The Finance Fiend

Getting Financial Freedom by 35!

Types of home loans! The 15 year fixed rate mortgage March 31, 2009

Filed under: Uncategorized — Rebecca @ 10:34 am
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I had to write this post because I am excited.  We are rather young, and have our first home.  In February we got a promotion and decided we would put all the extra income toward the future.  Some will go into investments but first we decided to put some extra toward our mortgage. So for the last 2 months we paid an extra $350 towards principle.  First off, I have to say, we owe less than $74K on the house! Yay!  Second, I went and looked at our amoritization schedule…and our contractual term is 28 years 10 month, but our actual remaining term is 27 years 10 months.  I had to be excited. (Granted we have a rather inexpensive home, but as a 1 Income family, this is awesome)

Now when you buy a house, there are a lot of rules now that weren’t there a year ago.  First, you have to have great credit.  Second, you have to find a home that the bank is willing to lend for, or have a lot of extra money to invest in a home.  This means, if you have great credit, and cash, you can find some great deals on houses right now.  But, its not the end of the world if you have to get a loan. In fact, I would say its better to get a home loan than to put your life savings into a house, you don’t want to risk not being able to retire in the name of owning your house outright.

I will not discuss Adjustable Rate Mortgages as I never thought they were a good thing.  You see, adjustable rate mortgages would only be a wise decision if you move every 3 years and never reach that 5 year mark when interest rates increase. There are many people in bad places now because they got an ARM and have lost their job, or don’t have the equity to refinance to a fixed rate mortgage thanks to the housing bubble popping.

Now there are three different length options for fixed rate mortgages. You can get a mortgage for 15, 20 or 30 years.  (There are other options but these are the most common out there.)

The 15 year mortgage. Benefits:

1. You don’t pay as much interest.  Think of it like this, a mortgage that is 15 years long will pay half as much interest as a 30 year mortgage.

2. You gain equity quickly. If you are going to be in your home for only 7-10 years you will have a LOT more equity when it comes time to buy another home.

3.  You can retire on time.  This is an important benefit for the older generations that are looking forward to retirement at 62 or 65. (Lucky me, I can postpone retirement until I am 72 if I want to get mroe social security benefits.)  So if you are in your late 40s or older and buying a home you plan on living in after retirement, a 15 year mortgage might be just what you want.

Things to ask yourself:

1. If you lose your job, can you afford to make the payment? If you know you cannot afford the payment on ine income, you should have 3-6 months worth of living expenses saved up.  This will ensure that if something happens down the line you can still make your payment.

2.  Am I still saving towards retirement? This is important not only for the people planing on retiring in 10 years, but the younger generation as well.  A 15 year mortgage means you are commiting several hundred more dollars a month toward your home, will you still have money to put toward your retirement? (note: if you don’t getting a 15 year mortgage won’t help you retire on time)

3. How much will it cost to refinance? Things happen, and sometimes people refinance not because rates get lower, but because they need a lower  payment.  If you can’t keep up on the larger payment you need to remember it will cost easily $2000 to refinance your home.

Next time: the 30 year mortgage!

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Budgets: Part 2 How to balance it! March 27, 2009

Filed under: Uncategorized — Rebecca @ 1:00 am
Tags: , ,

Anyone can sit down and write out how much they should be spending on everything, but most people rarely follow their budget.

Why?  Maybe its because they were to tight on the purse strings. Budgets aren’t a one in a lifetime occurrence. Things change every month and sometimes every day.

The easiest way to stick with it is to sit down and balance your budget.  Its similar to balancing a checkbook, not that many people do that anymore.

Now take my utility portion of my budget for the month:

Water/Trash $55.00 52.96 bill pay 3/25
Internet/Phone $20.00 19.95 bill pay 3/18
Gas (Black Hills) $60.00 116.04 bill pay 3/27 inc. feb
Electricity/WeStar $45.00 46.39 bill pay 3/09

Column one is the utility, two is the amount allotted to it, three is the actual cost, and 4 is notes.  As you can see I have estimated values for each of the utilities, but none of them are the same. Some are a bit lower, one is much higher because smart me scheduled the bill pay for March instead of February. What I do in Excel (you can do it in your choice of spreadsheet or software) is keep a running total at the bottom of the page.

