Stefu Investing

Guest Post: Scott Mathew - Securing a second mortgage loan post bankruptcy – What are my prospects?

2011-08-10T12:16:00.000-07:00

Scott Mathew operates several financial websites to help improve the knowledge and financial stability of the general public. Some of his work can be found at the following websites:

http://www.newwealthcreationblog.com

http://blog.wiserwallet.com

http://www.moneymindblog.com

So without further ado:

Securing a second mortgage loan post bankruptcy – What are my prospects?

Are you a struggling homeowner who has gone through a messy bankruptcy and is also stuck in a cycle of rent and release? If answered yes, you must be dealing with the issues of financing your home and dealing with the band of creditors and lenders who are questioning about your bankruptcy status on your credit report. Well, getting a mortgage loan after bankruptcy is certainly a tough process as it tanks your credit score to a large extent, but it’s not impossible. A second mortgage loan is a home equity loan that is lent on the basis of the equity that you’ve tapped in your home. This is a secured loan and this means that the lender will foreclose your home if you’re unable to repay the loan on time. Have a look at the steps that you must take if you want to secure a second mortgage loan post-bankruptcy.

1. Pull out copies of your credit report: The first step that you must take before applying for a home equity loan is to pull out a free copy of your credit report so that you get to know what the credit bureaus have to say about you and what your credit score right now is. You need to make sure that all the debts that are included in bankruptcy are displayed in your report or else this will lower your DTI (debt-to-income) ratio. Take the needed steps to remove any erroneous information on your credit report so that you can boost the score to some extent.

2. Gather as much paperwork as you can: You must gather all kinds of paperwork that will prove that you’ve paid off all your bills on time since you’ve filed bankruptcy. This paperwork may include your recent credit card statements, utility bill payments, auto loan statements and other such papers. Make sure that no document shows late payment as this will lessen the chance of getting a home equity loan.

3. Shop around different mortgage lenders: You need to contact multiple mortgage lenders and tell them about your present financial situation. You have to tell them that you’ve recently filed bankruptcy and hearing this some mortgage lenders will agree to work with you and some may not. The longer you wait after bankruptcy, the longer it may take to find out a worthy mortgage lender. If you had filed Chapter 7 bankruptcy, it will stay on your credit report for 10 years and a Chapter 13 will disappear by 7 years.

4. Determine the equity in your home: Go for an appraisal and determine the equity that you have in your home so that you’re sure about the exact amount that you’re going to borrow from your lender. You must also factor closing costs as they often come in with a home equity loan.

5. Fill out the paperwork and send them to your lender: The next thing that you need to do is to fill out the paperwork and send the last 3 month’s copies of your paychecks, the recent federal income tax return and the checking account statements in order to analyze your gross monthly income.

After you’re done with all the above mentioned steps, you have to sign the closing documents so that officially your mortgage lender approves the application. Make sure you repay the second mortgage loan on time to avoid any kind of future financial discrepancies.

Making the Most of your W-4

2011-07-20T10:08:00.000-07:00

A commonly misunderstood practice is the filling out of your W-4 for your employer. Some people would like to have more money withheld from their paycheck so they can get a "bigger" return at the end of the year. In actuality, the ideal situation is to take out exactly enough to cover your taxes and not a cent more. Having more money withheld is essentially giving the government an interest-free loan.

With that in mind, how do you know how many personal allowances to put on your W-4? I have looked into several calculators for this purpose, and I will share with you the one that I found most accurate. It takes some time to do, but is definitely worth it!

Visit the IRS website to calculate how many personal allowances to put on your W-4. CLICK HERE Then click the link at the bottom of the page that says "continue to withholding calculator."

Let me know how it goes for you!

9 Years Or 41?

2010-08-24T12:03:00.000-07:00

I came across this little fact today:

If you contribute the same amount of money into an account every month for 9 years, and then nothing more . . .

. . . you would have the same amount of money if you contributed nothing for 9 years and then the same amount of money for the next 41 years.

The power of compound interest!

So, start saving as soon as you can! Every month you wait can cost you money!

