Debt Free Adventure » Debt

Debt Reduction and Savings Statement – April, May, June, July 2010

Matt Jabs — Wed, 28 Jul 2010 03:32:57 +0000

Wow. Has it really been 4 months since I last brought you kind people up-to-speed on our debt reduction and savings progress? How sad. I’m sure you have had other things to focus your time and attention on, but let me offer my apologies all the same.

I’m pretty excited about this months update, scratch that, I’m always excited to publish these updates. Why? Chiefly because it means that I have less debt and more savings than I did the previous month. W00t!

Our goal progress for April, May, June, July 2010

Each month I post these Monthly Debt Reduction & Savings Statements so I can continually compare our current debt against our starting debt from back in January, 2009 – when my wife & I began our Debt Free Adventure – and summarize our progress toward debt free living.

Check out our debt reduction charts in the right sidebar. I like graphs.

Based on our financial goals for 2010, what follows below is the progress we made over the past four months.

1. Lending Club debt goal

Paid off. If you’re interested in borrowing through Lending Club, read my advice on debt consolidation and check out my Lending Club review to help you decide if a similar path would benefit your debt situation.

2. 2nd mortgage debt goal

Our 2nd mortgage is the next target in our plan to get out of debt. Alongside debt reduction, I always choose to save money too. We stepped up our payment amounts on this loan by quite a bit, although perhaps not as high as you might expect. Rather than throw all available monies at this loan, we decided to build our Emergency Fund up to cover 2 months worth of expenses. I wanted to do 1 month, my wife wanted to do 3, so we compromised by settling on 2. This means we used a lot of extra cash flow each month to get our Emergency Fund up to $6,000. More on this below. For the last few months we were putting an extra $300 toward the principal each month, but will bump this up to around $800 extra/month come October 2010.

Debt reduction on our 2nd mortgage during this period = $815.67.

3. Emergency fund savings goal

As previously mentioned, we decided to save 2 months worth of expenses in our Emergency Fund. The total goal is now $6,000 and at the time of writing we have $5,575 saved and will reach our goal with our August contribution. Over the last few months we have continued to fund our EF via our ING Direct automatic savings plan to the tune of $700 each month. No, this is not the preferred Dave Ramsey method, but it is the best decision for our current situation. Take advice from experts but never lose light of the fact that personal finance is personal and should be treated as such… as Mr. Ramsey agrees.

EF savings progress during this period = $2,815.70. Interest earned = $15.70. W00t!

4. Side income growth goal

Due to lack of posts, DFA traffic has dipped and earnings have done the same. For April and May DFA covered the mortgage payments, but June and July came up short. This is okay, although I wish I could have kept the momentum going unabated… I just had too many balls in the air. My new job (follow @justasknet on Twitter) has demanded more of my time than my last job, and of course will always come before side projects… until that day when I no longer require a day job.

Income diversification has also been put on hold for the time being; which is also fine for now.

Other savings

Our other savings accounts include:

Vacation Fund is now being funded with $200 each month – this is where we choose to splurge. Interest earned = $1.31.
Next Auto Fund is receiving $500/month going forward, but received $350 for the past few months. A lot of people disagree with our decision to save for our next automobiles while still in debt, but they do not walk in our shoes so let them save their critiques for their own decisions. We plan to build this fund up to $10,000 so we can both purchase our next vehicle for cash – we are capping this at $5,000 each. Both our vehicles are 8 – 10 years old and we choose not to finance ever again… which means we must be prepared. We currently have around $2,500 saved. Interest earned = $5.42.

As mentioned so often in times past here on DFA… we believe in saving while repaying debt.

Thoughts

I love paying off debt and I love saving money, and over the last four months we’ve been doing a hell of a lot of both. It feels good man… it feels really good. I don’t have a whole lot more to say, and I’ve already spent an ample amount of time writing this post so I’ll take this opportunity to close.

Cheers, and please leave your thoughts in the comments.

Business Debt in a Sole Proprietorship

Robert Espe — Fri, 04 Jun 2010 05:08:33 +0000

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Business debt mixed with our personal finances

DFA Reader Micki asked:

How should we begin to address this financial debt? How do we untangle our personal/business debt and does it even matter since our business is a sole proprietorship? (I have worked outside the business to earn extra money, but my absence cripples the business even more.)

Here is an explanation of their detailed situation:

I have been married for 20 years and have 3 teenage children. My husband, Ron and I own a small wholesale business and have done so for about 15 years. My husband initially started the business, and I took care of bookkeeping. As Ron discussed the venture with his father, Bill, he was encouraged to allow Bill to “help” him; So, because the two had a strong relationship, Ron agreed. Bill took over all finances while Ron was responsible for all sales and customer/vendor relationships and activities. I had entered all invoices and bills into the computer. Bill had never used a computer and refused to do so, therefore, all financial records were kept in his home and all bills and payments sent there as well. My mother-in-law entered all receipts, bills, and taxes. Any time questions arose about the finances, we were assured things were handled and that was Bill’s job. We eventually conceded control. We knew the sales numbers and monthly expenditures and felt confident in our business stability. The business grew quickly and was very profitable. At this point, Bill encouraged Ron to take on a partner who agreed to invest capital in return for a percentage of profits. Trusting his father’s advice, Ron agreed. Terms were agreed upon including a set draw for Bill and commissions for Ron. We spent months developing relationships with vendors that resulted in a preliminary agreement for importation and exclusive rights to inventory. After a short time, Bill realized that Ron’s income was increasing and became dissatisfied with the plan, so, instead of renegotiating the agreement, Bill began paying himself bonuses and selling merchandise to his “friends” under the table and pocketing the money. Our business began losing inventory by the thousands each quarter. The financial partner discovered the inconsistencies and insisted on immediate full return of his investment or face legal action. We paid this from our personal accounts, since Bill insisted there was no other way. Then Ron entered the office one afternoon to hear his father berating our importer for his lack of English skills and culture. He insulted the vendor’s daughter to whom we were personally close and whose wedding my husband had attended and explained that our company had no need of their involvement. The relationship was irreparably severed. Gradually, Ron’s time at the office was increasingly spent arriving late, taking long lunches, napping at his desk, then leaving early. Soon thereafter, I was involved in a severe automobile accident and was unable to work for a couple of months. When I returned, I found things even more unsettling. I overheard my father-in-law on the phone discussing business credit card payments to our vendors, and when I inquired as to the details, I was told it was not my business. Bill was handling the finances. This was the “final straw”. After many years of his promises to retire and leave the company to us, he again gave a date of his departure, and, on that day, we held him to it. He was enraged. He threatened to bankrupt us and said personal things I never imagined a father could say to his son. Upon his leaving he brought bills that we were now responsible for assuring us he would bankrupt our business if we held him responsible for any debt. We were hundreds of thousands in credit card debt. He had apparently forged Ron’s name on some documentation and, on others, had simply claimed full decision-making ability. Ron refused to hold Bill legally responsible or to claim bankruptcy on moral grounds, and we have since been tortured month after month with the magnitude of the debt with which we have been saddled. We continue to pay the bills on time, even those that are in Bill’s name, and his credit has been bolstered as a result. We struggle daily to “rob Peter to pay Paul”. The situation has, over three years time, broken us and nearly our marriage. Initially we were able to begin recovery and advanced repayment of the debts. Then the economy failed. Our business was in the direct line of losses, and customer bankruptcies hit us hard. I am responsible for all finances now, and it is overwhelming. Ron cannot reason with the situation and refuses to talk it through. He did make the decision to use all our available personal credit to shore up the business. We had previously made the decision not to carry any revolving debt. He has cut off all friendships and relationships and looks to me to be his strength. I am at the end. We take full responsibility for our failure to adamantly address the financial questions with his father. We are now paying the price for that mistake. We have forgiven Bill. It remains difficult, however, each month as we see Ron’s parents brandishing new purchases as we struggle to meet minimal obligations and upcoming college expenses. So I guess we are in the process of continual forgiveness.

Business debt, personal finance, and family partnerships

Unfortunately, there is no way to “untangle” your debt from the business. You say it is a sole-proprietorship, although to me it appears to be a partnership, both of which leave the proprietors/partners personally liable for business debt, unless they are incorporated. How to address this debt is more complicated. It is one thing to acknowledge that money is owed, in this case, it will be figuring out what to do about it that will be tricky.

The first thing that strikes me about this situation is how far back the problem goes. You say you have had this business (and these financial problems) for 15 years. Any situation that long in the making will not be fixed quickly. However, decisions must be made and a course set to correct the situation, or you may eventually find yourself in bankruptcy. You say that until recently the two of you did not carry revolving debt, so you know how to handle money, but there may be no realistic way for you to support your business and finance your father-in-laws debts.

Your story is the perfect example of why people should be careful with whom and how they conduct business. Reluctance to confront family members when they do something wrong often makes a bad situation worse. This appears to have been the case here, and I think the first step to dealing with your situation is to be honest with yourself about your father-in-law’s actions. He robbed you and your husband when he paid himself more than was agreed upon and stole the merchandise he sold off the books.

It is one thing to admit that your father-in-law stole from you, quite another to decide what to do about it. I understand your husband’s reluctance to take legal action against his father, however I believe it is misguided. While the Bible does say we are not to take Christian brothers to court, in context that is an injunction against civil disputes. You are dealing with criminal actions, and I see nothing immoral about pursuing legal action in this case, especially if your father will not do right by you after speaking with church leadership about the situation.

I would recommend meeting with an attorney to discuss options. Once you have a good idea of what is open to you, you will be able to decide what you want to do. It sounds to me like your-father-in-law was a full partner in the business, which would make him equally liable for business debt. Even if you pursue no other legal action, at the very least, I would not make any more payments on anything in your father-in-law’s name, what would be the point? If they are his debts, he should pay them, and you gain nothing by paying them for him. Let the collectors come knocking on his door. His threat to bankrupt you if you send him his bills rings hollow.

Finally, I would recommend that the two of you reconnect with your church, other family, and friends. Meet with your pastor to discuss your struggles, especially where you are concerned about legal action against family, and how these business troubles are affecting your marriage. This type of situation is not the kind of thing you two can afford to handle on your own. You need the prayers of others, you need fellowship, and you need counsel. You need to face this challenge as a team, communicate with each other, and make decisions together. Remember that your marriage is more important than the business.

Do You Have Any Other Advice for Micki?

Something you think I missed? Drop a line in the comments below.

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Get Out Of Debt: Start Acting Wealthy

Matt Jabs — Thu, 03 Jun 2010 05:49:52 +0000

Act wealthy to get out of debt

What? Act wealthy to get out of debt? Yes, precisely – and if you’ve misconstrued what I’ve said then you’re probably in debt for a very good reason, so read on.

How will acting wealthy get you out of debt? Studies and experience in personal finance have learned me a very valuable lesson – if you want to get out of debt, you must put an end to frivolous spending – which is our basic definition of acting wealthy. Remember, most wealthy people are well-to-do for a very good reason… Acting wealthy = no frivolous spending.

