Get Busy Living or Get Busy Dying

A weird title for a financial blog post. I know.  However, I just finished watching "Shawshank Redemption" and at the end of the movie when Morgan Freeman says “Get busy living, or get busy dying.” strikes a chord with me.  Get busy living or get busy dying.  Put into personal finance terms, get busy fixing your financial situation or get used to being broke and all that goes with it (e.g. – frustration, worry, anxiety).  

It doesn’t matter if you’re just starting out, retired or somewhere in between.  You should be in control of your financial life regardless of age.  It’s never too early and it’s never too late!  If you’re younger, you’ll have an easier time setting good habits and sticking to them.  The older you are the harder it may be; lifestyle, expectations, and old habits could make it difficult for you to make those difficult decisions you’ll be facing. 

The hard choices you’ll face and the decisions you’ll make will ultimately decide your financial future.  Do you have too much car? Will you trade down? Do you have too much house/apartment?  Will you downsize? Do you live like you make more money than you do? Will you cut your lifestyle?  These are the questions you’ll have to ask yourself and the hard choices that will undoubtedly follow.  Will you make that tough decision that will relieve the anxiety causing your sleepless nights?  Will you make that tough decision that will remove the worry from your life?  Will you make that tough decision that ultimately gives you control and not frustration?  You can do this, it is not complicated!  It’s hard but it’s not complicated.

Getting your finances in order is not rocket science!  It takes time but it’s not rocket science!  Take a look through the posts on this blog.  Visit other blogs like GetRichSlowly.org. Read “The Total Money Makeover” by Dave Ramsey.  Feed yourself the information that you’ll need to formulate a plan.  Then execute that plan!  Anyone can make a plan; it takes guts to step out of your comfort zone and execute that plan.  

If you need a reason, it’s the perfect time of year to call it a New Year’s resolution!  I don’t care what you call it; get busy doing something about it! Make the choice!  Get busy living or get busy dying...

Update:

So a few months ago I mentioned that I was gonna take a shot at the market.  Well, I did and I did pretty well.  I made about just over 20% by not fighting the fed.  It was a forgone conclusion that the Fed was going to initiate another QE so I jumped in a few gold stocks and rode them up and jumped out when I had made enough.  I’m on the sidelines now until after the fiscal cliff gets figured out.

Also, our mold is gone!  The basement and attic are clean!  The kitchen has been installed!  The work is done, except for some painting.  Now the fun part, paying off the debt!  We’re not worried because we have a plan.  Thanks to those who dropped notes of support!  They were very much appreciated!

Is It Ever OK To Go Into Debt?

Is it ever OK to go into debt?  I know what I'm about to write is contrary to everything I’ve pretty much ever posted but, as much as it pains me to say, we'll be taking on a substantial amount of debt soon.  I’ve realized that there are emergencies and then there are EMERGENCIES!  We recently learned that we have mold in our home (fortunately, non-toxic mold).  It’s in our basement, our attic and in our kitchen cabinets. While every home has some mold, our house has levels that require remediation.  Do we have enough money in our emergency fund to handle mold remediation and to replace the cabinets in our kitchen?  NOPE!  So what are we supposed to do?  

Fortunately, we recently refinanced our home so our bank had a recent appraisal and all of the documentation needed for us to take out a Home Equity Line of Credit.  Because of our low debt levels and great credit scores, our bank was more than willing to lend us the money, and quickly.   5 business days after applying for the loan we were signing the paper work.  The home equity line will allow us to remediate the mold and repair the attic so the mold will not grow back.

So now that the mold issue was “paid for” how were we to pay for a new kitchen?  We shopped around for the right kitchen AND the right financing options.  We asked friends and family about their experiences with certain companies and we decided that Lowes was the best option for us.  We would be able to have a new kitchen installed and finance it at a low rate.  We were even able to save close to 20% because we used their financing options.  Little do they know we’ll have this paid off quickly!  Sometime after Thanksgiving, we’ll have a brand new kitchen and our house will be mold free. 