Financial Calculators

2010-08-16T10:58:00.001-07:00

I came across the best collection of financial calculators here.

It not only answers specific questions like "How soon could I pay off all of my debts," but it also gives you graphs and additional information. Have exploring that today as you plan your financial future!

Store Credit Cards

2010-08-05T12:48:00.000-07:00

You may have experienced this scenario:

You: Thanks for ringing up my items today!

Cashier: No problem! That’s why they pay me the big bucks.

You: Haha

Cashier: By the way, you can save 20% on your purchase today if you sign up for our store credit card!

You: Goodie goodie! I have been to 46 stores today and they ALL offered me this same thing! And I signed up for ALL of them! Now I have 46 credit cards-one for each of my favorite stores (including Van Gogh’s Ear)!

Well, maybe not this exact scenario.

How do you know which cards to get and which to avoid, or should you avoid them all together?

Do Your Research

I found the following website helpful in finding information about any store credit card you can imagine:

http://www.bessed.com/departmentstorecreditcards/

There you will find links to the “Top 46” department store cards. A brief description of each is given. Now to answer a specific question posed by everyone’s favorite Bolivian Blogger:

“Can you compare a couple different store credit cards? For instance, we recently got a Nordstrom credit card (because [Mr. “Everyone’s Favorite Bolivian Blogger”] buys clothes there) and we are considering getting a Costco Am Ex card but I am wondering what the benefits and costs are to signing up for cards like that. Also, can you look into Banana Republic cards because . . . a friend of mine is wondering if she made a mistake. Okay thanks stefuinvesting. Happy transactions!”

Thanks for your question!

Nordstrom (Ranked #13 on the above-mentioned website)

(Good)

– This card offers you 2 “reward points” for every dollar spent at Nordstrom.

- The Visa Signature and Visa Signature cards also offer 1 “reward point” for every dollar spent anywhere else.

- 2,000 “reward points” means a $20 Nordstrom gift card. (Depending on where you racked up your points, that is about a 2% return on your spending).

- No annual fee

(Bad)

- If you only have the regular Nordstrom Retail card, you get no additional points for using it outside of the Nordstrom stores. You’ll have to spend $1,000 at Nordstrom to get your $20 (oh, and you only have 3 years before those points expire).

- Minimum APR of 18.9%

Costco AMEX (Ranked #3)

(Good)

- 3% cash back for money spent on gasoline and restaurant purchases

- 2% cash back for money spent on “travel.”

- 1% cash back on everything else!

- No limit to the cash back earned

- Cash back is actually CASH!

- No late fee if balance is under $250.

- No annual fee

(Bad)

- Although there is no annual fee, you must pay for a Costco membership.

- 15.24% APR. (Plus a 0% APR for the first 6 months).

Banana Republic (Ranked #42)

(Good)

- 5 Reward points for every $1 spent at Banana Republic, Gap, Old Navy, Piperlime, and Athleta.

- 1 Reward point for every $1 spent everywhere else.

- 1,000 points gets you a $10 gift card. (If you got all those points at one of the BR stores, that’s a 5% return on your spending).

(Bad)

- Between 17% - 23% APR depending on the type of card (Visa vs. “Banana Republic Credit Card.”)

- Late fee is $15 even if you only have a $15 balance.

Hope that all helps.

In General

One more comment about getting credit cards. A lot of people aren’t sure how just having a credit card will affect their credit score (even if you never use it). Here’s a hint: when checking your credit, creditors look at all of your credit cards and pretend that they are completely maxed out to their limits. So even if all of your cards are empty, having too many can still hurt. Specifically, creditors don’t want your “debt-to-income” ratio to be over around 37%. Take all of your monthly debt obligations (including rent) and divide by your monthly income. To get the same number that the creditors will look at, make sure to estimate what your monthly credit card payments would be IF you were pretending that they were maxed out.

How to Pick a Stock: Lesson 1

2010-07-15T12:25:00.001-07:00

First Things First: Know your Risk Tolerance

How does your stomach handle the possibility of losing your entire investment?