Consider the following example by JD Roth, my friend and author of Your Money: The Missing Manual:

In a recent article JD judges a friend who, despite a recent bankruptcy, continues to swim in the pool of bad financial choices. Although JD’s frustration toward his friend was spot on, it was actually a side note of the article that caught my attention.

While pointing out the mote in his friends eye, JD does not fail to recognize the beam in his own – and the details of the beam was the inspiration for this article.

Get of out debt by acting like John M.

John M. is JD’s millionaire next door neighbor, and on a recent 10 day cruise to Alaska… well here, JD tells it best:

As I began to silently judge Michael’s choices (JD’s friend,) I thought of my recent trip to Alaska. I spent ten days on the boat with my neighbor, the “real millionaire next door“, and in those ten days I often felt like I was being judged.
Before the trip, I bought a $120 backpack at REI. My goal is to use this for much of my travel during the coming years. It fits in an overhead compartment, and is a great way to limit what I carry. John frowned when he saw the new pack and asked, “What’s wrong with a duffel bag from Goodwill?”
On the first day, Mac and I tore a paper towel in half, and we each used our half as a napkin for several days. Eventually my napkin became grimy and gross, so I went to tear off another half a paper towel. When John saw me, he scolded me and told me I ought to use a cloth towel instead.
Near the end of the trip, I threw a molding orange overboard. “I wish you hadn’t done that,” John said. “I could have cut out the bad part and eaten the rest.”
On the last day, I went to the bookstore in Sitka and bought a copy of Bruce Chatwin’s In Patagonia, which I’ve been wanting to read for a long time. (After our trip to France and Italy this year, Kris and I hope to save for a trip to Argentina and Chile in 2012 or 2013.) When John saw I’d bought a new book, he shook his head. “I’ve got a lot of perfectly good books here on board,” he said, indicating his library of old paperbacks.
Throughout the trip, I felt like I was under pressure to, well, be more frugal, to make the same choices John would make. And you know what? That pressure sucked. It felt awful. I didn’t like the feeling of being judged, especially by somebody I look up to.

Get out of debt by curtailing your spending

Can you tell what inspired me? What did you think of JD’s neighbor? He’s a millionaire yet he shops at Goodwill and eats the good parts of bad fruit. That’s why he’s wealthy. The majority of wealthy people spend far less frivolously than the majority of those enslaved by debt, and John is no exception. Sure, as JD mentions, too much of a good thing can drive a patient man mad; but regardless, what John preaches is correct – and even if you don’t like it, it makes you think – and thinking is good.

Stop spending, cut your standard of living, start saving

Being wealthy is simple. All you have to do is spend less than you earn and give generously. As long as you sail that ship, how much you earn becomes nothing more than a variable in a personal finance equation that always ends up in the black.

Need some help? Follow JD’s lead and surround yourself with people who motivate you to succeed… even if they do annoy you every once in awhile.

How Much Our Debt Costs – March, April, May 2010

Matt Jabs — Tue, 25 May 2010 10:00:50 +0000

February 2010 Update – How much our debt cost

“He that hath no rule over his own spirit is like a city that is broken down, and without walls.” – Proverbs 25:28

Over the course of March, April, and May 2010 our debt cost us $37.08/day, down from 42.46/day back in February. This is just the cost of the interest on our debt, and does not include the principal amounts. That said, when we started our debt free adventure back in January of 2009 we were paying $1,328 – which was $47.43/day. Our debt reduction efforts over the course of the last 17 months are saving us nearly $10 every single day… money we now to funnel into our orange savings account to pay us rather than fat cat bankers!

I love thinking about how much more we can save because of how much less we owe. Hopefully this motivates you as much as it does me! Let’s take a look at the individual interest breakdown then talk about the progress in greater detail.

Here is the comparison between the last two months:

February 2009 Interest Paid	March 2010 Interest Paid	April 2010 Interest Paid	May 2010 Interest Paid
Mortgage 1 – $584	Mortgage 1 – $583 = +1	Mortgage 1 – $582 = +1	Mortgage 1 – $0 (refi – free month)
Mortgage 2 – $292	Mortgage 2 – $292 = 0	Mortgage 2 – $291 = +1	Mortgage 2 – $291 = 0
Student Loan 1 – $160	Student Loan 1 – $144 = +14	Student Loan 1 – $199 = -55	Student Loan 1 – $112 = +87
Student Loan 2 – $120	Student Loan 2 – $120 = 0	Student Loan 2 – $105 = +15	Student Loan 2 – $111 = -6
Lending Club – $33	Lending Club – $0 = +33	Lending Club – $0	Lending Club – $0

Total Interest Paid – $1,189	Total Interest Paid – $1,139 = +50	Total Interest Paid – $1,177 = -38	Total Interest Paid – $514 = +81

A few notes about the details of the numbers…

We’re down to just four debts. Back in March we paid our Lending Club loan off and are left with four debts. 1st mortgage, 2nd mortgage, my student loan, and her student loan.
Somebody screwed up. Although student loan interest varies each month, mine varied much more than expected over the last 2 months. Why? Either my student loan company, ING Direct, or I myself screwed up. I have auto payments set up for all of our remaining debts, including my student loan. Regardless of this, and despite the fact that I have $1,000 worth of overdraft protection on our my bank account, ING Direct reported insufficient funds to my student loan company when they attempted to auto-draft the payment. The result? A spiked interest payment for the month of April. Although I know I should have, I never called ING Direct about this. The draft would have overdrawn my account by just a few dollars, but instead failed to go through… not sure why. I normally carry a $1,000 checking cushion but let that dwindle too far down and ended up paying for it in higher interest costs, along with a $15 late payment penalty from my student loan company. *sigh*
Side hustle earnings still growing but could be higher. Thanks to continued earnings across the board and bloated TurboTax affiliate numbers through tax season our side hustle earnings reached nearly $2,000 in April, and were closer to $1,500 for March and May. Although these earnings are great, my decrease in posting frequency has hurt my income growth potential and I really need to bust my butt to get back on track here.
Home loan refinance allows skipped 1st mortgage payment. Because we refinanced our home loan back in April our 1st mortgage lender allowed us the opportunity to skip our mortgage payment for the month of May while they paid off the old mortgage loan and opened the new mortgage loan. While this did free up a good amount of money, we were not able to save it all or put it all toward debt repayment because of a few unplanned expenses. Our budget has since been updated to compensate for similar future budget mishaps.
Lapse in discipline. Although it isn’t easy to admit, we have had a few lapses in self-discipline over the last few months. These lapses have resulted in less scrutiny toward spending and less attention paid to my blogging. I am angry that I let either transpire and while our lapses were minute and affect our bottom line very little… they need to be acknowledged now and avoided in the future.
Overall outgoing interest is way down. The average amount of monthly interest on debt we are paying now is $200 less than when we started out debt free adventure! That is music to my ears and just the motivation I needed to kick things into high gear again.

The “How Much Your Debt Costs” Spreadsheet & Graph

Don’t forget to check out the spreadsheet I created to calculate how much our debt costs complete with the nifty little graph allowing you to visualize your progress. I call it the How Much Your Debt Costs Spreadsheet… check it out.

The spreadsheet also highlights monthly interest amounts paid in BIG BOLD numbers so you can print and stick them on your fridge.

401(k) Contributions With Outstanding Debt

Robert Espe — Fri, 21 May 2010 10:00:38 +0000

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Stop 401(k) contributions to speed debt reduction?

DFA Reader James P. asked:

Should I stop 401(k) contributions of $546 a month to pay off the car loan faster??? This will bring my monthly excess for debt payments to $1100. I use the 50/50 plan (50% of excess income goes to pay down debt, 50% is saved).

Matt, I would like to say your blog is one of the first websites I check in the morning for inspiration and knowledge. My family of six embarked on the Dave Ramsey journey in June 2008. Since then, we’ve paid off $47,000. $34k of that was credit card debt (ALL GONE!!!!) My wife and I are 34 and our sons are 14, 13, 10, and 10 so we are very proud of ourselves and the amount we’ve paid off considering the responsibilities we have.

I am currently putting 7% in my 401(k) (receiving a 2.5% match). My wife is currently putting 4% (receiving a 1% match). Our remaining debts include a mortgage, a car loan ($32,000 @ 6.9%) on an ‘08 Toyota Sienna (worth $26,000) and two student loans (totaling $23,000 @ 6%). The Dave Ramsey plan would pay the smallest debt (a student loan) first, but I’m conflicted as to what to do next. My thought is pay off the car next because it is my biggest payment, but I would have to stop my (not my wife’s) 401(k) contributions to make it happen in 1 year. My fear is, if I stop the 401(k) contributions I will miss out on a significant rise in 2010. I will keep the student loans for now because they are tax deductible. Getting the car payment off me would lift an emotional burden but my 401(k) contributions are making me have second thoughts.

Congratulations!

Anyone who has paid off nearly $50,000 in debt in two years deserves a pat on the back. You have been doing a great job, let’s have a look at your situation and see if we can help speed you toward debt free living.

Your Plan or Dave’s Plan?

You want to pay off your car because it carries a higher interest loan, but Dave says you should pay off a student loan, because it is smaller and he wants you to have fewer debts regardless of the numbers. Well, I agree with you. Dave’s debt snowball makes sense for people who lack motivation, have a multitude of smaller debts (3 credit cards, 4 store charge cards, and a couple major appliances) and can benefit from the visible progress of paying off individual debts. However, the amount you paid off this past year shows you are VERY motivated, and down to three big debts. The other reason I agree with you, is that the student loans are unsecured, your education cannot be repossessed, and while the tax deduction isn’t a great reason for keeping the loan around, when combined with the lower interest rate, it isn’t costing anywhere near as much as the car loan. You already owe more on the van than it’s worth, which is not a desirable situation.

A Better Rate of Return

Having established that your plan to pay off your vehicle before the student loans is sound, we will now look at how to do it. A 1-year timetable is a good goal; dragging debts out is never good and the amount is only slightly higher that what you paid off the last two years. You tell us the money you need to pay off your car in one year is currently being contributed to your 401(k). The way to do it then is obvious, your 401(k) contributions must be adjusted, and I am going to address how and why.

You are currently contributing 7% of your salary, and 4% of your wife’s into 401(k)’s although you are only being matched for 3.5% of those contributions. That means you have 7.5% of your salaries that I would consider “extra” contributions. I always recommend that people in debt (including a mortgage) not contribute any more to a retirement plan than is matched by an employer. When contributions are matched, you get a 100% return on investment with zero risk. There is no better investment than that, but for unmatched contributions to net a profit, they must produce returns in excess of what you pay in debt interest. On average, the stock market returns 8% over 30 years. While that is higher than the interest you pay on your debts, ask your self if a volatile investment with a 20-30 year timetable is worth 1%-2%. Paying off your debts offers an immediate guaranteed return of 6%-7% in your case. That is a much better deal.