In that total, if that total is positive its black, and negative its red.  (I like the visual reminder that I am not doing well.)

In next month’s budget (April) I will go to my income cell and enter the equation “=[cell number at bottom of budget]+incoming funds” So in my case it would be “=C26+850.64+106.23+…” So the 850.64 was a made up amount for a paycheck, the 106.23 was other outside income, etc.  That way if I have $26.54 extra at the end of the month, I can carry it over to the following month’s budget.

Now, just because I moved the amount into April’s column doesn’t mean I have an extra $25 to whatever I want with.  It means I need to figure out where I want to put that $25.  We are paying extra toward our mortgage so I would go to the cell for the amout paid to the mortgage and enter the $26.54 (in effect removing the extra income from the budget).

At the end of April, if I am in the red $2.54 (that means I spent $2.54 more than I made) I will actually subtract that amount from my income for May, and take $2.54 from the extra money paid to the mortgage.

My goal is to keep my budget balanced enough that I never have a variance of more than $5.

This does mean that some things I will mark as being paid, even if they are currently in the bank account.  Take our car for example.  April is the month we renew our tags and pay taxes on the car.  But, coming up with a couple of hundred dollars for this from April’s budget would make things tight.  Also, this is not an emergency, so I can’t justify using my emergency fund.  So how can I write the check for $250? Easy. Last year I know I paid $264 to renew my tags.  I can assume my car has lost value this year, but tax rates might increase, so I will budget money towards renewing the tags based on the amount I spent last year. So every month I will put down $22 in the car tags category, even though no money for it is coming out of my bank account.  Then come April I can find out that yes my car has dropped in value since its a year older, and the amount I need to pay is only $245. I can write the check without wondering if I have the money, and take the difference between the two and take it out of April’s budget.  This means that for the month of April I will effectively pay $3 towards my tags.  The surplus $19 will carry into next month and be redistributed as needed. {This also means that my new amount budgeted toward car tags will be $20.41/month.}

Did I lose anyone?

I know that I always had problems following word problems in grade school.  So if you want more explanation I can try and give it.  Maybe with pictures. If possible.

 

Entertainment on a Budget! March 26, 2009

Filed under: Uncategorized — Rebecca @ 12:57 pm

What do you include in your entertainment budget? We include any money we spend on things that are solely for fun.  Video games, movies, tickets to a concert or show, and baby sitter fees. Don’t forget the sitter!

Here is why getting a sitter can save you money.  Going to the movies. Adult ticket $9, child ticket $7. If you have more than 1 kid, it makes more sense to pay a sitter $20 than to take them with you.  An even better option: trade sitting with neighbors or friends that have similar aged kids.  If you have to watch 4 extra kids one Friday a month, but get a date night with your spouse alone the other 3 Fridays its a win-win situation.

Other budget friendly fun will include things like the local park.  There is a park less than a mile away from my house with a frisbee golf course.  Pretty much, its like playing Frisbee with a goal you throw at.  Some of the people playing will be hard core with fancy discs specially weighted to fly farther, but mostly its younger people taking some time outside.

That same park also has a great hill for kite flying.  For a couple of dollars (or free if you make your own out of things around the house) you can have countless hours of fun.  As long as there is a breeze.

Keep an eye out for free things in the community.  In the Kansas City metro all of the art galleries are open the first Friday of  the month.  Many of the pieces are for sale, but just browsing is fun.  The local university does ‘movies on the hill’ where they show a movie on the side of a building and everyone watches from the side of a hill.  Its totally free, a great way to meet friends and have movie and a picnic, and the movies are all newer.