This question is hard to really answer. The trouble is: quantifying risk can be tricky. I found this little quiz that gives you a general idea of your risk appetite:

http://moneycentral.msn.com/investor/calcs/n_riskq/main.asp

It will give you a score for your Risk Capacity and your Risk Tolerance.

Risk Capacity refers to the amount of risk you should be willing to take given your current situation in life.

Risk Tolerance refers to the amount of risk you are willing to take given your personality.

Go take the quiz and we’ll see you next time!

Getting Involved in Multi-level Marketing Companies

2010-07-12T14:58:00.000-07:00

A multi-level marketing company is a company which uses “distributors” or “salesmen” to find customers and other distributors which get put at the bottom of a chain or pyramid. Usually in companies like this, only those few at the very top are able to make much money in the company.

Some people equate multi-level marketing companies with pyramid schemes. That isn’t necessarily true. Here are two things to find out before becoming involved in any “multi-level” marketing company.

1- Does the company make at least 70% of its sales to people that are NOT going to become "distributors"?

2- If they have promised huge monetary returns to you, did they disclose the actual average earnings of ALL distributors as well as the percentage of distributors that HAVE earned the promised returns?

All multi-level marketing organizations are legally required to disclose this information.

If they don't make at least 70% of sales to non-distributors, then it is most assuredly a scam. And if they can't promise reasonable compensation for you (rule 2), then I wouldn't get involved if I were you.

Interest Never Dies!

2010-07-07T15:08:00.000-07:00

Literally, interest is unstoppable! It never needs to sleep or rest, it never takes a vacation, and it cannot be killed. It is literally the Sylar of the finance world!

But here is the good news:

Interest can be like Heroes’ Sylar, or it can be like one of Tolkein’s immortal Elves. (This is a reference towards “Bad” and “Good” in case you missed that).

The point:

Thems that understand interest, earns it. Thems that don’t, pays it.

Ben Franklin: The First Great Financial Planner?

2010-05-12T12:01:00.000-07:00

Here is a little wisdom from Ben Franklin's Poor Richard's Almanac:

"Beware of little Expences: a small Leak will sink a great Ship"

So today's thought is just that: A few dollars here and there and everywhere will make even the most wealthy submit to poverty.

Thought of the Day

2010-03-04T13:49:00.001-08:00

Never buy insurance for something you can easily afford to replace/pay for.

In other words, don't buy the $3 extended warranty for your $30 calculator, etc.

Wooters Beware!

2010-03-03T15:31:00.001-08:00

I love Woot. I really do. Maybe too much.

For those of you who have never wooted, Woot is a deals website. One deal, one day. They usually have electronics deals going on. But they also have divisions in "Kids," "Wine," "Shirt," and "Sellout." The deals are good, usually great. But what I'm about to say applies to all discounts, deals, coupons, or otherwise tempting purchase decisions:

Don't Over-do Woot!!!

A good idea is to only check Woot if you are already planning to buy something. Or perhaps during a gift-shopping season, like your Uncle Edna's birthday.

And of Course,

Don't ever spend money on something solely because you get a deal!

Taking Care of your Credit

2010-03-02T13:50:00.000-08:00

In modern society, one of your dearest financial friends is your credit. And if you don't want your friend to stab you in the back, you need to give it some attention.

Checking Your Credit Report (For Free)

You should be checking your credit report three times ever year. You can do this for free atwww.annualcreditreport.com. Don't worry, this is a legitimate site. It is the official way to obtain your free annual credit report. And since three different companies offer you a free annual credit report, you can check it three times ever year.

Once entering a little information about yourself, your credit report will be immediately viewable and will be available for 30 days.

http://super-affiliano.com/freecreditreportnocreditcardnow/images/report1.jpg

A Few Things To Look For

First, make sure that no accounts are listed that you didn't open. These accounts were opened by identity-stealing-house-efls!

Second, your credit report should list all inquiries to your credit score. Make sure that you can account for each of them. Everyone from bank lenders to landlords will run a credit check on you.