Wow, we’re going to be in debt up to our eyeballs!  How the heck are we supposed get back to being debt free?  Simple, with a plan!  Andrea and I sat down and looked at our budget and started cutting.  We pretty much cut anything that wasn’t necessary.  For example, our whole family took Tae Kwon Do twice a week.  Now, only the boys will take Tae Kwon Do and only once a week at that (we didn’t want to pull them completely out because we feel the martial arts are very important for our kids).  We determined our monthly payments, the exact amount we would have payoff and figured we could pay off this mountain of debt we’ve just gotten ourselves into as pretty quickly, relatively speaking.  In a year and a half, we plan to be exactly where we were before we found out we had mold.  Considering the obstacle in front of us, not too bad.

This has been an overwhelming experience from the beginning when you consider the possible health ramification and our financial philosophy.  We have a nice chunk of change in the bank but not nearly enough to pay for all of the work we need to have done.  After taking it all in, and it took some time, I’ve come to the conclusion that this is a blessing in disguise.  How so you ask?   Well, we got lax; we became comfortable; we became unwilling to cut because, well, we could afford it.  We didn’t have any debt other than the house, so why not take Tae Kwon Do?  Why not re-arrange the house and buy a new TV?  Why not inflate the budget categories a little?  We lost focus!  This situation has helped us refocus our financial life and we’ll be better off, in the long run, for it!  It’s helped me to learn to be flexible.  Yes, it’s good to be debt free, but as I said at the beginning, there are emergencies and then there are EMERGENCIES!  I had to learn to not take it as a personal failure; that I let my family down.  It’s been overwhelming, but we’ll come out stronger on the other side!

So, is it ever ok to go into debt?  Right now, we have no choice. 

College Savings

So you’re saving 15% of your annual income towards retirement.  Now what?  If you have children, now is the time to start saving for their college education.  There are two main options to consider; the 529 and the Coverdell Education Savings Account.  Which one is right for you?  Below is a brief description of each plan along with the major pros and cons.

The Coverdell ESA

According to the IRS,”A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the designated beneficiary of the account.”  That is a long winded way of saying it’s a college savings account. It is named after Senator Paul Coverdell (now deceased) who sponsored the legislation creating the Education Savings Account.

Coverdell ESA Pros and Cons:

Pros:

• The earnings in the account grow tax-free and withdrawals are always tax free as long as they are used for eligible education expenses.
• Available investments in ESA are the same as those for an IRA (almost anything) making the ESA more flexible than a 529.
• The money is not considered an asset of the child when applying for financial aid.
• A new beneficiary can be designated without incurring any tax penalty as long it’s transferred to an eligible family member(which is almost anyone remotely related to you.  Check out the IRS website here for the list).

        Cons:

• Contributions are limited to $2,000 a year for each child. 
• The beneficiary will eventually take control of the money at the age of the majority (18 or 21 depending on the state you live in). 
• Income limits prevent single tax filers earning more than $110,000 and married tax filers earning more than $220,000 from contributing to a Coverdell ESA.  However, a nice little loophole exists.  You can gift the $2,000 to your child who can then open an ESA for themselves.
• The funds must be used by the time the beneficiary is 30 to any tax penalties.

The 529

According to the IRS, a 529 plan is “a plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.” 

There are two types of 529 plans:

                 

Prepaid Tuition:

According to the SEC, “Pre-paid tuition plans generally allow college savers to purchase units or credits at participating college and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements.” Since there is no guarantee where a child will go to school, this strategy can be risky. Also, the fees of these plans can be very high since someone (i.e. – you) has to pay for the risk of rising tuition costs.

                 

Savings Plan:

Simply put, the 529 Savings plan is an investment  account for the purpose of paying eligible expenses.

529 Pros and Cons:

Pros:

• Like the Coverdell ESA, the earnings in the account grow tax-free and withdrawals are always tax free as long as they are used for eligible education expenses.
• Also like the Coverdell ESA, a new beneficiary can be designated without incurring any tax penalty as long it’s transferred to an eligible family member.
• Contribution limits are loosely defined by the IRS in the following way; “Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary.”  This essentially means you can contribute as much as you like but be mindful of the $13,000 gifting rule.
• At no time does control transfer to the beneficiary as it does with in ESA. The account owner maintains control of the money. 
• There are no income restrictions; everyone is eligible to take advantage of a 529 plan.
• The money is not considered an asset of the child when applying for financial aid.
• Most state 529 plans do not have residency requirements.  You are free to shop for the 529 that best suits you. 

