon, 28 Apr 2014 15:06:53 +0000 http://personalfinancebythebook.com/?p=1649

Hurricane Rick / October 20, 2009
Creative Commons License photo credit: Ani Carrington

He was a political hot potato – a prisoner accused of organizing a coup to overthrow the government. Because of death threats by his enemies, a soldier was assigned to escort him to the court venue where he would stand trial. Part of the travel itinerary included passage via ship; it was on this leg of the trip where our prisoner was put to the test.

A massive storm overtook the ship, an unrelenting storm, a storm that caused even the most experienced crew members to lose heart. After fourteen days, our prisoner spoke up, encouraging the men and assuring that them that not a single life would be lost. The very next day, his prediction came true as the ship was propelled to an island and into a reef where the waves tore it apart. The soldier’s first inclination was to kill his prisoners lest they escape and he be held responsible, but he had learned to respect this prisoner and therefore barked the order to swim to shore.

It was here that the real test took place. Our prisoner – cold, miserable, and hungry – did not consider escaping. He instead did the unthinkable. He gathered sticks to build a fire.

Prisoner is a hero

Many of you have already surmised that our hero is the Apostle Paul. Why do I say that gathering sticks was his true test? Simple: in the direst of circumstances, he chose to serve others. Even though the island natives had already kindled a fire, Paul decided to do his part. Think about it: no one would have objected if he has simply sat close to the fire and soaked up the heat. But Paul wasn’t like that. Cold, weak and wet, he gathered sticks. In the rain. (Acts 28: 2-3).

Paul did many great things throughout his life. He was the original and ultimate missionary, performing miracles and starting many churches. He wrote more books of the New Testament than any other author. Yet, in my thinking, none of these grandiose accomplishments were greater than the day he gathered sticks. Why? Because the small deeds of life, the ones that earn us nothing, the ones that are often overlooked, are the deeds that tell the true character of a person.  When Paul gathered sticks, we learned who he really was.

How about me?

I confess that, had I been there, I probably would have been soaking up the heat from the fire. But I also confess that I am inspired by Paul. I may never change the world like Paul did, but I can choose to serve, even if the service seems insignificant.

Serving others is the route to success.

I have recently joined a group of bloggers who have accepted what is called the Yakezie Challenge. This group has come together (and continues to grow) under the inspiration of Financial Samurai. I love the philosophy: “write great content and promote (serve) others”. This simple motto is making huge differences with the blogging members; nearly all of the sites are growing like crazy! My guess is the ones who promote others the most are the ones who are growing the fastest…reminding me of these words from Jesus, “Give away your life; you’ll find life given back, but not merely given back–given back with bonus and blessing. Giving, not getting, is the way. Generosity begets generosity.” from The Message, Luke 6:38

Final Thoughts

Paul was serving others when he gathered sticks. It was the right thing to do. But we are all in the service industry. Whether you run your own business or work for someone else, you will succeed if you serve and you probably won’t if you don’t.

Opportunities present themselves every day; usually in ways that appear insignificant. Most of the time, you would not be faulted by not stepping up. But the question is this, “How can I serve?”

Paul gathered sticks. What do you do?

This post has been included in the following Carnivals:

Carnival of Money Stories #49 hosted by Foreigner’s Finances

Christian Carnival 323 hosted by You Can’t Mean That

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5 Easy Ways to Pay Your Mortgage Early http://personalfinancebythebook.com/5-easy-ways-to-pay-your-mortgage-early/ http://personalfinancebythebook.com/5-easy-ways-to-pay-your-mortgage-early/#comments Mon, 03 Mar 2014 11:00:48 +0000 http://personalfinancebythebook.com/?p=7711

Paying your mortgage early can be relatively pain free, but, before getting started, you need to take care of some basic prerequisites.  I recommend that you:

  • Pay off all other debt.  Why?  Because getting rid of other debt will free up their cash flow to allow you to attack that mortgage with gusto.
  •  Save at least a six month emergency fund.  Why?  Because emergencies WILL happen, and money tied up in their house cannot not be easily accessed to pay for those emergencies.
  •  Be investing sufficiently for retirement.   Why?  Because you only have one shot at retirement.  You should ask yourself this question,  “If my retirement account was already sufficient, would I raid it in order to pay my house off early?”  Of course not, but neglecting your retirement account in order to pay your mortgage early is doing the same thing.

OK?  Ready to get started on that mortgage?  Let’s help a fictional couple get their mortgage paid early and easily.

Jack and Liz have a 30 year fixed rate mortgage on a $200,000 loan.  They are paying 5.5% APR and are motivated to pay that mortgage off early.  The following tips will get the job done.

 1. Make a payment every two weeks.

This strategy works especially well for those who are either paid weekly or bi-weekly because they can synchronize their mortgage payments to their pay schedule instead of the calendar.  This strategy works because a payment every two weeks, in a year’s time,  will total 26 payments, or the equivalent of 13 monthly payments– one extra payment per year.  If Paul and Shirley choose this option, their 30 year mortgage will be gone in slightly less than 25 years.

