Monday, April 29, 2013

Saving Thousands by Paying off Our Mortgage


I was recently reading an article on MSN Money about the possible demise of the mortgage tax break.  My first reaction to seeing the title though was disinterest.  Why?  Because I don’t currently have a mortgage.  However, after reconsidering for a moment, I found that I did care a little since our family might one day again carry a mortgage.  In the process though, I found that the train of though that the article set me upon drove home some of the multitude of benefits having paid off our mortgage provides.

Increased Savings
Without a mortgage, we’ve ditched a huge expense in our family budget.  This opens up a gap between expenses and earnings that can be used to increase our savings.  When we had the mortgage on our first home, we were making nearly half of each payment toward interest alone.  Our average monthly payment was right around $1,350, and that doesn’t include the amount added to this for property taxes and insurance, which pushed our payment closer to $1,750, and including repairs and maintenance was nearly $2,000 a month.  Now, we only have our $300 association fee and our taxes and insurance of about $250.  Even throwing an extra $50 a month onto this for additional repairs and maintenance, we’re still only at about a third of what we were paying for our previous mortgage and related home costs.  This makes for additional savings that can increase our spending options.

Tax Break Issues
We are no longer eligible for the mortgage interest tax deduction.  This works out in a way, since even if we had a mortgage on our current home, due to its size, it probably wouldn’t create enough in interest paid each year to make itemizing our deductions worthwhile as compared to taking the standard deduction.  Plus, I’ve often heard the mortgage interest deduction compared to spending a dollar to save twenty-five cents.  I’d rather not have to pay thousands of dollars in interest on a mortgage so I can take a tax deduction that saves us significantly less than we spent to get it. 

More Options
Now that we’re mortgage free, we can decide what to do with our excess money.  There isn’t a substantial amount of excess cash though because we’ve used part of our being mortgage free to work less and spend more time together as a family.  Not having those overly burdensome monthly mortgage payments has allowed my wife to change jobs to a role in which she has summers off.  While this has trimmed the gap between income and expenses significantly, we would rather trade our mortgage for more time together as a family.

Peace of Mind
While the financial benefits of not having a mortgage are huge, there is also the peace of mind that attaches itself to not having that monthly mortgage obligation hanging over us.  Knowing we don’t have to answer to a bank or financial institution -- whether or not we’re gainfully employed, or if one of us gets sick or whatever else might happen -- is a weight lifted from our shoulders.  Not having to worry about being underwater or being foreclosed upon is a great relief and is yet another advantage of being mortgage free.


 

Sources:

Lewis, Marilyn. MSN Money. “Is the mortgage tax break in danger?”  February 21, 2013. http://money.msn.com/home-loans/article.aspx?post=df063943-6501-4fcb-8fe0-81fda0dfe450. February 23, 2013.

Wednesday, April 24, 2013

Cool Kid Karting with Some Big Names in Racing

This one's for my mom!

Sunday, April 21, 2013

How to Stay out of Debt

According to a recent NBC News article, younger American seems to be taking on the attitude of “No house, no car, less debt”.  In many instances, it appears that the recent recession and economic hardships that have accompanied it have either forced younger Americans into this situation or taught them enough to know not to overextend themselves financially.

Personally, even though my wife and I fit the 35 and under age category, our situations is not one of “no house, no car, less debt,” but one of “house, car, no debt”.  While it wasn’t an easy path to get to this point, here is how we did it.

House
The housing market collapse hit us hard.  We had just purchased our first home in the middle of 2008 and we thought that we had avoided the majority of the housing market’s demise. 

We were wrong.

While home values in our area dropped by about 10 percent before leveling off, after a short respite they continued their long journey down to the bottom of the market, dropping a total of almost 40 percent and actually still falling in the area of Chicagoland in which we purchased. 