Cons:

• The money must be used for college, university, vocational school, or other postsecondary educational institution or you will pay ordinary income tax as well as a 10% tax on the earnings.
• 529 fees can be high.  Checking the fees should definitely be on your checklist prior to choosing a plan.
• Investment options can be limited as compared to the Coverdell ESA and you are only able to move investments once every 12 months.

We are saving for our children’s college educations by saving $2,000 into a Coverdell ESA and then anything above that into a 529.  I like the ability to invest in whatever I choose as great benefit of the ESA while the lack of contribution limits of the 529 allow for college savings above and beyond $2,000.  How are you saving for college?

Extended Warranty? Bad Idea!

I recommend that you never purchase an extended warranty.  They could be one of the biggest rip offs in the retail industry!  The probability you’ll ever use the warranty is pretty small.  They’re also really expensive so I create my own warranty by saving into a sinking fund for repairs and replacements.

The odds a product you purchase an extended warranty for will break within the warranty period are pretty low.   According to Josh Clark at HowStuffWorks.com, “Statistically speaking, a product is likeliest to break either early on, within the free manufacturer's warranty, or years down the road, after an extended warranty has expired.”  Consumer reports even states that “Products seldom break within the extended-warranty window.”

Extended warranties are also very expensive!  Approximately 80% of the cost of the extended warranty is commission paid back to the seller of the warranty. Often times, the cost of the repair is either less than or equal to the cost of the extended itself and many repairs are covered by the manufacturer’s warranty!  If you do use credit cards, some of them automatically double the manufacturer’s warranty.  Purchase the item on the credit card (then pay it off right away, of course) and you have peace of mind for a couple of years. 

Instead of buying an extended warranty, create a sinking fund!  A sinking fund is a way to save now for something you know you’re going to have to replace.  So when it’s time to replace that item, you have the money to pay cash!  Let’s take a TV for example.  If I’m offered a 2 year extended warranty on a new TV for $100, what I’ll do is save that $100 every year, or $8 a month, into a sinking fund so that in 4-5 years, if the TV breaks or needs to be replaced, I can pay for it, no worries, in cash without having purchased the extended warranty. 

So, I hope the next time you are offered an extended warranty, you say no, no matter how hard the sell! You probably won't use the warranty, and it is way too expensive.  You can create your own warranty plan by saving a few extra dollars a month into a sinking fund!

Schmorgesborg

It’s been a while since I last posted.  It’s been a wild and crazy beginning to our summer!  We’ve had weddings, parties, emergency room visits (everyone is fine), and a crazy work schedule.  Over the past few weeks I’ve had a few thoughts I’ve wanted to write about but they’re not incredibly long topics.  So, I thought I might throw a few of them together here. 

The Change Bin

We have one of those Beefeater Gin change bin piggy bank type things that we continually throw change in.  It’s a nice little monetary surprise when you decide to sit down and count it.  I actually count the change when we’re ready because I can’t stand giving 9.8% to Coinstar.  Well, I’ll let Coinstar count the pennies; they can have 9.8% of them.  If your bank has a change counter they may let you use it for free.  Anyway, that change really adds up.  If you really want to let the money pile up in there, throw in a random dollar bill every now and then!

Rounding up

When I budget, I round up.  What do I mean by that?  If, my transportation monthly budget is $367, I might actually budget $370 or $375.  Over the course of the year over many budgeting categories, I’ve saved an extra few hundred dollars without realizing it!

Working out

Andrea and I work out.  We don’t belong to a gym because I’ve found it to be a money drain.  However, I’ve invested in adjustable weights, a pair of good running shoes and some home workout videos.  With a little discipline, working out at home saves us both time and money.  I don’t have to drive to a gym, get changed, get my workout in, change back into street clothes and drive home.  Before the kids get up or after they go to bed, we either go for a run, bang out a p90x workout or get in a quick 10 minute trainer workout.  It works for us!  Ya know...saving time and money as well as staying in shape!