Third, your credit report should show you if you are late on a payment or if you have been sent to collections. It is possible that you were sent to collections and were not informed (those dirty Diana's! -- Michael Jackson reference . . .)

If you see anything on your credit report that shouldn't be there (as listed above) make sure to contact the appropriate credit bureaus and fraud alerts. Visit the Privacy Rights Clearinghouse for more detailed information.

Getting Your Credit Score

The free annual credit report does not give you a credit score. It is just a report of your accounts and account activity, etc. Most of the time, your credit score isn't free. After you have viewed your free credit report, it will offer you a credit score for a fee. Should you choose to pay the fee, you will receive a lot of helpful information about your credit score and why it is the way it is. My advice: if you are expecting to borrow a lot of money within the next year, you need to get your credit score with the accompanying explanations. You will need a while to fix any problems.

One More Thing: Junk Mail

Don't just throw away your junk mail. Sometimes this mail has important personal information. If you have a shredder, shred them. If you don't have a shredder, ask one of the ninja turtles to take care of it instead (-- Ninja Turtle reference). You can opt out of pre-approved credit card offers by calling this number: 1-888-5OPTOUT or 1-888-567-8688.

Bye bye!

Money For Your Small Business

2010-02-24T14:24:00.000-08:00

Question:

Where is the quickest place for me to get $35k to expand a small but profitable business? I'll pay up to 20% interest.

Answer:

This question reaches just a little beyond the area of personal finance, but I've been thinking about a helpful way to answer.

As far as a specific place to go, that I can't really tell you. But I have some ideas on getting money for your business regardless of the source from which you choose to get it.

As you are probably aware, you can either get money from lenders and pay them back plus interest, or you can get money from investors and give them part ownership in the company. Either way, a good set of financial statements goes a long way.

Financial Statements

Since your business is profitable, it would be a great idea to put together an income statement, balance sheet, and statement of cash flows for the past several months or years. Lenders and investors will be more likely to lend money to a company that can provide professional financial statements that prove the company's profitability. You should also consider putting together a set of pro forma financial statements (as in, statements that estimate future operations).

I'm sorry I can't be of more help at the moment. As always, I will continue researching this kind of topic to be of more assistance in the future. Click here for another article with more information.

Mortgage (and other) Interest

2010-02-23T14:16:00.000-08:00

My last post provided one way of looking at the costs of buying a home. This post will expand on the ideas brought up in the comments.

Deducting interest

The interest that you pay throughout the year on your mortgage can, under many circumstances, be deducted from your taxes at the end of the year. You must itemize your deductions to do this. The same thing is true for interest paid on student loans.

Does this mean you should maximize interest in order to get the deduction?

Certainly not! Financially speaking, you should never try to pay more today so you can get some back later. The fundamental principle in all financial planning is that one dollar today is always worth more than one dollar tomorrow. (This is true even in times of deflation because of the interest you could be earning on that dollar).

So when it comes to interest, or any other government "paybacks", remember:

ONE DOLLAR TODAY IS WORTH MORE THAN ONE DOLLAR TOMORROW

This means that you shouldn't pay more in interest over the life of a loan simply to get it back later. The same is true when you consider your income withholdings. Some people want the government to keep more money from each paycheck so they can get a bigger return at the end of the year. Remember:

ONE DOLLAR TODAY IS WORTH MORE THAN ONE DOLLAR TOMORROW

Other considerations

The $8,000 first-time home buyer tax credit has been extended through May 1 of this year (a binding contract must be entered into by May 1 and deal must close by July 1). You must live in the house for at least 3 years or else you will need to pay back the $8,000. But even if you have to pay it back later, remember:

ONE DOLLAR TODAY IS WORTH MORE THAN ONE DOLLAR TOMORROW

In addition, other costs should be considered when deciding to buy a home:

Home owner's insurance

Home owner's association fees

The cost of making your own repairs

The high cost of leaving the house on short notice

Happy day to you all.

Question: Should I Rent or Buy my Next Home?

2010-02-22T14:47:00.000-08:00

The decision to rent or buy is common.