We lost nearly $100,000 on this home when we sold in 2011, but we found a way to make the situation a positive one.  Rather than just giving up, we took the little remaining equity we had from our home, sold a lot of our unneeded possessions, and downsized significantly.  We purchased a much smaller home -- a two bedroom one bath condo -- that was about half the price of our first home.  We bought the home outright so that we could avoid the costs and constraints of a mortgage, as well as the associated interest.  While our first home experience was far from a perfect one, we did our best to make the best of a bad situation.

Car
While we are currently a one-vehicle family; I guess the takeaway from that is that we at least have a decently working vehicle.  According to the NBC News article:

“Younger Americans are also putting off borrowing to make other big-ticket purchases, including cars. In 2007, when credit was easy to get, nearly three out of four under-25 households had a car, the Pew researchers reported. By 2011, that number had dropped to two-thirds. Despite a recent surge in car buying, and a pickup in auto lending to subprime borrowers, both the number of younger households and their average loan balances have fallen since 2007.”

We have avoided taking on a vehicle loan for several reasons.  First off, we downsized to our one-vehicle situation in order to cut costs on things like parking, insurance, maintenance, and upkeep.  Secondly, we’ve looked at newer used vehicles, and most of what we’ve seeing out there isn’t much better than what we have now, and making such a purchase could end up being costlier than just maintaining our current vehicle. 

Therefore, since we’re not willing to buy new, and the used inventory isn’t on par with what we’d like, we’re willing to have to put $1,000 or so into vehicle maintenance each year since it’s still cheaper than buying a used vehicle or making payments on a new one.

No Debt
The NBC News article state that, “Americans under 35 are carrying substantially less debt than they were before the 2008 meltdown, according to an analysis released Thursday by the Pew Research Center.”

We’re not only carrying less debt, we’re carrying no debt at all.  The entirety of our debt in 2008 came from our home mortgage, and the elimination of the debt when we downsized in order to own outright allowed us to become debt free and stay that way.  With no mortgage payment, we can ensure payment of bills with greater reliability since we have more money to put toward these areas.

Therefore, while we’re similar to the younger American norm after the 2008 financial crisis and recession, we’re trying to take it a step further and push ourselves even harder to stay financially stable and responsible members of the younger generation.

 

Sources:

Schoen, John W. NBCNews.com. “Younger Americans: No house, no car, less debt”. February 22, 2013. http://www.nbcnews.com/business/economywatch/younger-americans-no-house-no-car-less-debt-1C8473187. February 23, 2013.

Tuesday, April 16, 2013

Is Our Country Becoming a Federal Truck System?

As the power of the federal government continues to grow, and their mandates push further into the facets of our everyday lives, it makes me wonder, is our country becoming a federal truck system?

A “truck system” -- for those not familiar with the term -- is a barter-type situation in which an employer pays employees in “scrip” or a form of substitute currency rather than regular money.  The scrip might only be useable in turn to make purchases to or through the issuer.  The whole system is a kind of cyclical trap, where prices can be inflated to keep employees poor or indebted to the employer, forcing them to continue to work there.  In essence, it’s kind of a voluntary economic slavery of sorts.

 The truck system was referenced, and explained concisely in verse in the Merle Travis song, “Sixteen Tons”, a song later popularized by Tennessee Ernie Ford, which includes lyrics like:

“You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store”

While the government isn’t forcing us to buy products and services solely from them, sadly, I’ve almost feel like I “owe my soul” to the federal government as well as our local government due to their increasing interference -- or assistance, depending upon one’s outlook -- in certain areas of our financial lives.  And from what I’ve discovered, our situation isn’t as bad as it is for some others.

Health Care
According to a recent MSN Money article, “The nation's big health insurers say they expect premiums — or the cost for insurance coverage — to rise from 20 to 100 percent for millions of people due to changes that will occur when key provisions of the Affordable Care Act roll out in January 2014.”

Frankly, this is a terrifying revelation for our family.  Year-over-year, our insurance premiums already jumped nearly 25 percent – rising from $120 a week (for our family of four) to $150 a week.  If it increases again next year by another 20 to 100 percent, we’re looking at a premium of anywhere from $180 to $300 a week or between $9,300 and $15,600 a year.