Investing

Over the course of the last year or so I’ve been reading about, listening to podcasts and researching the topic of investing; so much so that I’m trying my hand at it outside of mutual funds.  I’ve actually done pretty well so far and I’ll keep you posted as to how I’m doing from time to time.  However, the market is not for everyone so I don’t suggest entering into this form of investing lightly and it should not be done before you are out of debt, have an emergency fund and saving for retirement. 

The Wagon

Everyone falls off the proverbial wagon!  The trick is getting back on.  For example, I wrote about how we were hit with car trouble and medical expenses in an earlier post.   Shit happens!  That’s why we have an emergency fund.  If you have to dip into the emergency fund, replenish it as quickly as possible and get back to the budget!  Don’t use the fact that you had to dip into the emergency fund as a reason to buy an “emergency” wardrobe!

Time To Refinance The Mortgage?

Have you checked out mortgage rates lately?  Wells Fargo has a 30 year fixed rate mortgage at 3.75% and a 15 year fixed rate mortgage at 2.875%!  2.875%!!!!  Are you kidding me?  I’m not saying you should run out and refinance right now but it is worth thinking about.  There are some factors you should consider first.  How long have you had your current mortgage?  How long do you plan to stay in the house?  How long will it take you to recoup the money you spend to refinance the mortgage?  Do you have a prepayment penalty?

There used to be a rule of thumb that said you shouldn’t refinance your home unless you could reduce the interest rate by at least 2%.  Then the rule of thumb changed to a reduction of at least 1%.  Now, the rule of thumb is you should consider refinancing if you will you stay in your home longer than it will take for you to recoup the cost of refinancing.  

If you took out a mortgage in May of 2006 for $200,000 at a rate of 5.5% you would owe $180,766.53 as of July 1^st, 2012.  If you were to refinance the balance of that mortgage today at 3.75% for 30 years your payment would go down $280 (from $1135 to $855).  It would take you approximately 14 months to pay off that refinance. 

Even better, if you took that same mortgage originally taken out in 2006 and refinanced it to a 15 year at 2.875%, your payment would go up $129, up to $1,264.  However, in those 14 months you would have paid $6,016 in interest as opposed to the $12,298!!!  That’s a savings of $6,282, making this refinance well worth the time, effort and initial cost! 

It doesn’t always make sense to refinance.  It may not make sense to refinance if:

• You plan to move within the next few years; a monthly savings of $100 at a cost of $4500 to refinance would not be justified. 

• You are on the backside of your current mortgage.  The majority of the interest paid on your mortgage is paid on the front end.

• You current mortgage has a prepayment penalty. Most prepayment penalties hit you with a penalty of 80% of six months interest (ouch!).  However, most expire after 5 years so check your documents!!

It may make sense to refinance if:

• You can reduce the term of your loan without increasing your payment beyond your means.  For example, you refinance to a 15 year mortgage from a mortgage with 23 years left.

• You could reduce your monthly payment substantially!

• If you are in an Adjustable Rate Mortgage (in that case, stop reading and call your bank to refinance to a fixed rate mortgage right now!)

You might consider going to an extra payment calculator like the one at http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx to determine if you could save yourself interest AND the cost of refinancing by just adding extra money to your payment.  A Do It Yourself refinance without the hassle of refinancing!

I’ve taken the liberty of running some numbers to quickly illustrate how much interest you could save by refinancing: 

• Interest paid on 30 year $200,000 mortgage at 6.00% is $231,676

• Interest paid on 30 year $200,000 mortgage at 5.00% is $186,511

• Interest paid on 30 year $200,000 mortgage at 3.75% is $133,443 

• Interest paid on a 15 year $200,000 mortgage at 2.875% is $46,450

With interest rates as low as they may ever get, take an hour or so to run some numbers.  It may save you tens of thousands of, even hundreds of thousands of dollars!