Many towns have special summer programs aimed towards children and families.  In the small midwest town I grew up in they always had brown-bag concerts and activities at the local library or a nearby park.  They also would show children’s movies occasionally in the summer, this was in addition to story time.  I have not run across a public library that didn’t offer a story time.  Usually the summer will have older story time groups, or reading programs, but they always have ways for the kids to gain a love of reading, or maybe a new skill if they get the right books.

Museums can also be a low cost form of entertainment. Most towns have at least a tiny museum, and give tours for only a few dollars.  Even the larger museums will have special days when entrance fees are waived or reduced.  Try getting a small group and explore the different continents or eras of art.

One of my favorite ways to have fun is to play in the garden.  You can water, pick flowers, and occasionally pulling weeds can even be fun.  Besides what kid doesn’t want an excuse to play in the dirt? If you live in an apartment or rental and can’t have a garden, look into community gardens.  My mother found one in her town where they provide seeds, shovels, and compost.  The only thing they don’t provide is the labor.  Gardening is a great way to meet neighbors either in the garden, or by dropping off a basket of whatever crop is most bountiful at the moment.

So you can see there are many things you can do that are both fun, as well as educaitonal for little or no cost.  In the words of LeVar Burton of Reading Rainbow: But you don’t have to take my word for it.

 

Food Glorious Food! March 24, 2009

Filed under: Uncategorized — Rebecca @ 11:07 am

The song that made Oliver the musical awesome.  A song totally devoted to food.  This post is totally devoted to food.  Its all about your grocery budget.

Now I know you can find people saying they feed their family of 4 on $50 a week, I have seen these claim and I have seen what they eat.  But, I do not think its healthy. You should not try to cut money from your grocery category.

Why shouldn’t I cut from my grocery budget? It is a variable expense.

True, it is a variable expense, but when you cut from your grocery budget you are more likely to over spend in that category, or eat unbalanced meals. Potatoes are a great inexpensive food source, but if your grocery budget only allows you to eat potatoes every day its not healthy.  There are also the option of doing the coupon thing, but from my experience in order to truly save lots of money, it takes time and a serious commitment.  Very few people have the time/patience to do this.  I don’t so I do not do use coupons.  Occasionally I will use a coupon, but I don’t shop based on coupons.

Now, we eat at home most of the time, and we also keep a well stocked pantry. That means we plan on having plenty of food in the house at all times.  We also shop the sales and if some food item that we eat regularly is a particularly good price we will buy extra.  We also have long term food storage that we buy through our church that we use and eat on a regular basis.  Regardless of that we have budgeted $100/month per person.  That gives us $300/month.  How did I get this number?

Look at your credit card statement, bank statement or receipts.  We use a credit card for all of our grocery purchases, so it is was rather easy to look and see how much we were spending a month on food. A comparison of a few month\’s worth of grocery shopping let me know what was reasonable for our family.

Then I added in some extra.

Thats right I made my grocery category of the budget MORE than what we had been spending. Why? Well, one reason is that the baby is hitting toddler stage, and will be eating real food. Another reason, our health (in my opinion) suffered on that diet.  We were eating lots of meals filled with pasta.  While pasta is great, Macaroni and Cheese is a side dish and it should stay that way.  I am fine with not eating meat every meal, but eating pasta every other day and having it be the only thing you are eating is not good for you.

Besides, if I spend $50 more a month on groceries instead of spending $150/month on take out, I am still saving money. So look at what you have been spending, and add at least 20% before you put that number in your budget.  Trust me, it will save you more in the long run.

How much do you spend on groceries a month?

 

The Splurge category! or Mad Money! March 23, 2009

Filed under: Uncategorized — Rebecca @ 10:28 am

Everyone knows that its important to budget.  You have heard it before.  One of the classes required to graduate in my high school was “consumer ed.”  In that class we learned about writing checks and checking accounts, as well as how to make a budget.  As part of the class we even made a budget based for when we were in college (or rented our first apartment).

That was a great learning time for me.  I was lucky to at least know how to make a budget at 17.  My parents had to learn when they were in thier 30s.