Note: many banks, because they are structured to process payments monthly, will not be able to accommodate the bi-weekly payment schedule.  However, a diligent borrower can do this on his own by multiplying whatever he is paying now by 1.083 (or 13/12) in order to pay the equivalent of 13 payments a year.

2. Change their W-4 forms, get less refund, and pay extra on their mortgage.

Jack and Liz, who are receiving a $3,000 refund every year, could claim more exemptions on their W-4 forms in order to bump up their take home pay and receive a smaller refund.  If they were to plan for a $600 refund, they would have an extra $200 to add to their mortgage payment each month, lowering their payoff from 30 years to only 21 years.

3.  Refinance and keep paying the same payment.

If Jack and Liz could refinance their loan from 5.5% to 4.5%, and keep making the same payments, they would knock the mortgage out six years sooner.

4. Utilize pay raises.

Jack and Liz’s current house payment is 25% of their take home pay.   If they decided to continue to pay that same 25% as they receive future pay raises, they would be making incrementally bigger payments – a relatively pain free strategy.  Assuming these two get a 4% annual pay raise, this tactic would allow them to pay that 30 year mortgage off in slightly over 17 years.

 5. Do all four.

What if Jack and Liz decided to use all of our easy tips?  It would look something like this:

  • By changing their W-4 forms, their monthly payment would bump from $1135.61 to $1335.61.
  • By paying bi-weekly, their equivalent monthly payment would become $1446.91 ($1335.61 x 1.08333).
  • They will refinance to 4.5% with $1000 closing costs, and keep their payment the same ($1446.91).
  • They will increase their payment by 25% of whatever ensuing pay raises they receive. We will assume pay raises of 4% annually.

Put it all together, and our happy couple will have paid their 30 year mortgage off in … drum roll please … 12 years and 3 months.

Wasn’t that easy?

Readers:  Have you used any of these tips?  How did they work?  Do you have any other tips for paying your mortgage early?

This is a modified version of a post I wrote for ChristianPF.
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No Retirement Plan and I’m 48 Years Old http://personalfinancebythebook.com/no-retirement-plan-and-im-48-years-old/ http://personalfinancebythebook.com/no-retirement-plan-and-im-48-years-old/#comments Thu, 16 Jan 2014 10:33:55 +0000 http://personalfinancebythebook.com/?p=38

I'm Broke.
Creative Commons License photo credit: barbaranixon

Q: Joe, I am 48 years old and have not yet made any plans for my retirement.  I realize that I should have started years ago, so I am anxious to begin investing.  My wife and I have a good income ($7000 a month take home pay).  We also have $25,000 in credit card debt and owe another $40,000 on two cars.  Where do we start?

A: By recognizing the problem and asking for help, you have already started.  The three keys to your success are:

  1. Agreement with your wife,
  2. Willingness to make sacrifices, and
  3. Utilizing the power of focus.

Once these are in place, the following plan will put you on the path toward retirement:

Year One:  Focus on getting out of debt.

Your income is your greatest financial tool, but not if it is flying in all directions.  Your strategy is to create a positive cash flow now so you will have money to invest later.   One great way to do this is to sell your cars, buy beaters and use the money you were paying on the cars to get rid of your credit card debt.  Is selling your cars a radical thing?  Is driving a beater risky?    Perhaps, but being 48 years old with no retirement plans is risky and requires some radical measures.  Will your friends and family think you are weird?   Probably, but “normal” in America is broke, so embrace your weirdness with a smile.  With the added cash flow from your sold cars (I am guessing about $1,000 a month) added to the payments you are already making on your credit cards (probably another $1,000 a month), you should be able to pay off your credit cards in about a year.  Of course any extra cash flow you can squeeze from your budget will only accelerate the process.

Year Two:  Focus on your emergency fund.

You need a minimum of 3-6 months of expenses set aside for emergencies.  Your positive cash flow just from getting rid of your debt should be about $2,000 a month, so in another year you should have about $25,000 in that fund.  This is a very minimum, so don’t start investing until your emergency fund is in place.  The average family experiences a major disruptive event in their lives in any given ten year period, so you need to be ready for life to happen to you.  Keep your emergency fund apart from all other funds but liquid enough to easily access.  And agree with your wife exactly what constitutes an emergency.

Age 50 to age 65:  Focus on investing for retirement.

With no debt and a great emergency fund, you are now positioned to invest.  You can start by investing that $2,000 a month cash flow you created by getting out of debt, but make plans to also invest half of all future pay raises.   With 5% annual pay raises, your pay will double by age 65, meaning you would be investing $5,500 a month at that time.  It is therefore not out of reason to expect a retirement nest egg in the neighborhood of $1,000,00 by age 65.

If you keep doing what you have been doing, you will keep getting what you have been getting.  But sacrifice today, coupled with focus, will help you retire with dignity.

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