November 27, 2007
photo by Eric Strauss
In thinking over what prompted me to start this blog, it became clear that learning from mistakes has got to be the biggest way people learn to get better at something. So, with that thought in mind, I’ve decided to dedicate Tuesdays to relay some money mistakes I’ve made and what I’ve learned from them. And more importantly, how not to repeat them. I’ll include my mistakes(oh, I’ve got a bunch), and maybe some mistakes by others that provide valuable lessons for all of us. Of course, I’m open to any of your stories on how you messed up, so please comment!
And I’m going to apply the term “Stupid Tax Tuesday” in honor of the “stupid tax” phrase coined by Dave Ramsey, someone who has given me a bunch of motivation. I hope I’m not infringing on any copyrights by using the term, if so somebody please let me know!
Back in the day when I thought I was a financial genius, I convinced myself to pay off my car loan by using my Home Equity Line of Credit. I reasoned that:
- I would have 1 less payment to make every month (the debt-consolidation tv commercials ringing in my ears – “1 easy payment”)
- The interest I pay every month on the car loan would now become tax-deductible. Yipee! More interest to itemize!
- I’d gain a great feeling of accomplishment by technically having “paid off” my car and would have the deed in my hands.
Technically, I was right on these points. But what I didn’t factor in was my ever-present lack of self control. Since the payment on my HELOC did not increase by the same amount as my old car payment, I didn’t feel the need to pay any more than the minimum on my HELOC.
The result was that it took 1.5 years longer to pay off my car that it would have if I had kept the original loan intact. I never actually figured out if the added interest deduction helped increase my tax deduction, but I doubt it, since I was making more money and jumped up to the next tax bracket.
Another reason this was a dumb move was that I exchanged non-mortgage debt for mortgage debt. It was unknown to me at the time, but this is a cardinal rule of personal finance: Unless you are deep in debt, it’s generally unwise to pay unsecured debt off with secured debt. If only because it puts your home more at risk if something should happen down the road.
Lesson Learned? Keep paying on your existing car loan and do your best to pay it off asap. Don’t roll it into a home equity product unless you have the discipline to pay it off at the same rate you would if you had not rolled it in.
Posted in Mortgage, Stupid Tax Tuesday 
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November 25, 2007
Ever since I added on to my house and acquired a large balance on my Home Equity Line of Credit, I’ve often considered refinancing my balance along with my primary mortgage into 1 big fixed-rate mortgage. The main reasons I’ve considered it is because I’ve always thought variable rate mortgages are scary, mainly because the rate can change at any time (depending on the bank, the fed, etc.) and you usually have a balloon payment at the end. Plus the security of a fixed-rate loan can be very comforting.
However, I’ve been starting to be swayed to keep my HELOC intact, at least for now. My main reasons are the following:
- The Federal Reserve Board is lowering rates due to the current mortgage crisis, which directly impact my rate and thus lowering my monthly payment. This extra cash can be put toward a higher interest debt.
- Because of the way a HELOC works (interest calculated daily), every time I make a payment, my next months minimum payment is reduced. Again, the extra money I payed last month can be put on the principal this month! Or put toward some other debt, or toward building my emergency fund.
- With every payment, I free up some of my credit line, to invest elsewhere, perhaps in real estate, or something else. Plus, theoretically, a freed up credit line improves my credit score. A lot of creditors report HELOCs as revolving debt, and as such, more available credit will improve my debt to credit ratio. Now on the other side of the coin, by refinancing, I could eliminate this revolving debt.
I’m not sure my reasoning will stay the same if interest rates rise, but for now, I think the wise choice will be to stay put and keep putting every extra penny I have into paying off this behemoth. I still take consolation in the fact that even with both of my mortgages added up, I’m still well below the (down) market value for my house.
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November 21, 2007
So here’s my first posting of my financial status, going along with my goal to be accountable to myself. Just posting this really forced me to take a hard look at where I am. At first glance, I can see that really the only thing that’s keeping my net worth positive is the value of my house, which is kinda sad.
Honestly I wasn’t sure if I should even include it, because for some reason, so many other PF bloggers don’t list it. But I did anyway, since I have debt against it, and if I sold it, I would some out on the positive end. Maybe the reason the others don’t include it is because they rent, or just want to track their cash and investment accounts only, as described here by nickel at fivecentnickel.com, but lately nickel seems to be reconsidering.