If all else is equal (i.e., location, distance from work, size of the home, etc.), then your decision comes down to a simple comparison of costs. Seems easy enough. But what are all the costs? In the following post I will go over (1) the costs associated with renting, (2) the costs associated with buying, and (3) a conclusion.

The Cost of Renting

The most obvious cost of renting is that your money is not recoverable. That is, you pay your monthly rent to the owner and the owner never gives it back to you. You can add up this cost by taking your monthly rent amount times the time period you will live there. For example:

$800 X 48 months (4 years) = $38,400.

Seems like a lot. But we’ll discover later why it might not be.

Maintenance is usually done by the landlord or property management company, saving you some money. But the biggest pro of renting is that you can pick up and leave with very few consequences. If you leave in the middle of a lease agreement period you will probably lose your deposits. Other than that, you are free as a gazelle grazing the green grass of Guyana (are there gazelles in Guyana?).

The Cost of Buying

Most people assume that by buying a house they are building equity through their monthly payments. Equity is just a fancy word for “worth,” or, for our purposes, “money I can get back.” Let’s figure out what the first year of equity would be under one scenario:

Mortgage payment: $800.56

Average Interest Rate (right now): 4.5%

Years on the mortgage: 30

Loan amount: $158,000.00

Since you can consider the interest paid as irretrievable money, only the amount going toward the “principle” of the loan can be considered equity. Remember that interest is calculated and paid first before being applied to principle each month.

After the first year the total equity under this scenario is $2,332.

After four years the equity will be be $10,671.

You paid out $800.56 X 48 months = $38,427. This means you paid $27,755 of interest. The interest is of particular concern during the first few years of a mortgage.

This all points out that simply buying a house doesn’t mean that all the money you would have paid in rent will go toward building equity. The interest is money lost, unless you can recover it when selling the house.

When you sell your house after four years (assuming you are able to sell it at all), you will need to pay back the remaining mortgage of $147,328.

If you can sell it for exactly that price, then you are just as well off renting as buying.

If you can sell the house for what you paid ($158,000) then you will have lost only $27,755 (the amount you paid in interest).

This means that you need to sell it for at least $185,755 just to break even (the original price of $158,000 plus $27,255). Selling at $185,755 in this case recovers the amount you paid in interest.

Just for your information, selling your house at $185,755 represents a 17.6% gain in value of the home. Use www.zillow.com to evaluate the price fluctuations of specific homes in your area.

Conclusion

If the total cost of renting is lower than the total cost of buying, then you should rent.

If the total cost of renting is higher than the total cost of buying, then you should buy.

The trouble is, the fundamental part of this discussion is knowing how much you’ll be able to sell your house for at the end of four years. That would take either Merlin’s Beard or a sophisticated knowledge of the real estate market in your area.

Of course, another option exists: renting out your purchased home after you move out. In this way you can start offsetting the interest you paid during the four years you lived there.

To calculate the interest that you would be paying on a mortgage, use an amortization calculator which can be found here.

Hope this all helps!

A Call for Questions

2010-02-19T13:17:00.001-08:00

Hey everyone! I just wanted to put out a Call for Questions. Please leave a comment on this post with some questions about personal finance. It could be about anything from buying groceries to buying houses or whatever else you can think of. If I don't know the answer, I will find it for you!

Stefu

Emergency Fund Question

2010-01-27T15:21:00.000-08:00

QUESTION:
When saving for an emergency fund, do we include money we'd use to pay debts (car loan, student loan, etc.)? Or just money for necessities (rent, food, utilities, etc.)?

ANSWER:

You should definitely include at least the minimum amount that you would pay for all debts. One purpose of the emergency fund is to keep your financial lives in order during a crisis.

Hope this helps!

What's the Value of Your Stocks?

2010-01-07T11:31:00.000-08:00

I love buying, holding, and selling stocks! And that's no secret. I was recently asked a few questions regarding stock buy, hold, and sell decisions. I have permission to paraphrase that conversation. So here we go:

Question: Up until about a year ago my stock account purchased and sold several stocks. After purchasing a particular stock, the selling obviously stopped. I am curious as to the reasoning behind that. Was it because the economy tanked and the stock dropped in value? Was it because the stock was really stable (or at least more so than others) and it would ride out the economic storm? Was it because the dividend was really good so I should just let it stew for a while?