Planning For an Uncertain Future

You mention your concern that next year may be a good year for the market, and you want to get in on it. Since none of us can know the future and because different “experts” are all just guessing anyway… I would counsel that your investment decisions should be based on where you are financially, not what the markets are doing. Get out of debt, save money, avoid future debt, then invest your surplus.

I would recommend reducing your and your wife’s 401(k) contributions to the amount that will be matched. You will then have the necessary money to pay off your car, then shift your attention to the student loans. Once they are gone, bring your emergency fund up to at least $10,000 if you have not already, and then turn the hoses on the mortgage. Once you are completely debt free, you will have the excess income necessary to max out your 401(k) contributions (as well as a Roth IRA if you are eligible) and your retirement savings can grow steadily without interference from debt.

Do You Have Any Other Advice for James?

Something you think I missed? Drop a line in the comments below.

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Car Repairs – Scrap it, Park it, or Fix it?

Robert Espe — Tue, 11 May 2010 16:14:45 +0000

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Job loss – prepare by saving or debt reduction?

DFA reader Benedictus asked:

Should I spend another $6,000 to fix a vehicle that is only worth $4,800?
Should we just park the vehicle until we can save enough money to fix it and continue to make $291 monthly car payments and $75 monthly insurance payments until we can save up $6,000 (which would certainly be a year or more)
Should I sell the minivan for parts/needed repair and use that money to buy another older used car with unknown problems and high mileage?
Should I borrow the money to do the repairs, spending more to repair it than the vehicle is even worth, and having to pay both a car note and repair note?
What is the best angle, financially, to deal with this situation?

We have a 2006 Dodge Caravan Minivan with 52,000 miles that we purchased new in 2006. It has a 3-year/36,000 mile warranty. We had the van in the repair shop and found out yesterday that the entire engine will have to be replaced at a cost of +/- $6,000. We owe about $5,800 on the vehicle. Trade-in is around $3,200 and private party value is about $4,800. However, neither of those two figures matters because it would have to be repaired first before we sold it or traded it in. WE DO NOT HAVE $6,000 TO REPAIR THE VEHICLE. My husband just recently had to take a second job delivering pizza just to make ends meet and we just started working on re-building an emergency fund after our previous $15,000+ emergency fund was depleted from him being out of work for 5 months before he got the supplemental pizza delivery job. I don’t want to borrow money to fix the car because I would be paying a car note and a repair note. We could almost buy two older used vehicles for what it is going to cost to repair our minivan and I would have to have a vehicle large enough for a family with three children. Then I would be getting an older car with someone else’s problems. Even if we purchased two older vehicles instead of repairing my minivan, then I have a useless 3 1/2 year old vehicle sitting in my driveway. The only solution I could come up with was for us to park the vehicle and be a one-vehicle family until we could save the money to fix it, but I hate to keep making $291 monthly car payments and $75 monthly insurance payments on a vehicle we can’t even drive.

~Thank you, Benedictus

What Makes The Most Financial Sense?

There are many variables here, so naturally you have questions. I will try to answer all of them beginning with your last, “What makes the most sense financially? The answer to this question is usually, “Do not go further into debt.” In fact, owing money on this vehicle is a big part of your dilemma. Adding more debt will only compound the problem. Therefore, I would say the one thing you absolutely should not do is borrow money for the repairs (this is Debt Free Adventure after all.) With that option off the table, we will look at the pro’s and con’s of the other possibilities you listed.

Scrap It?

In situations like this, we tend to feel let down by the vehicle we have. This makes us want to junk what we have, and try for anything different. Caution is warranted, as disappointing as it is, solid vehicles break down sometimes, and recklessly jumping to another vehicle may not alleviate the problem. As you noted, few people sell perfectly good cars, so anything we buy will have problems of their own. That being said, if you have to have another vehicle now, a used car that you can afford may be the only option.

Park It?

Unfortunately, the payments will have to be made no matter what you decide. Since you owe more than the vehicle is worth in its present condition, whether you scrap it, park it, or fix it, you will have to keep paying on the car note. More unfortunately, it is likely that you will have to maintain full insurance coverage as a condition of the car loan even if you park the vehicle. Check your loan documentation to find out for sure. If the option is available, you could save money by parking the van, and only maintaining the comprehensive coverage.

Fix It?

You may not have the money now, but once you save up the money, this is still a good option. While the vehicle may not be “worth” that much, that is not an important consideration. Vehicles are an expense, not an investment. We spend money on vehicles for transportation, and eventually they end up being worth $0. What that means is you are asking the wrong question. The question is not whether it is worth $6,000 to fix your van, it is whether $6,000 would buy a better vehicle. The answer depends upon your local used car market, but consider that because you bought this van new, you know if it has been maintained. That is worth something and should be factored into your calculation. If a better vehicle is available, buy it, if not, fix the one you have. Finally, before you make a decision on this point, I would get a second estimate on the engine. $6,000 sounds a little steep to replace the engine in a domestic vehicle; I would have expected it to be closer to $4,000.

In Summary – What is the best way to deal with this situation?

Should I borrow the money to do the repairs? No.
Should we continue to make payments while we save? Yes, the payments must be made no matter what you decide as the van is worth less than you owe.
Should I spend $6,000 to fix a vehicle that is only worth $4,800? Yes, if a better vehicle cannot be bought for the same amount.
Should I sell the minivan? No, better to still have the van after making payments, than to sell it and make payments on nothing.

I think you were on the right track before you wrote to us. If I were in your situation, I would live for a time as a one-car family. Your financial situation makes this necessary. While it is no fun paying for a broken car, a contract is a contract. Learn from the experience; buy your next car in cash. Save your money for the repair; next year you will be a two-car family again; your low-mileage van will have a brand-new engine, and you will be one step closer to being debt-free.

Do you have any other advice for Benedictus?

Have something to add? Please share your wisdom and experience and help point Benedictus in the right direction. Thanks!

Have a question of your own? Ask DFA writers for free!

Debt Plan – Facing Bankruptcy & Foreclosure

Robert Espe — Fri, 30 Apr 2010 14:10:18 +0000

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Should Julianna let her homes go into foreclosure?

DFA Reader Julianna asked:

We are guilt-ridden and full of shame that we have allowed ourselves to get caught up in this lethal debt trap. Unwise use of credit cards when income diminished due to income drop. This month we had $1900 income with $7K in debt payments:

$300K unsecured debt, 2 mortgages (one rented) while waiting to sell, 2 auto loans $5K remaining on one and $20K on the other; $24K student loans. Income drastically reduced due to medical crisis for me; husband employed in real estate, 100% commission based. RE market is dreadful here.

Against our better judgment, met with bankruptcy attorney and were advised we make too much money to file. He said only way is to let both homes get foreclosed, give up one vehicle, and find a rental house $700/mo (IRS allowable guideline) As strong Christians, we do not believe bankruptcy is the way. We want to pay our debts, and have now contacted Consumer Credit. The repayment plan would reduce interest rates and lock fees, but we aren’t certain if we can meet the minimum payments. I’m scared of being homeless! I’ve been reading everything I can — and realize we need an emergency fund right away — but with what? We are in survival mode. Please pray for us and give any advice God lays on your heart. Thank you in advance. God bless.

Debt and shame

This is an extraordinarily difficult situation, but there is hope. Release your feelings of guilt and shame. They will not help you; a firm commitment to paying back what you borrowed will. That being said, the task ahead of you is neither small nor easy. You will need to live far below your means in payment for living above. The process will be all the harder if well intentioned people foolishly say you “deserve to live a little.” Ignore them, and continue to do what you know is right… and you can do this.

Although this situation is difficult, the way out is no secret. The principles of sound financial management are the same no matter what amount you are working with:

Spend less than you earn and save the surplus.

Here is my recommendation for how to deal with your situation.

Create a Written Budget

This MUST be your first step, your budget is your map. Without a written budget, it is impossible to know what you have or where you are going. This is especially crucial because of the variable nature of your husband’s income. To calculate your monthly income, use his net income from last year (be conservative) and divide by 12. Never spend more than that in a month, even when you have more. When creating your budget, follow this simple rule:

Give 10% – Save 10% – Live on 80%

Realize that somewhere out there a family is living off 80% of your income. It is important, as a Christian, that you not neglect your giving when in financial difficulty. The 10% you save will be used to start building a $1,000 emergency fund (a larger cash reserve only makes your creditors more likely to sue for payment.) With every check that comes in, before you do anything else, write a check for 10% for giving, and place 10% into a savings account. When setting up the rest of your budget, eliminate every monthly bill you can: cable, magazines, cell plans etc. Small bills add up. Assess the difference between wants and needs and get down to the basics of food, transportation for employment, and shelter. The excess will go towards freedom from debt.

Debt Reduction

Once your budget is in place, you need to eliminate all the debt you can. First step is to cut up all the cards. This prevents you from going deeper into debt slavery. Next, eliminate as many debts as possible. Return anything you still can that was bought with credit. Those that you cannot return try to sell for enough to pay it off. Try Craig’sList, a garage sale, and friends/church/family. Finally, do not limit yourself to things you still owe on. Anything of value you can do without should be sold. Your goal is to reduce the amount of debt you will have to pay off with earned income.

Downsize Your Vehicles

The car you still owe $20,000 on needs to go. Try to sell it for enough to eliminate the debt, and adjust your lifestyle to having one vehicle. The one you owe $5,000 on is another matter. If you can sell it for enough to cover the debt, you should, but you may already owe twice as much as it is still worth. If this is the case, make paying off the vehicle your priority. If your husband’s job allows, consider going car-less for some time and using bicycles or public transportation.

Evaluate Your Housing Situation

You say you have one house rented pending sale. I hope that it will sell soon. Add up the total ownership cost of your current home (mortgage, PMI, insurance, utilities, maintenance, etc.). If the total is more than 35% of your husband’s net income, or more than 40% of gross, the house is more than can be afforded. Place the home on the market, and begin the search for an apartment that meets the above guidelines. It may be smaller, but you will feel better knowing that all the bills can be paid.

Final Details

Remember when paying your bills to take care of the important stuff first. Give, save, pay for your housing, buy food, and spend the money needed to keep your husband working. Do not spend the money for these things on unsecured debts. If you are late paying an unsecured debt, the worst-case scenario is a line on your credit report. That is ok as long as you have a place to live. Meet your needs, and as you are able, begin paying on the highest interest debt first. If a consumer credit agency can work out a payment plan, that is a good option. Stay focused, stay the course, and one day sooner than you think, you can be debt-free without having to go through bankruptcy.

Do you have any advice for Julianna?

Have something to add? Please share your wisdom and experience and help point Julianna in the right direction. Thanks!

Have a question of your own? Ask Matt Jabs for free!

Job Loss – Save Money or Get Out of Debt?

Matt Jabs — Wed, 31 Mar 2010 15:55:18 +0000

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Job loss – prepare by saving or debt reduction?