While this sounds ridiculously expensive, both my and wife and mother-in-law -- both of whom work in the public school system here in the Chicagoland area -- know of co-workers who are working solely to provide the family health insurance and whose paychecks are negated by their deductions for insurance premiums.

Housing
Housing is yet another aspect in which many of us – knowingly or not – are in a way indebted to the federal government.  According to a recent post on Bloomberg.com:

"Central to the effort are Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backed nearly 97 percent of U.S. mortgages in 2009.
 
Government involvement has more than doubled since 2005, when the three companies accounted for about 45 percent of a $2.2 trillion market, according to Inside Mortgage Finance. Since Fannie Mae and Freddie Mac were seized by the government in 2008 after losses on mortgage investments pushed them to the brink of collapse, taxpayers have injected almost $150 billion to keep them solvent. The Treasury has promised unlimited aid."

Thankfully, our family has avoided being indebted to such government controlled financial institutions by selling our previous home after the housing bubble burst (losing nearly $100,000 in the process) and downsizing to a small condominium that we could afford to buy in cash.  Before this though, we were paying over $16,000 a year toward the mortgage on our home, nearly half of which was in interest on the loan itself. 

Still, even now and without a mortgage, we pay nearly $3,000 in property tax on this two bedroom one bathroom space.  And we pay this amount each and every year to the government even though we own our home outright, something that I understand yet still find rather strange.

Taxes
Similar to the housing and health care situations, our income and sales taxes are hurting our chances of being able to put anything extra away for ourselves when it comes to savings.  With the payroll tax going up it’s another 2 percent in income that we no longer have available.  Factor in a jump of 66 percent in state income tax when Illinois recently raised their rate from 3 to 5 percent, and we’re up to 4 percent of our income that has evaporated, going to federal and state governments.  Add in another 2.25 percent for any food essentials we purchase or 8 percent for non-essential items and our income is deteriorated even further.  Add in gasoline taxes (according to an api.org report, Illinois has the sixth highest such taxes in the country), excise taxes, amusement taxes (yes, we are even taxed when just trying to enjoy life), entertainment venue taxes on sporting event tickets, vehicle taxes, utility bill taxes, and all the rest, and I’m beginning to feel like I indeed owe my soul to the “government” store.

 
Sources:
http://www.cowboylyrics.com/lyrics/classic-country/sixteen-tons---tennessee-ernie-ford-14930.html



Tuesday, April 9, 2013

Questions I Consider Before Pursuing New Income Options

As a freelancer or “solopreneur” if you like, I’m continuously looking for and open to new income options.  However, with the Internet as an income earning environment and a business world that’s constantly changing, exploring new options can be costly in time, effort, as well as monetarily.  This means that I have to explore and make my decisions wisely and with minimal costs.  Therefore, here are some of the questions I ask myself before ever moving forward with developing a new income opportunity.

Is it Sustainable?
While some business decisions are short-term in nature, for the most part, I want business and income streams that I’m going to be able to grow over time into sustainable income.  Whether this comes by way of relationship building with clients in the form of discounts and free product, or through investments that can grow and continue to earn without me, looking for income sources that I will be able to count on for the foreseeable future can help me avoid being left without cashflow over the long term. 

Can it Become Passive Income?
The more income I can earn without doing much to earn it, the more time I can devote to exploring and building other income earning revenue streams.  This is why I love it when I can find somewhat passive income.  Whether it’s residuals from the articles I’ve written, interest from money in the bank, or dividends from stocks and bonds, income streams that can be set in place to work on their own are great ways to get my money working for me rather than vice versa.

Will the Work/Risk be Worth the Rewards?
It’s not always that easy to tell whether the risk involved in creating a new income stream will be worth the rewards.  And risk doesn’t always have to equate directly to my money and finances.  There can also be the risk of wasted time and effort, and sometimes that can be just as costly as directly losing money on an investment or building an income stream.  However, there are often things that I can do to evaluate what the risk versus the reward of a particular income stream is before moving forward with putting time, effort, and money into creating that stream.