I am just curious as to the reasoning that goes behind stock trading.

I think I like the idea of having multiple stocks. Right now we have all the cash in just one. Would you recommend me adding money to the account so we can purchase more of that one stock or would you think it better to look at other stocks while that one simmers?

Just trying to pick your brain. Thanks again, friend.

Answer: Some people would look at the current value of a declining stock and become a scaffolding full of scofflaws! Indeed, risk tolerance is a big part of stock market investing and that's why it shouldn't bother you right now that your stock account isn't soaring through the rafters.

You asked about your current stock holding. I answer:

There are a few emotional things that you can do when a stock you are holding starts losing value. First, you can panic and sell off the stock before it loses any more value. Second, you can grudgingly go down with the ship saying to yourself: "This is MY stock choice and I'm sticking to it!" Finally, you can put your emotions to the side and think about it logically.

That's what I try to do when it comes to stock investing. Taking a logical view means understanding what the real value of the stock (company) is. Here are a few logical views on valuation:

First, you may have bought the stock in a bullish market (rising in value) with the sole ambition of having it swing up with the market. Second, you may have bought the stock because you thought that its value would increase over time because of the company's operations (not necessarily the market). Finally, you may have bought the stock because it pays regular and reliable dividends.

The latter is the case with your stock. If it had been a purchase relying on the market for its increase in value, then I probably would have sold it when things started sinking and before they got too low, because the VALUE of the stock changed in tandem with the market for me. In the other two scenarios listed it is smart to hold onto the company until either one of those two criteria stop being applicable (in other words, I would sell if I no longer thought that the company's operations were going to increase its value or if it lowered or suspended its cash dividends). Your stock looks like a dividend stock from the beginning. Since its first declared dividend in 2004 it has yet to decrease or omit any payments! In fact, in that time the dividend has increased by almost 16%!

In a nutshell, since the purchase of your stock, you have received equal dividend payments. You'd be lucky to find that kind of solidarity of return anywhere else in this economy aside from strong stocks in the market! The beauty is that you will keep getting that return whether the "value" of your stock goes up or down in the market. However, the moment the company is unable to sustain those payments, that would be a good time to sell off.

My advice would not be to put more into the one stock you have simply in the spirit of diversifying. If you wanted to start adding some more money into your investment, I would suggest getting at least $500 before purchasing another stock. I've found that stock purchases with less money than that are counter-productive because of the commission on each trade.

How to Save Money Eating Out

2010-01-05T11:16:00.000-08:00

Here's an idea to help you save money when you "eat out."

Have you seen the portion sizes that many restaurants are serving now!? Huge, right!? If you don't believe me, just look at this:

This here pizza is called "The Kraken" and is sold at Pirate Island. It is a full 24" in diameter. My suggestion is that you take advantage of these huge portion sizes in every way possible. That includes SHARING them. My wife and I recently decided to start sharing most things that we get when we eat out. Not only does it usually cut our bill in half, it may end up cutting the calories in half as well! For extra-large portions, take it home to eat for lunch and that will help cut down on your grocery bill too! And if half the meal doesn't quite fill your tummy, you can always find something else to eat when you get home from your outing.

More About Credit Cards: Questions Answered

2009-12-12T09:29:00.000-08:00

I was recently asked the following question:

"I was wondering if you could help me. I have been reading your blog and it makes a ton of sense, but I haven't found out an answer to one of my questions....What I was wondering is if I have a card at the credit limit of $1,500 and and interest rate of 22.90% how would I figure out how much I need to pay to drop the balance far enough that when my finance charge is figured in I don't go over limit and have to pay an extra $39. I can't make a large enough payment right now to just clear the issue, but I would like to drop the balance far enough that I am not getting charged more in fees than I am paying each month."