DFA reader Tiffany asked:

My husband just came home from work and told me he may be laid off at the end of the semester (he’s an adjunct professor at a small liberal arts college). He doesn’t seem panicked, but I know he is worried and I am VERY worried. He has never managed the household finances, we’ve agreed that’s my responsibility because I am so much more careful with our money than him. I run a small business from home and we have a daughter in day care full-time. We have a very small mortgage (10K), credit cards ($300/mo), and a household expense budget of about $3000/mo. plus $1000/mo for day-care. We have NO emergency fund. I bring in about $2500/mo. We had been using his income to pay for full-time care for our daughter, but that will end if he’s not working.

So here’s my question: Since we have advance knowledge that we may end up in a financial train wreck, how should we best prepare? Do we work on building the emergency fund, pay off the credit cards, pay off the last of the mortgage? Thanks for your advice. I am trying to be pro-active and not wait for the “crash.”

How to best prepare for job loss

Great question Tiffany. First thing is first: make sure your husband has his resume updated and is searching out and applying for every available and relevant positions.

Focus on trimming the fat. You mention having a $3,000 household expense budget… I guarantee that can be lowered if you put your mind to it. Cancel your cable, cut back phone plans, apply my grocery hacks, make your own diy household cleaners. Be creative… you will be amazed how much cash flow you can free up for savings.

Consider pulling your daughter out of day care to increase your cash flow. You mentioned working from home, and I know this would be tough, but if it is doable it will instantly free up $1,000 every month to help you prepare.

How much credit card debt do you have? When is the semester over (so we know how many months you have to prepare?) Without knowing the answers to those two questions, this is what I would do if I were in your situation.

1. Save $1,000 in a high yield savings account.

The first thing you need to do is give yourself some semblance of monetary security. You mentioned having no money saved in your emergency fund, and that needs to change right away. Save some money… at least $1,000 for now.

2. Forget about paying off the mortgage for now

Unless you have some unique circumstance surrounding your mortgage it is probably your lowest rate debt and is also secured by the home, so put mortgage repayment on the far back burner.

3. Pay off your credit card debt

If your credit card debt is minimal, go ahead and pay it off. By minimal I mean minimal compared to your monthly cash flow. If you can pay this debt off within a month or two… go ahead and do it. If you owe multiple thousands and it would take you longer to pay off, then just increase your monthly payments while saving simultaneously. With job loss looming, I would encourage you to save 75% of your available cash flow and put the remaining 25% toward your credit card debt.

4. Save money

Continue saving money up until the day your husbands employment ends. Depending on how much time you have, if you can save $1,000 each month on day care and get that credit card debt out of the way, you should be able to build up quite a bit of cash. No liquid cash means no security.

In closing

Update his resume and start the job hunt. Reduce your household expenses wherever possible. Seriously consider pulling your daughter out of day care (even if just for a few months – it will be hard but the pay off will help your situation immensely.) Save at least $1,000 to get your emergency fund started. Pay off your credit cards. Save more money.

Remember to bring your situation before the Lord in prayer. He cares for you more than you could ever imagine and is always waiting to help you… you just have to ask.

“Consider the lilies how they grow: they toil not, they spin not; and yet I say unto you, that Solomon in all his glory was not arrayed like one of these. If then God so clothe the grass, which is to day in the field, and to morrow is cast into the oven; how much more will he clothe you, O ye of little faith? And seek not ye what ye shall eat, or what ye shall drink, neither be ye of doubtful mind. For all these things do the nations of the world seek after: and your Father knoweth that ye have need of these things. But rather seek ye the kingdom of God; and all these things shall be added unto you.” – Luke 12:27-31

Do you have any other advice for Tiffany?

Have something to add? Please share your wisdom and experience and help point Tiffany in the right direction. Thanks!

Have a question of your own? Ask Matt Jabs for free!

Debt Reduction and Savings Statement – March 2010

Matt Jabs — Tue, 30 Mar 2010 06:52:19 +0000

Our goal progress for March 2010

Check out our debt reduction charts in the right sidebar. I like graphs.

Based on our financial goals for 2010, what follows below is the progress we made during March of 2010.

1. Lending Club debt goal

PAID OFF! As previously mentioned, earlier this month we paid off our Lending Club loan. It was a consolidation of credit card and auto loan debt, totaling $11,080 that we were able to pay off in just 7 short months. Woo hoo!

If you’re interested in borrowing through Lending Club, read my advice on debt consolidation and check out my Lending Club review to help you decide if a similar path would benefit your debt situation.

March debt reduction progress = $1,933.47.

2. 2nd mortgage debt goal

After paying off our Lending Club loan we are now left with an average excess of around $1,500 each month. We debated whether to use the excess to repay our 2nd mortgage or my student loan debt first, but after much deliberation decided to save most of the money.

Although we will be saving around 67% of the money as a hedge against job loss, we will also be putting $500/month toward extra principal reduction of both our 2nd mortgage and my student loan.

Essentially we are changing this goal, and beginning next month (April 2010) we will put $400 toward extra principal payments on our 2nd mortgage and $100 toward extra principal payments on my student loan. Her student loan and our first mortgage will continue to receive regular monthly payments only.

March debt reduction progress = $72.23.

If you find the content on Debt Free Adventure helpful and would like to contribute to our debt reduction, check out the SmartyPig savings account widget in the bottom of my right sidebar. Any help is greatly appreciated.

3. Emergency fund savings goal

While repaying Lending Club we were contributing $100/month to our Emergency Fund via our ING Direct automatic savings plan but will bump this amount up to $850 come April. This is not the preferred Dave Ramsey $1,000 plan, but is the best decision for our current situation (threat of job loss.)

March savings progress = $100.00. Interest earned on this account for March 2010 = $2.56.

4. Side income growth goal

For the 2nd month in a row, DFA earned us enough to cover the cost of our 1st and 2nd mortgage payments. Woo hoo!

I am also still working on ways to diversify my income. The more sources I have, the more monetary security we have.

Other savings

Our other savings accounts include:

Vacation Fund = $100 added – interest earned for March 2010 = $0.84
Next Auto Fund = $100 added – interest earned for March 2010 =$0.79

Oh yeah… if you did the math you probably noticed that of our extra $1,500 each month we only accounted for $1,250 so far. The remaining $250 will go into our Next Auto Fund. Why? Because both our vehicles are at least 9 years old and we want to have a good amount of cash saved if one were to die. The next vehicle we buy will be purchased using whatever cash amount we have saved in this fund, which is currently just above $1,000 and growing at only $100/month. Bumping that amount up to $350/month will greatly improve our chances of being able to afford a reliable replacement when the time comes.

Thoughts

Don’t agree with all the money we are saving as a hedge against job loss? Think we should be putting it all toward our 2nd mortgage instead? Well… don’t forget that my wife’s position will likely be eliminated next year due to state budget cuts. Beyond that, my company has recently changed its business model and while we are hopeful, there is no guarantee the changes will generate enough revenue to keep the company afloat. In light of all the uncertainty, we are focused on building our savings.

In the event that our jobs remain stable over the next year or so, we will then have enormous amounts of money that can then be used to make lump sum debt payments accordingly.

Oh yeah… our vacation fund has also grown to $1,000 and will be used toward a much needed spring break vacation next week. We are incredibly excited about the trip and are so happy to be paying cash for the entire thing. Like I always say… pay off your debt, but don’t forget to stop and smell the roses along the way!

DFA Weekly Link Rally: Saving Money to Repay Debt in Lump Sums

Matt Jabs — Sat, 20 Mar 2010 17:28:14 +0000

2nd mortgage, student loan, or save

If you didn’t already know, I am a staff writer with FiveCentNickel.com (see this link for my FCN article archives) and have articles published there every Thursday morning. This past Thursday I asked the FCN readership to help me decide whether to repay my 2nd mortgage or my student loan debt first. I received a lot of great advice but ended up deciding to save money while simultaneously accelerating debt repayment.

Let me explain…

If I had to decide to contribute all available funds toward a debt snowball one of these debts ahead of the other, I would choose the 2nd mortgage. However, rather than lock up all available monies into debt repayment, we are choosing to save a majority of available monthly money in a Debt Repayment Fund (click to contribute,) then repay the debt in lump sum payments. Yes, this strategy will cost a little more in interest, but the amounts are negligible compared to the incredible flexibility this approach affords us.

The economy and housing market are worse in Michigan than in most any other state. The Debt Repayment Fund will accumulate for the purpose of lump sum debt repayments, but will also act as a hedge emergency fund against job loss. How probable is job loss for us? Very probable. In fact, my wife’s employer has already warned that her position is likely to be eliminated for next school year. Coupling this information with the tumultuous Michigan housing market, we are choosing to save most of our extra cash flow, then decide what to do with it as time passes.

We may use the Debt Repayment Fund to pay lump sum debt payments quarterly, bi-yearly, or yearly… we’re not sure yet. What we do know is that a combination of increased principal payments and a hedge of savings is the best decision for us at this point in time.

Extra principal payments on two loans

To keep accelerated payment momentum going on our debt snowball we will still make extra principal payments on the two loans in question. In my FCN article I asked for advice on whether to repay our 2nd mortgage or my student loan first. We have an estimated excess of $1,500 each month and will disperse it like this:

Debt Repayment Fund = $1,000 (this is an interest bearing SmartyPig Savings account)
2nd mortgage extra = $300 (this amount is added to our regularly scheduled monthly payments)
Matt’s student loan = $200 (this amount is added to our regularly scheduled monthly payments)

Any extra income over and above the $1,500 will also be saved in the Debt Repayment Fund.

In summary

We will pay extra principal payments on our two highest rate loans and save all excess in our Debt Repayment Fund for future lump sum debt payments. We are doing this as a hedge against unemployment and a devastated Michigan housing market.

What do you think of this plan?

Link rally for this week

Dollars Spent by Dave Ozment
3 Things To Remember About Roth IRAs by Peter
7 Shortcuts to Frugal Shopping With Google by CouponSherpa
Paying Down the Mortgage: Our Family’s Plan by Elle
Savings Accounts for Children by Frugal Dad
How to Help Teens’ Spending and Consumerism by Craig Ford
New Images: What Your New Credit Card Bill Will Look Like by PT
What Is A Checking Account? by Craig/FFB
A Financial Lesson From StarCraft by Tom @ Canadian Finance Blog
Roth IRA Limits: Aged, Contributed, Phased Out, and Converted by Junior Boomer
Why You Should Avoid PayDay Cash Loans by Jeff Rose
Tight Budget or Extra Cash In Your Account? by Mike
What is a tax-sheltered annuity (TSA) by Mike
Best Small Business Ideas 2010 and Beyond by Wealth Pilgrim
Should I Open a Bank Account Online? by MD
The High Price of “Low Cost” Payday Loans by Being Frugal.net
Immediate Annuities Explained by Kyle

DFA Weekly Link Rally: We Paid off Lending Club!