What are Others Saying?
One of the main ways that I evaluate risk versus reward is by seeing what others are saying if in fact it is an income stream that has been tried before.  While I don’t often base my decisions completely on what others are saying or doing, they can provide certain valuable feedback regarding their experiences with a particular income stream.  Noting their successes and failures, the time it took them to develop the income stream into any substantial revenue producing item, as well as the amounts they were able to make and similar information can help me make a more informed decision before moving forward with my new income earning option.

Wednesday, April 3, 2013

Quote of the Day

I found this on a Forbes.com article today,

"Ben Franklin is reported to have said: 'When the people find they can vote themselves money, that will herald the end of the republic.'"

With 47 million people on food stamps and 14 million on disability, it makes you wonder if he had a time machine...or at least a crystal ball.

“Why Marrieds Tend to Be Richer”: I’ll Tell You Why

I have to say that when I recently saw a CNBC article entitled “Why Marrieds Tend to Be Richer: It’s Complicated” I can’t exactly say I thought the answer was really all that complicated.  As a married person myself, I can’t say I’m exactly “rich”; however, I’d definitely agree that it’s easier to save and stay out of debt with a financial partner at my side.  While I know that for many couples this isn’t the case, for our situation it is, and I’ll explain why.

Staying Married
Getting divorced can be expensive.  Having to split assets down the middle can cut the net worth of each couple in half.  And having to pay alimony or child support can get expensive too.

Coming from a broken home myself, I know the stress -- both mentally and monetarily -- that can come with such a situation.  Thankfully, the possibility of such results is not what holds my own marriage together.  Having a clearly defined relationship -- and defined expectations from that relationship -- as well as communicating about wants and needs regarding our finances before getting married let both sides know what we were getting into and has helped keep our relationship strong over a variety of financial challenges.

Combined Income and Experience
So as a married couple, we have the strength of a combined income, which many single people miss out upon.  With both of us being able to handle income earning jobs, and with my being able to work from home, it puts us in a favorable financial situation compared to some single people.  Not only do we increase our revenue compared to if we were each on our own, but since I work from home, I can handle the childcare aspects of our family situation, shaving tens of thousands of dollars off the expenses we might incur otherwise for such supervision.

From being able to make decisions as to whether we’ll take our own individual Social Security payouts in retirement or base our decision off the benefits of the higher wage earner, each of us having retirement accounts, and having increased jobs security and health insurance security through our partnership, the dual job, dual income situation serves us well in a number of ways.

The experiences of the two sides, as well as the strengths of weaknesses of each, can come into play in a marriage situation as well.  In our case, I have the much stronger financial education and have therefore strengthened my wife’s understanding of personal finance as well.  However, she’s better at handling certain aspects of our personal finances in which I’m not as adept -- like health insurance and medical costs.  Therefore, we tend to combine our collective knowledge regarding money and finances to act together as a team, being stronger than if we were each on our own.

Halved Expenses
While having two incomes is nice, we also enjoy being able to cut expenses through our marriage.  Sharing the costs of a vehicle, a home, utilities, food, entertainment, insurance, etc. pays off big time.  When we go on vacation, we might pay for things like transportation, a hotel room, food, entertainment, and similar items whether we were traveling individually or together.  While the prices might be the same as a couple or individually, such costs can be shared between us, in effect acting to cut many of them in half as compared to what they might be were we paying for them on our own.

Dual Families
The dual family aspect of being married might be a somewhat ignored reason as to why married couples could be richer.  With each couple possibly bringing its own family to the relationship, there is any number of advantages to the situation.  From the financial background and education that has been imparted by the families, to vacation location options through various family member’s homes or vacation homes, educational assistance in paying for college, wedding gifts, inheritances, and just general life lessons and support from other family members, having two families rather than just one can certainly help to bolster the financial support a married couple receives.