One thing that I have learned, is that you need some flexability in your budget.  In my current budget, we have labled this the Save/SPLURGE category.  It can either be saved for some unnecessary toy or gadget we want, or it can just be an extra we want. Either way, this money is not rolled over into the following month.  Its withdrawn from the bank and used as cash.

For example: Our eating out budget is $50/mo. (We rarely eat out.) Now this would normally be plenty for us, and we might even have extra. Now, say this month we have family in town and decide to take them out to dinner.  $50 for two at a restaurant in our area is plenty most of the time.  $50 for four? Possibly, but it would be close, and what about gratuity? Now, if our bill with tip was $80, we would use the 50 from eating out, and the 30 from our mad money.

Now, you may not have the flexability to have $30 in your splurge category, but vven $5 will get two ice cream cones.

I had a friend in college that had a cute little ceramic jar with Mad Money written on the front.  She used cash for most day to day purchases because she was a waitress and got tips.  Every day she worked she would put a little bit of money into the mad money jar. If she wanted to go to the movies she would grab some ones from her Mad Money.  If she didn’t have enough she wouldn’t go.

She used the mad money for her wants.  If she wanted a soda from the machine she would use mad money.  It was there to keep her from going mad. 🙂

Now even if you don’t have a cute little Mad Money jar, you should keep your splurge money in cash.  That way, you can splurge, but you won’t get out of control.  Besides, if you feel like your budget is controlling you, you will not be happy and you will choose to not follow it. So instead of not budgetting, just allow yourself to have some non-discretionary spending.

I like to keep $20 in my wallet.  We typically split up our mad money.  So, I will have $20 totally separate from the household money and totally up to me to spend.  That means if I want the nice brand of toothpaste, but our budget allows for the basic toothpaste, I buy the nice stuff with my cash.  Its also used exclusively by me since my spouse has no preferance for toothpaste brands.

 

How much money should I spend on my home? March 20, 2009

Filed under: Uncategorized — Rebecca @ 11:27 am

You know your blog is new when you keep the spam comments just so you have comments. 🙂

As I mentioned in a previous post, http://www.crown.org has some great tools for people starting a budget, or learning about a budget.  I am going to reference some of thier information.  I have found it makes me feel like I have more leniancy in my budget, and I hate feeling confined by money.

As I linked to previously here is the page with their percentage guides.  Now, these don’t have to be strictly followed but they give a great outline and plan for where you money should be going and how much should be where.

I will be referencing the family of 2 (married couple) file as that is the closest to our family.  We actually have a family of three, but the third is still quite tiny.

One thing that is important to keep in mind is taxes.  No matter what your income, and even if you qualify for an Earned Income Credit at tax time, the government will take thier share out of your check everytime you get paid.  Its sort of humbling to know that 21.2% of my income can be expected to go to taxes (I am using the 45,000 category’s percentages as that is the closest to what we make as a family.)

Now back to the home. How much should you be spending?

Financial planners will tell you 30% or 36%.  Usually the 36% number is based on your gross pay and includes monthly mortgage payment and all other debt.  So if you have a car payment and a house payment they shouldn’t total more than 36% of your gross pay. So if you make $45,000/year only 1350 should be going towards ALL debt a month.  Also keep in mind, your monthly payment for your mortgage may include money for taxes and insurance.

We were smart and bought the smallest home we could find that had the few things we required (3 bedrooms being the most important to us).  That and the fact that we actually made a down payment means we can keep our home costs to 30% of our take home pay.  I am not including any other debt, but I am including utilities.  Sadly enough, many people cannot even say this.

If you are renting, and you are spending more than 30% of your take home on your apartment, it might be time to consider finding a different place to live when your lease runs up. Now, if you live in a high housing cost area,NYC or California for example, crown.org says you can allocate closer to 50% toward housing.  Keep in mind that you will have a lot less to spend on other things.  Also, its hard to survive at 50% if you have car loans, credit card balances, or a layoff.  Also, many larger cities have higher city and county taxes.  If 28% of your gross pay is 50% of your take home, you still might be in trouble.