Matt Jabs — Sat, 13 Mar 2010 07:59:16 +0000

Lending Club debt is gone

I once was a Lending Club borrower, but as of this coming Monday am strictly an investor. If you haven’t already done so, and would like to read the whole story, check out my Lending Club review article where I detail the entire experience.

In summary, back in August of 2009 we borrowed $11,000 from Lending Club in order to consolidate four separate debts – 3 credit cards and an auto loan. Now – just 7 months later – we have repaid the entire loan and will now focus our debt avalanche onto our next debt.

Here is a list of our debt that remains:

1st mortgage = $118,950 at 5.5% fixed with 20 years remaining (recently refinanced)
2nd mortgage = $39,700 at 8.8% fixed with 27 years remaining
My student loan = $31,850 at 6% fixed
Her student loan = $34,200 at 4% fixed

Thank you for all our encouragement along the way, we are VERY happy to be paying this debt off and will be rewarding ourselves accordingly.

Link rally for this week

Run for Your Lives! by BibleDebt
5 Lessons From My Encounter with a Personal Finance Advisor by Lakita
The bible on get rich quick schemes by Arthur @ FinancialBondage.org
Initializing My 401k Rollover To Roth IRA Was A Breeze With Vanguard by Kyle
Why Parent’s Shouldn’t Pay For Their Kids’ College Education by MD @ Studenomics
Simple Ideas for a Balanced Life by Neal@Pilgrim
What is Financial Literacy? Part 1 by Tom @ Canadian Finance Blog
Packing Lunch for Work Just Got Easier by Adam
Is There Such a Thing as “Good Debt?” by Paul @ FiscalGeek
Easy Money: Good and Not So Great Ways to Get Money Fast by PT from PT Money
How to do a Roth IRA conversion by ABC
I bought a dvd player to keep the kids quiet in the car by Mike
How To Make Quarterly Estimated Tax Payments by Jeff Rose
Should You Sell Your Mutual Fund if it’s Placed on a Watch List? by Junior Boomer
QuickBooks Accounting Software = Small Business Relief by Ben
Using and Understanding a Net Worth Statement by Ryan

Debt Reduction and Savings Statement – February 2010

Matt Jabs — Thu, 11 Mar 2010 17:12:45 +0000

Our goal progress for February 2010

Our debt snowball just keeps on rolling…

Like charts/graphs better? Look in the sidebar for those.

A debt free adventure can be a long, dry road… but continued progress in all areas of personal finance is a sweet breath of fresh air! Based on our financial goals for 2010 here is the progress we made through February of 2010.

1. Lending Club debt goal

WE WILL PAY OFF THIS DEBT WITH OUR MARCH PAYMENT! Stay tuned for the announcement later this month.

Our personal debt consolidation loan of $11,080 – secured through Lending Club in August of 2009 – has been reduced down to a principal balance of $1,925.20 in just six months. If you’re interested in doing something similar for your debt situation read my advice on debt consolidation and my Lending Club review to see if borrowing through Lending Club is right for you.

February debt reduction progress = $2,318.48.

2. 2nd mortgage debt goal

We are paying double principal payments on our 2nd mortgage until after we pay off our Lending Club loan, however… lately I have been considering paying off my student loan before this 2nd mortgage. I will be writing a post about it later this month to ask your opinion. The interest rate on the 2nd mortgage is 8.8% compared to just 6% on the student loan. At this point both are unsecured loans (since I’m upside down on the home value.)

February debt reduction progress = $71.71.

I also created a SmartyPig savings account as a way for DFA readers to contribute to our debt reduction if they would like. As of right now Frugal Dad is the only one who has contributed, and for that I give him a big ole shout out! Thanks FD. If you want to contribute, just look in the bottom of my right sidebar.

3. Emergency fund savings goal

We save $100 each month through our ING Direct automatic savings plan and will continue to do so until we reach $3,000 (one months expenses.) This is not the preferred Dave Ramsey $1,000 plan, but rather the preferred Matt Jabs 75/25 savings plan.

February savings progress = $100.00. Interest earned on this account for February 2010 = $2.39.

4. Side income growth goal

The income growth for DFA continues upward. As I mentioned on my February 2010 interest paid post, we earned enough this month to cover the cost of our 1st and 2nd mortgage payments. Woo hoo!

I have a few other ideas to diversify my income, but I will not report on them specifically here… possibly in a future post as things develop.

Other savings

The other savings accounts we have that make up our 75/25 savings plan include:

Vacation Fund = $100 added – interest earned for February 2010 = $0.72
Next Auto Fund = $100 added – interest earned for February 2010 =$0.60

Thoughts

I don’t really have much to add this month that I didn’t already say above, but to recap… keep an eye out for these posts due out soon:

Lending Club pay off announcement!
Should I pay off my 2nd mortgage or student loan first?
More alternate sources of income.

Thanks for reading… you all rock!

photo by kamshots

How Much Our Debt Costs – February 2010

Matt Jabs — Mon, 01 Mar 2010 17:14:09 +0000

February 2010 Update – How much our debt cost

Over the course of February our debt cost us $1,189 – which is $42.46/day. That does NOT include the principal costs… that is just the cost of the interest on our debt. The good news is, one year ago we were paying $1,328 – which was $47.43/day. Our debt reduction efforts over the course of the last year are saving us nearly $5 every day! That may not sound like much, but if I were to put $5/day into my orange savings account, by this time next year I would have $1,825 plus any interest earned!

One of my least favorite things to think about is the amount of interest we pay toward debt each month. The good news is that it is shrinking with each passing month. Pretty soon all the money we line others pockets with will become our own… it’s just a matter of time, sacrifice, and hard work. What a concept eh… being able to keep the money that we earn rather than paying it toward interest on debt!

Here is the comparison between the last two months:

January 2009 Interest Paid	February 2010 Interest Paid
Mortgage 1 – $585	Mortgage 1 – $584 = +1
Mortgage 2 – $293	Mortgage 2 – $292 = +1
Student Loan 1 – $160	Student Loan 1 – $160 = 0
Student Loan 2 – $117	Student Loan 2 – $120 = -3
Lending Club – $51	Lending Club – $33 = +18

Total Interest Paid – $1,206	Total Interest Paid – $1,189 = +17

A few notes about the details of the numbers…

Lending Club will be GONE next month! Unless something unforeseen happens we will have this debt paid off with our March payment! That will mean we repaid this $11,000 loan in just 7 months! We reduced this debt by $2,300 in January 2010 and by $2,318 more in February 2010 – because of this, the interest we pay to Lending Club decreases significantly every month.
Student loan interest amounts vary month to month. As promised last month, I wrote a post detailing how student loan interest is calculated to better explain why the amounts vary so much each month.
Side hustle earnings continue to fund large debt payments. Once again this month, the earnings from our side hustle have enabled us to make huge strides in repaying our debt.
Killing debt creates great motivation. I hope this article makes you think… and if you are not currently tracking how much your debt costs you each month hopefully it motivates you to do so. Think about it – right now we are paying nearly $1,200 just in interest on our debt. This makes me sick to my stomach, but it also lights a fire under my britches to keep going full-speed-ahead!

The “How Much Your Debt Costs” Spreadsheet & Graph

A few months back I released a spreadsheet that does all the above calculations for you and also gives you the nifty little graph allowing you to track your progress. I call it the How Much Your Debt Costs Spreadsheet… check it out.

The spreadsheet will also give you the interest amounts paid for each month in HUGE BOLD numbers for you to print off and stick on your fridge.

Is It Better to Buy or Rent?

Matt Jabs — Tue, 23 Feb 2010 12:00:20 +0000

Over the last few weeks we have had some good discussions regarding the buy vs. rent debate. Robert gave us a few solid articles and many of you chimed in with great thought provoking comments.

But who is right? Does the fact that 30 year mortgages double home prices really make renting a better option than buying?

Is It Better to Buy or Rent?

The question is anything but simple, so it’s only logical to assume we’ll wind up with guys-n-dolls going to bat for both teams.

What are others saying? Thanks to help from a couple dinosaur comics and several atrocious years in the housing market, Get Rich Slowly founder JD had a change of heart on the matter. In his own words,

“One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.”

A few years back he felt home ownership was always the way of the dragon but now perceives the best reasons to buy are actually non-financial and/or personal, since the numbers often favor renting. I agree.

If you’re interested in reading more of JD’s take on this topic and many others be sure to grab a copy of his soon to be released book, Your Money: The Missing Manual.

Aside from JD’s point of view I also checked out several other takes on this topic. The wise consensus seems to be… neither option is best for everyone. I agree.

What about the numbers?

We’ll start by shooting a hole in the argument that “homes appreciate over the long term.” The truth of the matter is that home prices over the last 80+ years beat the inflation rate by a mere one percent. Sheesh, I get better rates in my Orange savings account.

Laying aside emotional factors, let’s see if we can help you determine which option is best for your unique situation according to the numbers. After all… numbers don’t lie right?

This is where the bottomless pockets of big companies come in handy. They pay really smart programmers to dev really cool calculators that make really complicated formulas look really sexy. Check it out…

Is It Better to Buy or Rent Calculator – Wall Street Journal

I used this awesome WSJ calculator to discover if it would be better for us to rent or buy (for the record, we bought nearly 3 years ago.) Here are the details of my calculation, complete with a screenshot:

Monthly rent = $800 – this would be the maximum amount we would ever spend on an apartment in Lansing, MI.
Home price = $165,000 – this was the cost of our home.
Down payment = $0 – yeah I know… real smart eh?
Mortgage rate = 6% – the combination of our 1st and 2nd mortgage rates would actually be a bit higher.
Annual property taxes = $3,200 – which is about 2% of the cost of our property each year.
Annual home appreciation = 1% – despite our currently depreciated asset, I chose to go with the long term trend here.
Annual rent increase = 3% – to factor in increasing yearly rent costs.

We have owned our home for only 3 years so we are still on the really expensive end of our mortgages, which made my self-audit especially hard to swallow… but I knew that going in.

Renting an $800 apartment for the last three years instead of purchasing our home would have saved my wife and I approximately $24,000.

Another factor worth mentioning, but not covered by the calculator, is the current value of our home. We’re upside down on our home by an approximate measure of $20,000 which leaves us unable to sell until that deficit is wiped out (either by us or by the markets, but likely by us.) Adding in the cost of our depreciated asset, home ownership, over the course of the last 3 years has cost us approximately $44,000 more than renting.

*sigh* Oh well… this just stokes my motivation to soldier on in passionate debt-slayer mode!

Try placing your numbers into the calculator to audit your own housing situation.

Conclusion

Does the joy of home ownership outweigh the higher cost? Is sacrificing home ownership more than you can stand to do, or are you one of the few who have chosen sacrifice immediate wants choosing instead to rent, save up, and pay cash for your a home?

Ultimately, you are the only one who can answer that question… according to your unique situation.

If you are currently contemplating home ownership, I recommend being careful not to make partially educated decisions based mostly on emotion. Instead, run the numbers for yourself and be sure you have a full understanding of both the short and long term financial ramifications before making your move.