A fair question. And maybe some of you have had a similar conundrum. Here is my response:

If your card has a balance of $1,500 with a 22.90% interest rate then the monthly interest (finance charge) can be calculated like this:

First, divide the interest rate by 12 to get a monthly interest rate. The 22.90% is the annual interest rate. 22.90/12=1.9083% monthly rate.

Second, multiply the balance of the card by the monthly interest rate to get the monthly finance charge. $1,500*0.019083 (The 1.9083% needs to have the decimal moved back two places) = $28.63.

So in this case $28.63 is the finance charge. (This can also be calculated by taking $1,500*.2290 (annual rate) and then dividing the whole thing by 12 for the monthly interest).

What happens when you make your payment:
Payments are first applied to interest and then applied to principle. So, if you were to pay $30 on this card the principle would be reduced by $1.37 to $1,498.63 calculated like this:

Beginning balance = $1,500, Payment = $30, Interest = $28.63 (calculated above). $30 - $28.63 = $1.37 (this is the amount left after covering the interest and will be applied to reducing the principle or $1,500 - $1.37 = $1,498.63).

I hope that all makes sense! To summarize, $30 a month would be a safe payment on that card to avoid the "exceeding the limit" charge. $28.63 would be the minimum and making that payment would keep the card at $1,500 eternally.

Everybody out there feel free to ask me any of these types of questions. I love working with these kinds of things and I will always be sensitive to your situation. You can find me on facebook (Steven Smith) or email me at: stefuinvesting@gmail.com

Good luck out there and be smart with your Christmas shopping!

Has Christmas Shopping Maxed Out Your Credit Cards?

2009-12-11T07:25:00.000-08:00

'Tis the season to be spending! And sometimes that means money we don't have. Well, it's not too early to start figuring out how to pay down those debts! Here are some ideas:

Step 1: Estimate how much is available to pay down debts (monthly)

Answer these questions:

How much money do you make per month? (Example: $3,000)

How much of that is spent on necessary monthly expenses? ($800 rent, $100 Utilities, $100 other, etc)

How much is left so far? ($2,000)

How much is spent on minimum payments on your debts? ($300 car loan, $50 on all credit cards)

How much is left so far? ($1,650)

How much do you plan to spend on "other" "unnecessary" expenses? ($100 eating out, $50 gifts)

The amount left is available to either pay off debts or save. ($1,500)

Step 2: Decide which debt needs to be accelerated (paid off earlier)

For this step there are basically four schools of thought:

1- Pay off the smallest debt first and start snowballing the payments

2- Pay off the highest interest debt first

3- Pay off the debt that causes the highest dollar amount interest first

4- Pay off the debt with the highest minimum payment first

I'll provide a simple scenario for each:

You have 4 debts as follows:

$8,000 on a credit card (interest rate: 18%, minimum payment: $50)

$5,000 in student loans (interest rate: 6%, minimum payment: $0 --you are still in school)

$10,000 car loan (interest rate: 7%, minimum payment: $300)

$100,000 mortgage (interest rate: 5%, minimum payment: $800)

1- Under the first scenario you will want to pay off the student first and afterward snowball the payment you were making on it to the credit card.

2- Pay off the credit card first and then move on to the car loan.

3- Pay off the highest dollar amount of interest bearing loan first. This takes a little explanation: the credit card bears monthly interest of $120 calculated as follows: $8,000*(.18/12)=$120. Student loan interest is $25, car loan is $59, and mortgage is $417. So you would start paying off the mortgage faster because of it's higher interest (in dollars).

4- Here you will also pay off the mortgage faster to get rid of the higher minimum payment.

Step 3: Decide how much of your leftover (discretionary) income will be applied to your chosen debt.

This step is pretty simple. In the example I was using you would have $1,500 left for paying off debts or saving. Just decide how much you can put towards your chosen debt from step 2 and then do it!

So there you have it! The choice is yours! Good luck!

Getting Ready for a 2010 Budget

2009-12-10T12:24:00.001-08:00

It's the time of year to start thinking about your 2010 budget. So let's do that together right now. Again, the time to do something like this is the same day that you are motivated! There is no magical property about the beginning of a new year or month, so start today if you are motivated!