If I only tracked investement accounts and non-mortgage debt, I’d definitely be negative, so I think I’ll do it this way for a while if only for the fact that it makes me feel better right now. Otherwise I’d have a crushing feeling that I’m way behind. Ok, I still have the crushing feeling. I used Excel, because I haven’t really played with Quicken’s net worth feature yet.
A couple of notes, to get a somewhat reasonable home value, I chose to get it from zillow.com which seemed right in line with what I thought. I also pulled my car values from kbb.com, choosing the private party sale in good condition options. Why include car values? Well again, if I needed to sell them, it would put cash in my pocket so I consider them to have value, even though I have a loan against one. Thankfully I’m not upside down on it.
You’ll notice that I didn’t include any cash savings numbers, mainly because I don’t have any worth talking about. It varies based on the time of the month, and it never really accumulates, so I’m choosing not to include it. I’m also not including a 529 plan for my son, which has a small balance.
I still haven’t made any specific plans or goals for retirement yet. The only real goal I have right now is to get rid of my consumer debt, which adds up to be about 25K including my car loan. However, I think I’ll just focus on the credit cards and medical bills right now and really try to be aggressive with them.
Posted in Financial Status Updates 1 Comment »
November 16, 2007
photo by soundman1024
Turning 35 this year was a giant eye opener for me this year. No longer am I 22, 26, or 29, and I am fascinated and terrified at how fast I got here, to age 35. The thought of hitting 40 in just 5 years is like a splash of cold water in my face. Now, don’t get me wrong, I still consider 40 to be young in the grand scheme of things, and I’m sure that anyone older than that probably remembers feeling the same apprehension that I do now.
So here I am, thinking about the future, about my goal of retiring at age 55, in 2027, with enough money accumulated to live on, some to give away, and some to leave to my kids.
So what’s financial independence to me? In a nutshell, it’s not having to rely on someone else, aka “an employer” to be able to feed my family and pay my bills. It means being able to have a stream of income, hopefully from various sources, without it being subject to the whims and decisions of another person or entity. In other words, it’s having an income engine that I have been able to set up, that is independent of any one force.
Can my income stream be totally protected from the outside world? No. To be realistic, I know that if I have money in investments, things can go down. But hopefully, if I diversify enough, I can limit the possibility that I’ll lose money.
Am I there yet? No way. I’m not even close. I often ask myself, “Where did the last 10 years of income go?” Mainly it went to the expenses related to having a house and 3 kids and trying to live on 1 income. I have less than $5000 saved for retirement now and I have a ling way to go before I accumulate the million or so I’ll need in retirement.
Could I have saved more? Probably. I lacked any real financial planning skills, mainly because I had the attitude of “I have plenty of time to save for retirement.” My corrective action? One of them is that I started and automatic deposit into my Fidelity Roth IRA account last year, so I can start the ball rolling without having to “think” about it.
I think most people are resigned to the fact that they’ll never be “financially independent”. I have a vision and I’m aiming to accomplish it, and I hope it encourages others to do the same.
So I’m declaring independence day on May 17th, 2027.
Posted in Investing, Life No Comments »
November 14, 2007
As I discussed in a previous post, I’m now in the possession of a fairly large home equity balance in the form of a home equity line of credit (HELOC). Thankfully, I gained a little hope when Federal Reserve Chairman Ben Bernanke lowered the Federal Funds rate by .5% on September 18th, it’s first cut in 4 years. It only got better when it was lowered again on Oct 31st by another quarter point.
Now, to some, a half percent reduction in this rate may not mean a whole lot, especially if you don’t have a HELOC, which is one of the few financial instruments that is directly affected by this rate change. Other things is affects are short-term interest rate products like credit card rates, some car loans and adjustable-rate mortgages, like my HELOC. In retrospect, I’m glad I didn’t choose a regular home equity loan for this reason among others.
Anyway, because HELOC rates are directly impacted by any change in the Fed Funds rate, my rate dropped the .5% to 7.65% about 3 weeks after the announcement.
The result? My monthly payment is now lower by almost $60. Again, thank you Mr. Federal Reserve. Now will I do the right thing and keep paying that extra $60 so it goes directly toward the principal? I could, but I don’t think I will. The debt snowball method suggests that I put it toward a higher interest balance, like my credit card, so I can get rid of it quicker. After it’s gone, I’ll put that old payment toward my HELOC, which will go down much faster thanks to Ben.
photo by AMagill
Posted in Mortgage 1 Comment »