IRS Tax Debt Help

Guest Author — Mon, 22 Feb 2010 11:00:06 +0000

Hopefully you do not find yourself in the position of owing income tax, but for those who do I wanted to provide this helpful tax debt information from guest author and tax expert, Matt Robinson.

Will you owe income tax this year?

With April 15th on the horizon, you may find yourself with an inability to pay your taxes. This happens not only to individuals who make estimated payments, but also W2 employees with other sources of income.

Avoid tax penalties

Do not be paralyzed by an inability to pay. Even if you cannot afford the tax owed, file a tax return! Failure to do so will trigger unnecessary penalties that will only increase your tax debt. The “failure to file penalty” is 5% per month on any balance due (up to 25%). If you cannot file by April 15th, request a filing extension using IRS Form 4868 which gives you until October 15th to file (not pay). When you file, it is best to pay as much as possible without sacrificing basic living necessities, as this will not only reduce the total amount you owe, but it will also reduce the failure to pay penalty. There are many different ways to become compliant with the IRS, with some options being a better fit for certain financial situations. Some of the most popular ways taxpayers resolve tax debt is through the use of a credit card, a personal loan, a home equity loan, or an IRS Installment Agreement. As you read the options below, understand that a credit card is a last resort long-term option.

Tax debt help – Situation 1

You only need a few weeks to come up with the money

If you need a few weeks to pay your taxes, it is best to send in a tax return with a small payment and wait for an IRS letter requesting the balance, which is normally 45 days after the due date. Although you may be charged a failure to pay penalty, 5% per month, and interest of, 4% compounded daily, it is a better alternative then the interest on a credit card. This additional time can also be useful in order to tap equity in your home, which will allow you to pay off your tax bill, or to get a personal loan; the interest is tax deductible. Many of us, with this economic downturn, may not have any home equity, or we cannot easily get a bank loan. If this is the case, keep reading.

Tax debt help – Situation 2

You need a lot more time and a home equity or personal loan is not possible or not for you

If you need more than a few weeks, the IRS can give you up to a 120 day temporary extension, if that is all you need, call them at 1-800-829-1040. If you think you may need more time, it is best to request an Installment Agreement from the IRS, which will allow you to pay your tax debt over time, which is generally over the time span of 3-5 years depending on the agreement. In order to request an Installment Agreement (IA), fill out IRS Form 9465 or use the Online Payment Agreement (OPA). If you owe $10k or less, you are “guaranteed” an IA by right of law. If you owe more than $10k but less than $25k, you can use the OPA, and normally, the IRS will not request a Collection Information Statement (CIS) from you to verify your financial situation. This type of agreement is referred to as a Streamlined IA. If you owe over $25k you cannot utilize the OPA and you will need to complete a CIS; you will need to use Form 9465. Regardless of the IA, you will have to state the amount you are able to pay each month, which must be more than the monthly minimum payment. To calculate the minimum monthly payment, take the total amount owed, plus interest and penalties, and divide by 30 for a guaranteed IA, or divide by 50 for a Streamlined or IA over $25k. In summary, look at this Installment Agreement like a loan as it will carry a .25% per month underpayment penalty and interest, which is currently at 4% compounded daily. Therefore, the faster you pay off your installment agreement, the less penalties and interest you will pay over the long-term.

Tax debt help – Situation 3

You need a lot more time and an installment agreement is not possible or is not a good fit

If your Installment Agreement is rejected or not a good fit you can apply for an Offer In Compromise (OIC). An OIC can be accepted if:

Your tax liability is not correct
The IRS feels they will not recoup the taxes by other means (doubt as to collectible)
You are under severe financial hardship (which must be proven to the IRS).

The benefit from an Offer In Compromise is that you end up paying less than you owe, but it is only for taxpayers with extreme circumstances. Moreover, only 10-12% of OICs are accepted. You will start by completing IRS Form 656 and a Collection Information Statement. It is highly recommended with an OIC to use a tax professional, due to the simple fact that they are rarely accepted. If you know you will not be able to pay your taxes, the best advice I can give you is to be proactive and communicate with the IRS on a resolution. Failure to do so will trigger various tax penalties and additional interest that will add to your total tax bill. If you fail to pay after a series of IRS notices, you could be facing a tax lien and/or levies, which will only exacerbate the financial situation.

Will you owe income tax?

If you do owe income tax hopefully you have no trouble paying ASAP… but if you cannot afford immediate payment be sure to utilize the advice that works best for your unique situation.

Matt Robinson is a tax accountant and author for TaxDebtHelp.com. His firm provides IRS tax debt help for major tax problems like tax liens, wage garnishment, bank levies, excessive penalties, tax audits, and more.

A Home Mortgage Means You Pay Double – Limited Income and Wise Spending

Robert Espe — Fri, 19 Feb 2010 11:00:30 +0000

Home mortgage and home ownership

I came out strong enough against home mortgage in last weeks renting vs. mortgage article that I errantly gave some the impression I was opposed to home ownership; that could not be farther from the truth. What I am opposed to is the home mortgage. This is because a home mortgage will cost the average homeowner more than twice the asking price of their home over the life of the mortgage. Some feel this is no big deal – as long as the monthly payment is manageable – and that quality of life issues outweigh concerns of being in debt. My biggest concern is how much a home mortgage will steal from your future standard of living; which is true of most forms of debt although mortgages deserve special attention since they tend to be our largest debts.

Cash flow and earning potential

Most people think in terms of monthly cash flow because they pay their bills monthly – nothing wrong with that. However, something many people fail to consider is the limit to how much money they can make in their lifetime. This is especially true of young people – for whom retirement and cessation of work is a far off – who like to think they will make more money “some day” but may never actually see the growth they might first imagine.

For the most part what we choose to do for a living decides our wages and we can usually estimate those wage with some variation for job experience and cost of living. Our earnings scale will be similar with others who share our occupation so using current wages and demographic data we can estimate what our income will be each year from now until we retire.

Annual income example

Let’s use me as an example. I made about $50,000 this year. I am on a pay scale that starts at about $40,000 but with hard work can quickly jump to about $80,000 over the next 5 years. Then that is it. In good years I might receive a cost of living adjustment (1.7% this year) and if I want more, I either have to have the aptitude for competitive management positions, or try to work as much overtime as I can (which has limits.) If I wanted to make a heavy six figures, I probably should have done something else. My little side hustle writing for DFA is nice, but it is not about to bump me over the $100,000 mark. Even investing, as wonderful a tool as it is for preserving savings against inflation is not going to skyrocket me to new financial heights.

Future wealth example

Using my salary and an example closer to the national average salary, I created a simple spreadsheet that shows projected salary with some cost of living adjustments after 30 years of work for me and average Joe. Before taxes, I stand to earn around $3.3 million, and Joe will earn about $1.4 million. That looks like a lot. After some rough adjustments for taxes however, (and who knows what those will do in the future) I am left with $2.4 million, and Joe still has about $1.1 million. More staggering, an average inflation rate of 3%/yr results in 100% inflation every 18 years (that’s a 50% loss.) That means after 36 years I would have just under $620,000 and Joe $298,000 of today’s dollars. These calculations include salary increases that outpace inflation, and have not yet factored in spending any money.

Consider income limitation with home mortgage

This analysis is far from exact. There are many variables, and it is difficult to precisely value currency, investments, and income across time. What I wanted to demonstrate is that none of us have unlimited supplies of money, and are therefore limited in the number of things we can buy in a lifetime.

Before entering into a home mortgage make sure you roughly consider how much money you stand to earn over the course of your life.

Because most of us cannot make significant changes to our income, we can better affect our future wealth and standard of living by limiting how much we buy and spend. The more informed we are about our earning potential, the more apt we are to use our money wisely. These considerations are especially important when making a large purchase such as a home. With all the other things we do to save money and get good deals, it does not make sense to turn around and spend double the price tag on a house by using a home mortgage. I mean, does it really make sense to rate chase for savings accounts only to end up spending twice the purchase price for our homes? No, it doesn’t. It makes mathematical sense to parlay our wants by saving for a few years… and paying cash – if at all possible.

Financial decisions always catch up with us

Whenever we overspend, at some point in time we will have to give something up to pay for it, even if that time doesn’t come for decades… it will come nonetheless. Consider this a plea to take greater care when making purchases. We work very hard to earn what we have so let’s make sure we spend as wisely as possible!

How To Spend My Tax Refund? C.L. Haddon Answered

Matt Jabs — Thu, 18 Feb 2010 20:32:55 +0000

Need help with your situation? I offer free personal finance advice.

Visit the Ask Matt Jabs page and fill in the form to ask your question for free.

How should I spend my tax refund?

DFA reader C.L. Haddon asked:

Hi, Matt – I am receiving approximately $1,000 back from taxes this year and want to make the best decision as to how to use it. Should I pay down credit card debt, payoff a small installment loan or put it in savings for an emergency fund? I have a personal loan of $1075 at 18%, a credit card with a balance of $3,500 at 14.99%, a credit card with a $1,000 balance at 0% (until June, 2010), another credit card with $4,500 at 9.99%, and lastly a Sears card with a balance of $650 at 22%. I live on SS and income from a part-time job. I commonly have some difficulty making ends each month, primarily due to one-time events like medical co-pays, prescription co-pays, auto repairs, etc. I am 65, female, and the sole wage earner. What is the best use of the $1,000 refund?

Always pay yourself first

Hi CL, thank you for your question.

If I were in your situation there would be no question as to what I would do with the $1,000 tax refund – I would start an emergency fund and save the entire amount as a buffer against the “one-time events” you mention.

Here are some other ways you can a turn your financial situation around:

Increase your cash flow

The reason you have credit card debt is because it sounds as if you are living pay-check-to-paycheck. You need to increase your cash flow. This does not mean that you have to increase your income (although that is a solid idea if it is possible) instead you may want to focus on decreasing your expenses so you have more money available for savings at the end of each month.

Other ways to increase your cash flow:

Create and live by a written monthly budget
Implement the cash envelope system.

Doing these two things help make my wife and I much more efficient in our spending. Now we tell our money where to go instead of wondering where it went.

Decrease expenses

After seeing your income sources and your debt amounts I am assuming that a good portion of your cash flow goes toward debt repayment; but are their any expenses you could cut, at least for awhile?

Some possible expenses to cut:

Cable TV – we just plain do not need television, if cutting this helps you get on your feet financially, then cut it.
Cell phone – cut back your plan or consider getting a land line with limited or no long-distance service.
Eating out – we were spending $6,000/year on dining out and have since all but eliminated this expense.
Unnecessary groceries – pop, snacks, etc. Instead focus on beans and buying in bulk, here are a few ways to save money on groceries.

Pay down debt

Another reason you have no cash flow is because so much of your monthly income is going toward the interest on your debt. I am willing to bet that your debt stacked up slowly over time as one emergency after another hit your pocketbook when you were without savings. If you have that $1,000 emergency fund then you have some solid ground to stand on next time something comes up.