Here is what you'll need before you can start your 2010 budget:

*an estimate of your monthly income in 2010

*an estimate of big purchases/expenses that you'll be making

*an estimate of regular expenses (not debt related)

*an estimate of minimum payments on debts

and most importantly:

*some well-defined goals for your financial health

Here are some areas for which you may want to construct goals:

*debt reduction

*emergency fund...funding

*increasing income

*reducing expenses

*start a savings plan for a specific item or event (i.e. retirement, next year's Christmas)

Your goals should be very specific with dollar amounts or percentages and time frames.

I'd love to help with any ideas you may need for goal-setting and achieving. Just leave your thoughts in the comments to this post.

Remember that you can't manage what you don't measure!

Tax Planning Tuesday: Capital Gains

2009-10-27T14:47:00.001-07:00

With the tax year coming to a close it's time to start preparing for tax season! So I wanted to try posting a little tax tip once a week. Hopefully these will be helpful to you.

Capital Gains

I post a lot about stocks and other investments that yield capital gains. Here are a few tax facts about your realized capital gains:

-Short-term capital gains arise from selling a capital asset after holding for less than one year. They are taxed as ordinary income at the same rate as your regular income.

-Long-term capital gains arise from selling a capital asset after holding for more than one year. These are the best kind of gains since they are taxed at a much lower rate (between 0% - 15% depending on your tax bracket).

So if you are thinking of selling any of your assets soon, make sure you consider the type of capital gain (short or long-term) you will be incurring. Also, if you wanted to sell a stock on December 31st, you could wait until January 1st if you want to avoid declaring the income this year.

Capital Losses

Capital losses can be a good thing for your tax bill. If you incur a short-term loss you can offset that loss with your short-term gains and you won't be taxed. The same is true for long-term losses and gains. So if you've got an asset that you wouldn't mind ditching before the end of the year this might be an option for you.

*It is not generally advisable to sell off profitable assets just to get the offset.*

Effective Rates: Good and Evil

2009-10-22T11:20:00.000-07:00

Effective rates (of interest) describe the overall cost or gain that your annual interest rate/yield will give you over the life of the account.

The bad news about effective rates:

Let's say your home mortgage is $200,000 with an annual interest rate of 5%. Over a 30 year mortgage this would make your payments $1,073.64. If you've read my post about installment loans then you'll remember that most of this payment will be going toward interest for the first several years (over $833 the first payment). So the total cost of your home is going to include all of these interest payments and will give you your effective rate.

In this scenario:

Total of all principle payments: $200,000

Total interest paid: $186,512.

Total principle and interest: $386,512

That means that the effective rate that was paid is 93%! (In other words, almost twice as much was paid back than was borrowed).

This is bad news for bonzo! But consider this:

If you paid just an extra $100/month over the life of the mortgage:

Total interest saved: $37,069.62!

This would reduce the effective rate to: 75%.

Also, you would pay off the mortage 5 years early!

Addition $200/month:

Interest savings: $61,161.39

Effective Interest Rate: 63%

Early Payoff: 8 and 1/2 years!

As you can see, the more you put towards the payment, the lower the effective rate gets.

Here's the good news about effective rates:

For investments it works FOR you instead of AGAINST you. If you invested $1,000/month for 30 years in an index fund returning 10%/year, here are the numbers:

Your Cost: $360,000

Interest EARNED: $1,900,487.92

Account Balance: $2,260,487.92

Effective Rate: 528%

Addition $100/month:

Your Cost: $396,000
Additional Interest EARNED: $190,048.80
Account Balance: $2,486,536.72
Effective Rate: 528% (*Note that the effective rate for investments doesn't change unless you change the annual interest rate or the number of payments).

Additional $200/month

Your Cost: $432,000.00

Additional Interest EARNED: $380,097.59

Account Balance: $2,712,585.51

Effective Rate: 528%

The moral of the story? Keep effective rates in mind when you are making loan payment and investment decisions.

The OTHER moral of the story? Keep the Stefu Blog in mind when you are making loan payment and investment decisions.

Stefu Investing

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