Moral of the story, even with the drop in home values, housing is expensive.  If you have been laid off, and are considering making a move for work, look into moving to a place with lower cost of living.  While we survived living on one uneducated  $23,000 income last year we were not able to afford many things just because so much of our income at the time went toward our house payment.  Granted, we were lucky and our mortgage was less than $600/month including taxes and insurance (equal to rental prices for smaller apartment in the area).  If we had not had more income the previous year when we bought our home, there is no way we would have been able to come up with a down payment.  We also wouldn’t have been able to make it on just $23,000 once the baby started eating solid food.  Case in point: living with that much of our income toward housing was temporary.  While we are still uneducated, we are making nearly twice what we did.  That means that we can actually make investments.

How much of your income do you spend on housing? Do you think it should be less? More?

 

Creating a Backup plan March 10, 2009

Filed under: Uncategorized — Rebecca @ 12:00 pm

If you are into sports or business you know that things are given a specific plan or for sports a ‘play.’  If a situation changes, the players need to know what changed and how to compensate for it.  It should be the same in finance.

I have a budget.  I typically follow it, but sometimes things happen.  I may pay a bill using the wrong account and get $100 in fees between the two organizations.  I may send in the wrong amount to the Gas bill because you didn’t look closely enough and get an additional charge, or maybe I scheduled the bill using bill pay, but scheduled for the wrong month(yes, I have done that).

In all these situations you need a backup plan.  It may not be that big of a deal to get an extra $2 for forgetting the gas bill, but what about $100 or $500.

A great solution is to get an emergency fund.  Whether you run over a nail and need a new tire or break your tooth biting into a hard candy things happen and they cost money.  Even if you have $150/month set aside for medical expenses, what if you need reconstructive ‘cosmetic’ repairs they aren’t covered by the insurance.  Do you use a credit card to pay this?  Or get a personal loan?

No, you shouldn’t need to. You should be able to repair the muffler on your car and not have to take money out of the car replacement fund.  You should be able to pay the $300 to get the AC unit repaired. And you can! You just need an emergency fund.

I am personally not a fan of Dave Ramsey, as I don’t see him as the ‘be all end all’ of money, but lets face it everyone knows his name.  If you don’t, do an internet search and you can find books he has written and his goal to be debt free.  I also think that most of the things he sells are principles that have been taught for decades, but since people haven’t listened for decades, I suppose he is needed.

With that said, I think his plan to have an emergency fund before paying extra on debt makes a whole lot of sense.  He recommends $1000.  I would recommend more, but $1000 seems more attainable for most people.  I would recommend that your emergency fund be at least the amount of the deductable for your house/auto insurance policy (whichever is higher).  So if your deductible is $2000 you had better have that much in an emergency fund.  To me a car accident or tree falling onto my house are not budgetable, so its best to be prepared just in case.

It may seem like it takes you a while to get your emergency fund together, but if you decide to brown bag lunch instead of buying from the vendor in the cafeteria and save $4/day you can save $20 a week.  Even if you cut back to a couple of days a week it would free up money to go toward the emergency fund.

Once you get a funded emergency fund, you can take that  money and put it towards debt.  Again, $20 may not seem like that much, but if you had $20 as part of your balance of a credit card and kept that much on your account every month you would be paying $2.40/year in interest assuming you have a 12% interest rate. Some rates are lower than this, and if yours still is I envy you.  I got some wonderful new ‘terms and conditions’ at the start of 2009 almost doubling my interest rate on my primary credit card.  I have to find it ironic that home loan interest rates are in the 4-5% range and credit cards are increasing thier interest rates, but that is evidence that we shouldn’t live on credit.

So good luck! Enjoy the PB&J and if you take a plastic water bottle to 2pm matinee at the theater and fill it at the water fountain, I won’t judge you [afterall its $2 less per ticket to see the matinee].