Build your savings

Beyond creating your emergency fund you should also continue to fund it each month, even if you can only do so a little at a time. I have debt too, so I cannot save everything I make. What I have decided to do is attribute 75% of my available cash flow to debt repayment and 25% toward savings. This allows me to pay down my debt and save at the same time – I call it the 75/25 method.

What do you think?

Do you think that C.L. should use her $1,000 to start an emergency fund, pay down some of her debt, or toward something else entirely?

If you need personal finance advice… ask Matt Jabs.

Lending Club Review – Peer to Peer Lending

Matt Jabs — Tue, 16 Feb 2010 11:00:26 +0000

In this article I will review in detail the subject of borrowing from Lending Club and then provide perspective from several individuals who have experience investing with Lending Club. Enjoy.

How Lending Club Works

From the horses mouth…

Lending Club is a social lending network that brings together investors and creditworthy borrowers to offer value beyond traditional banks.

Borrowers with good credit can get personal loans from $1,000 to $25,000 at interest rates that are often significantly better than rates from conventional sources.

For lenders, money invested goes immediately to Lending Club’s approved borrower members. Most lender members spread their investment across tens or hundreds of qualified borrowers. Notes (that correspond to specific borrower loans) are offered only by means of a prospectus.

Is Lending Club right for me?

Those of you who read DFA on a regular basis know I am on a purpose driven mission to free myself and my family from the bondage of debt. For the last 7 months I have been trimming excess fat from every part of our budget and after making many positive changes have recently shifted my focus on getting a few big wins. That’s when I stumbled upon Lending Club…

A little background…

A while back I had the eye opening experience of calculating my interest amount paid, and ever since have been growing increasingly restless over the high interest rates on my auto loan and 3 remaining credit cards. The rates, already high enough to make a gangster blush… were recently pushed even higher by my big bank lenders. And that was the last straw for me… I was ready for a change.

Here are my current loans, banks, and corresponding rates:

Auto Loan – Capital One @ 10.5%
Credit Card 1 – JP Morgan Chase @ 14% (rate recently increased due to “bad economy”)
Credit Card 2 – Capital One @ 16.25% (rate recently increased due to “bad economy”)
Credit Card 3 – Citigroup @ 19% (rate recently increased due to “bad economy”)

I am almost never a proponent of borrowing money, but this is one exception where it is actually quite wise to in more than one way. It did not take much deliberation between me and my wife before drawing the conclusion that it was clearly in our best interest to go ahead and borrow from Lending Club in order to consolidate our high interest debt into one loan at a MUCH LOWER RATE.

Why Borrow with Lending Club?

Let’s be honest… nobody wants to borrow money… period. In fact — as I mentioned above — if you have been following my Debt Free Adventure then you know full well how adamant I am about paying off my debt and reaching financial freedom.

So why did I borrow?

I had heard about peer to peer lending, aka social lending, aka p2p lending before but had never really paid much attention or explored if it could be an option for me. Why? Because I am not looking to borrow money!

Then I had an idea…

Since I hate dealing with credit card companies and big banks in general I wondered… could I borrow from Lending Club to consolidate my high interest consumer debt and pay less interest in the process?

Once on the scent of a big win, some obvious questions racing through my head included:

Who is lending us the money and would we be repaying “regular Joe’s” instead of the Big Banks whose practices we have grown to abhor?
What kind of interest rate could we get?
Will they approve our loan?
How long will it take?
How much are the fees?
Is this a wise alternative to simple debt repayment of our numerous individual high interest debt accounts?
Can I prepay the loan early without penalty?

To better educate myself…

I started poking around on the Lending Club website… studying every inch of it, especially the fine print! All of my questions were answered rather quickly and directly. Here are the answers I found to the above questions:

Individual investors (regular Joe’s like you and me) were lending me the money. As a matter of fact, I ended up getting financed by many other personal finance bloggers I interact with on a daily basis. This story is covered in detail on FiveCentNickel.com and coined “Lending Club: Invest in Your Friends“
With our credit score we were able to secure a rate of 9.32%.
Our loan was approved in just a matter of hours.
An $11,000 loan cost us only $85 in fees.
Even after adding the $85 fee into the calculation, we stand to save $500+ over the life of the loan.
There are no prepayment penalties… so I could pay the entire loan off tomorrow if I so desire (although that may not make my investors the happiest campers!)

It was an awesome feeling to think I would be saving over $500 because of a much better rate, then also paying the necessary interest to friends and business associates rather than huge corporate banks in whom I have nothing short of anti-confidence.

While this was the best decision for my situation, make sure you evaluate your own situation strategically before proceeding — every situation is different and each will require careful attention to detail.

Use this calculator to help determine if consolidating your high interest debt through LC is the best mathematical option for you.

Why Invest with Lending Club?

“Our investors join LC for the opportunity to make above-average returns and to diversify their current holdings in the stock market and other traditional investment vehicles. As the economy starts showing signs of recovery, many investors are also moving away from “defensive” assets like CDs and high-yield savings accounts.
With a 9.61% net annualized returns since we opened back in June 2007 (net of fees and defaults, across all credit grades) despite the tough credit market, LC certainly is an attractive option to benefit from a recovery in consumer credit.”
– Rob Garcia, Director of Product Strategy at Lending Club

Although I am not currently in a position to invest with Lending Club, the system they have in place is fast becoming one of the best decisions to be made with investment dollars… especially in a down market. The alternatives available to the average investor pale in comparison to the several benefits offered when investing through LC.

Below I will list all the reasons to invest as found on the LC website, then deliver several testimonies from actual investors that I know personally. Several of which are my financial mentors, and all of which I trust.

On their website Lending Club gives us these 7 Lucrative Reasons to Become an Investor:

You can earn better returns – Since June 2007, LC investors have earned an average net annualized return of over 9%. Read the report by Javelin Research.
It’s straightforward – The money you invest funds loans made to creditworthy borrowers.
We’re selective – Many borrowers apply, but less than one in ten are accepted. LC approves only creditworthy borrowers as members.
It’s easy – We make it easy to build a portfolio based on your criteria. Most lending members spread their investment across tens or hundreds of qualified borrowers.
We set fair and fixed rates – Our rates are based on historical trends and the current economic climate. Borrowers pay a fixed rate for the 3-year life of the loan.
You get flexibility – You can reinvest any interest and principal payments each month or withdraw them like an annuity. You can also put your notes up for sale on the Note Trading Platform.
Do good while doing well – Many of our lender members find it rewarding to help others meet their financial goals. Especially in this economic environment, LC members come through when big banks do not.

Investor Testimonials…

Each of the following testimonials are from individuals in my own personal contact list. They are not paid by Lending Club to share their opinion, rather they simply wanted to share their story in an effort to help other investors — seeking stable opportunities — to plug into the lucrative option they have found.

Another great part of LC is the ability to invest in those you trust. Both Nickel and Erica invested in us and helped fund our loan. I believe Pete tried, but our loan was funded so fast that he didn’t get the chance!

All of these investors agree that the returns they are making on Lending Club far exceed that which the could be making in a high yield savings account

- Nickel of FiveCentNickel.com

Over the past few months, I’ve become a fan of investing through Lending Club. Prior to actually trying it out, I’d been pretty skeptical of peer-to-peer lending. After all, the idea of lending money more or less directly to other people is pretty “out there” nowadays. I finally decided to give it whirl with a bit of “fun money,” and I haven’t look back since.
It’s too soon for me to make any grand claims regarding investment performance, but things have been going great so far. LC is very easy to use, and the interest rates are great. The fact that you can invest as little as $25 per loan also means that you can really reduce your risk by spreading your money around.
While we haven’t abandoned more traditional investment vehicles, we’ve been gradually increasing our LC investments as we’ve become more comfortable with the concept. On top of everything else, it’s kind of fun to know that your loans are directly helping real people.

- Erica Douglas of Erica.Biz

I’m a high net worth investor, and I chose to invest through Lending Club over many alternatives. Here’s why:
The stock market is risky and could plummet
It’s easy to get started with as little as $25
LC handles all the payments, so I don’t have to worry about collecting money directly from people
There aren’t any mammoth trading fees that would eat up an entire small investment like mutual funds/the stock market.
Besides, even a “high-yield” savings accounts is only paying 1% right now. 1% should be pretty easy to beat.
I use LC the way many people would use a CD ladder. I can liquidate my positions easily if needed via their Note Trading Platform. And it has far better returns than a CD ladder would.

- Pete of BibleMoneyMatters.com

Over the past year or so I’ve heard a lot about the peer to peer lending market, and investing through Lending Club. For quite some time I’ve been pretty skeptical about the concept, and I just assumed that most of the people borrowing through Lending Club were big credit risks unable to get a loan elsewhere. I also didn’t want to be lending money to people for irresponsible reasons. After talking with other lenders and doing a bit of research I’ve found that while there certainly are some folks on there that are big credit risks, as a lender you’re able to choose who you loan your money to, and what you lend for. That allows me to be picky about who I’ll lend to, and how much risk I’m willing to take. Add to that the fact that LC registered with the SEC in 2008, and their credibility in my eyes has increased quite a bit. I’m finally taking the plunge because I believe my money can give help to others, and still make me a little bit of money in the process.

- Jacqui Pittenger of Twitter

I signed up in February 2009 through a free $25 referral link on one of my favorite blogs – Dual Income No Kids. I figured there’s nothing to lose when you invest free money. I enjoyed the experience so much, I soon added another $500 to my account.
While I would not consider peer to peer lending safe enough for an emergency fund, or even as a primary investment strategy, it’s a worthwhile addition to my investment portfolio. My mix of loans skews to the riskier side with rates ranging from 8% to 18%. My current Net Annualized Return is 13.55% and all payments are current (so far at least). Even a few defaults would still leave me with an acceptable return.
The promise of yields far in excess of a savings account or CD is very tempting. But my favorite feature is being able to fund loans to people I want to help – like those digging out of a mountain of medical debt, moving closer to their place of employment, or purchasing a motorcycle to reduce fuel consumption. If I have any doubt about person’s ability to repay the loan I move on. There are plenty of applications to choose from, so trust your instincts.
In the spring I signed up to automatically transfer $25 from my checking account to Lending Club each month, though I opted out of their automatic investment plan. I prefer to hand pick my loans each month. Soon I’ll reach the point where I can not only invest in a ‘new money’ loan each month, but will also have a ‘repayment reinvestment’ every month as well.

Closing Thoughts…

For a long time we have bestowed great confidence upon our financial institutions; but with all the recent bail out money — that seemingly grows on trees — a rapidly increasing number of people, myself included, are turning to social lending providers like Lending Club for simplistic and transparent borrowing and investing. A lot of people are hungry for change, for the power of choice, and for greater control over their own financial destiny! And in my experienced opinion… LC seems to be answering that call quite nicely.

Using Lending Club has indeed been a big win for me and my wife and I do not hesitate to recommend their service.

What do you think?

Have you recently borrowed through Lending Club and want to share your experience? Are you an seasoned LC investor with a testimonial of your own? Maybe you simply have an opinion that just has to be voiced. Whatever it is… let us hear it!

My interview with Barry Moltz on borrowing from Lending Club.

Other Bloggers featuring Lending Club

Lending Club: Peer-to-Peer Lending @ MoneyFunk

Renting vs. Mortgage and A Solution for Mortgage Free Home Ownership

Robert Espe — Fri, 12 Feb 2010 21:27:55 +0000

The Lie – Renting is throwing money away

Although I am currently debt free I do not own a home, have no immediate plans to buy one, and have been renting an apartment for nearly 3 years now.

You may remember a past discussion on the topic of renting before buying a home, and while there are many factors involved in the renting vs. mortgage debate, today let’s hone in on one common misconception that often drives people into the arms of mortgage lenders:

“Renting is just throwing money away”

Well intentioned friends like to remind hapless renters like myself how much we have “thrown away” in rents over the past several years. They are also quick to point out that had we only bought (a.k.a. mortgaged our lives for) a home, some of our rents paid would now be counted toward our net worth calculation as equity. In reality this is misleading at best. Actually, avoiding a mortgage has provided us an opportunity to build more equity while renting. To prove my point let’s compare a hypothetical mortgage against my current rental housing situation.

The Truth – Renting cost vs. mortgage cost

According to Bankrate.com borrowers in Laredo, TX with credit scores over 700 can borrow $165,000 on a 30 yr fixed note for about 5% – if they put 20% down. I don’t know a lot of first time, prospective mortgage slaves with $33,000 in their pocket. Heck, many may be hard pressed even to have credit scores of 700 or higher. So we will go with the default numbers in Bankrate’s payment calculator: $165,000, for 30 years, at 7%, with no down payment. That is enough to buy a house about twice the size of my current apartment in the same neighborhood.

I currently pay $700 for a 626 sq ft, 1 bedroom apartment in a gated community, with a pool and a gym. We are trading up to a larger house in this example, because that is what most people do. Few go looking for a 600 sq ft house, as they usually leave apartments for more space. Feel free to run these numbers with a more expensive apartment or cheaper house; the results should be similar.

Here is a snippet of the Amortization Schedule (click image to see the full amortization schedule.)

Our imagined loan results in monthly payments of $1,097.75. At the first payment, only $135.25 goes toward principal. After one year of payments the equity, according to amortization schedule, would be $1,676.09 not $13,173. As you can see… that’s not a whole lot of equity.

We THREW AWAY almost $12,000 in the first year with a mortgage; my apartment only costs $8,400!

Also, by the time the loan is paid off, $230,189.68 has been thrown away in interest paid to the bank. That is more than the price of the house! Mortgages steal from your future standard of living. Sure… you will get into a house sooner, but think of all the things you could buy with $230,000 if your house was already paid for!

The Solution – Build more equity while renting

The snippet amortization schedule above shows the initial & final payments on our imagined loan. It also shows the turning point where the money I through away on interest is less than the money through away on rent. Notice it is 15 years in the future. That means I could rent for 15 years before buying a house and still come out money ahead, and maybe save enough to buy a home with cash.

The loan payment is $397.75 more than my current rent. Instead of making the larger payment to a bank, I continue to pay my rent and put the difference into an ING Direct savings account labeled “Personal Equity.” At the end of one year, I will have $4,773. That is more than double the equity I would have with a mortgage, and it is also a liquid asset in MY bank account… accessible without having to sell my home or qualify for a HELOC loan. You build your personal equity faster as you save money, I like to think of this as mortgage pre-payment.

My own personal equity grows by $875 with every paycheck. I will have $22,000 by the end of the year. I am also looking for a cheaper apartment, and probably will spend less than $165,000 on a house. If I maintain my current standard of living, as my income increases so will my savings. Eventually I will be able to buy a house with cash in the time it takes most people to pay off a car.

Final Details

You might notice I didn’t account for the mortgage interest tax deduction. I wanted to keep the math simple, so I also left out costs for home maintenance, property taxes, or private mortgage insurance that more than offset the tax break. These forgotten expenses will only add to the savings a renter can accumulate while those paying mortgage continue to pay, pay, pay.

For this to work you will need to secure housing below your means while you save to afford something better a few years down the road. This concept of sacrificing now to benefit later is a fundamental building block of sound personal finance. Renting indefinitely without saving will never get you into a house, but paying a mortgage guarantees that you throw away money on interest.

There will always be a few areas with no available rental housing, but most people should be able to find a decent rental while they save for a home. However, most people choose a mortgage over renting because they refuse to live below/within their means for a few years… never realizing how much it actually costs them in the long run.

What Do You Think?

I encourage you to visit Bankrate.com and try out their amortization calculator with prices from your area. If you rent, take note of the difference between your current rent amount and a mortgage payment. How much personal equity could you build in a year? If you already own a home, try the pre-payment calculator to see if you can pay that bugger off early.

Do you believe people could ever be completely free from mortgages? If not, why?

11 Ways We Dove into Debt and How We’re Digging Out

Matt Jabs — Tue, 09 Feb 2010 18:01:38 +0000

It was not all that long ago that our ‘Debt Free’ Adventure was more like a ‘who cares how much debt we have’ adventure. I suppose we were semi-responsible in that we never made ourselves house poor, nor did we ever go hog wild on gadgets or toys. In fact, the reason we accumulated debt at all is simple… up until January of 2009 we never understood how powerful a prison of debt can be.

Now that we do understand the power of debt slavery, we avoid it like the plague.

Mindset of the chronically indebted

Before I get into specifics, it is important to touch on a few “thinking problems” we had that are commonly shared by those in debt:

We just didn’t care – By far the biggest personal finance problem for us was simply our lack of responsible money management. If we would have taken control of our financial reigns from day one we would be in a much better position. Oh well, since we can’t change the past we focus on doing the right thing going forward.
Influenced by culture – One of the biggest reasons we slowly let ourselves get into debt was because we did not purpose to think for ourselves. Rather than responsibly determining our purchases based on actual savings and income, we bought according to cultural norms.
We make decent money – We figured because we were both college educated, working professionals that we should be able to have certain things. Rather than responsibly determining our purchases based on actual savings and income, we presumed our income would always be there and leveraged against future income.
We deserve nice things – Because we sacrificed and worked hard all the way through school, we felt as if we deserved to buy nice things the day we began earning rather than the day we had actually accumulated the savings. Rather than responsibly determining our purchases based on actual savings and income, we felt as though we deserved nice things before we actually earned those nice things.

Ways our debt accumulated

Here are a few specific ways our debt built up over the years:

We ate out constantly – Before analyzing food costs we rarely planned or prepared meals in advance, instead we would just eat out whenever we felt like it. Now we set a strict budget for groceries and dining out and are careful to stick to it every month. Not only do we save thousands of dollars each year, but we have also lost around 60 combined pounds.
We never used a budget – Rather than telling our money where to go, our money would just seem to vanish into thin air. This always happened, regardless of how much money we made. Now we give every dollar a job rather than wondering where it all goes… and boy does it feel great!
Credit cards as an emergency fund – Rather than save money for emergencies, we chose to go into high interest debt each time we had an emergency. Saving for emergencies was a personal finance fundamental we lacked in times past but have since adopted… and we feel much more secure because of it.
I fell for the HDTV craze – I take full responsibility for all our financial irresponsibility… but this particular purchase deserves a special mention. Against her better judgment, my wife gracefully went along with my decision to purchase a $2,000 television – bless her heart. This was obviously a terribly unnecessary purchase decision on my part. We had a 27″ television that worked perfectly fine, but for whatever reason I just had to have a fancy new boob tube. I would sell it in a heartbeat if I weren’t sure to lose my tail on it… so we just keep it and plan on having it for a loooooooong time.
Bank fees – Oh my word… I hate talking about this because it makes me feel like such a D-bag. Before we started our debt free adventure it was not super uncommon for me to be hit with bank fees. Both over-the-limit fees and late fees were things that ate up a good amount of our money over the years. Never again I say… never again! Next to responsible management of our money the best move we made to avoid bank fees was switching to ING Direct Bank – they treat us so much better than any bank in the past.
Just swipe it – We used to just swipe our debit cards for everything with the only requirement being a positive balance in our checking account – and even that was ignored sometimes. Now-a-days we use cash envelopes for our five most easily abused budget categories: groceries, miscellaneous, dining out, entertainment, and clothing are all kept under tight reigns by limited amounts of cash each month.
Alcoholic beverages – Rather than waiting until we were home to enjoy a beer or glass of wine for much cheaper, we would order drinks with dinner. A lot of people talk about the latte factor, but I wonder if the less popular alcohol factor eats up just as much or more of the average American family budget. Now-a-days if we want an occasional beer or glass of wine we just wait until we get home.

Of course there are other factors that contributed to the debt we battle so fervently today… but this list gives you a good idea of what not to do if you want to win with money.

Ways you got into debt

What are some specific things you have changed or need to change in order to avoid future debt and help dig your way out of existing debt?

Debt Free Adventure » Debt

Debt Reduction and Savings Statement – April, May, June, July 2010

Our goal progress for April, May, June, July 2010

Check out our debt reduction charts in the right sidebar. I like graphs.

1. Lending Club debt goal

2. 2nd mortgage debt goal

3. Emergency fund savings goal

4. Side income growth goal

Other savings

Thoughts

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Business Debt in a Sole Proprietorship

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Business debt mixed with our personal finances

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Get out of debt by curtailing your spending

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How Much Our Debt Costs – March, April, May 2010

February 2010 Update – How much our debt cost

Here is the comparison between the last two months:

A few notes about the details of the numbers…

The “How Much Your Debt Costs” Spreadsheet & Graph

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Stop 401(k) contributions to speed debt reduction?

Congratulations!

Your Plan or Dave’s Plan?

A Better Rate of Return

Planning For an Uncertain Future

Do You Have Any Other Advice for James?

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What Makes The Most Financial Sense?

Scrap It?

Park It?

Fix It?

In Summary – What is the best way to deal with this situation?

Do you have any other advice for Benedictus?

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Downsize Your Vehicles

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Final Details

Do you have any advice for Julianna?

Have a question of your own? Ask Matt Jabs for free!

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Job Loss – Save Money or Get Out of Debt?

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Job loss – prepare by saving or debt reduction?

How to best prepare for job loss

1. Save $1,000 in a high yield savings account.

2. Forget about paying off the mortgage for now

3. Pay off your credit card debt

4. Save money

In closing

Do you have any other advice for Tiffany?

Have a question of your own? Ask Matt Jabs for free!

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Debt Reduction and Savings Statement – March 2010

Our goal progress for March 2010

Check out our debt reduction charts in the right sidebar. I like graphs.

1. Lending Club debt goal