A $100 Bill

A couple of years ago I read a book entitled 'You're Broke Because You Want To Be' by personal finance author and reality TV show host Larry Winget. In this book, he briefly mentions how he carries around a $100 bill in his wallet. He stated that this action gives a person confidence, knowing that emergency cash is readily available.
Since then, I've stashed a Benjamin in my wallet. On a couple of occasions, I've used it instead of my debit card. For example, on one occasion, my wife and kids and I were visiting relatives in Las Vegas. The oil pressure light came on the day after we arrived. I took the car to a repair shop, and they performed an inspection. Everything checked out OK, except for the oil pressure sensor. Confident that we could return home safely without replacing the sensor, I only needed to pay for the inspection, which was around $80. So far, we had kept to our cash only travel budget.
Because this was an unexpected expense, I pulled out my trusted cash and paid the shop. I was happy because I had a small emergency stash available when I needed it. When I returned home, I snatched a $100 bill from our automobile budget envelope.
Carrying cash allows me to have confidence that while standing in a checkout line, if my debit card doesn't work, I can pull out cash and avoid an embarrassing situation. It also gives me one more reason not to carry a credit card for so called 'emergencies'.

Consumer Debt during the Great Depression

Not long ago I was reading "The Automatic Millionaire" by David Bach. In the chapter on paying off debt, he mentions that those who lived through the Great Depression hated debt. I've read the same thing in other books, but without an explanation as to why those people avoided debt after the Great Depression ended.

Did they avoid debt because so many people were without jobs? Was it because they lost their savings in the stock market crash? Was it because of inflation where everyday items became expensive?

I decided I needed to dig in and find out why those who lived through the depression avoid borrowing money. What can we learn from them?

A couple of online searches revealed that the economy grew rapidly before the Depression occurred. Many banks and finance companies came up with creative ways to lend money. A couple of methods available to consumers included credit and installment loans.

It appears that a large percentage of the middle and lower class borrowed money for consumer goods during the economic boom. When the Depression hit, many people were left without jobs or smaller incomes and may not have been able to pay back their debts. If the consumer goods had value, they were reposessed by the bank.

When most people who had borrowed money were unable to make monthly payments because of a lost or reduced income, or knew someone who was in this situation, they most likely resolved right then and there not to borrow money, because they could see the stress it caused.

The reason that the old timers avoided debt wasn't simply because of the hardship they experienced during the Depression, but because they or someone they knew got burned because of excessive borrowing.

Today, as we move out of the Great Recession, let's remember their advice to live within your means, avoid borrowing money, and save for a rainy day.

Financial IQ

Recently, I went to a class on investing. The instructor was a professional investor. There were only about 12 people in attendance. The first topic was debt. He put two columns on the blackboard, and in the first column he put the word "Good" and in the second he put the word "Bad". He then proceeded to ask us what types of debt would go in each column. Some raised their hands and said that a mortgage and education could go in the Good column, while credit card debt would go in the Bad column.
At that point, he took over. He then added additional items to the Good list, including car loans and investment real estate. It was at that point where I could see where the rest of the class discussion was headed.
The discussion then turned to investing. He used the term "Financial IQ" to explain how he we could become proficient in personal finance and investing, and as we studied we could become as proficient as he is.
Over the last several years while my wife and I got out of debt and began saving for our future, I believe we've increased our Financial IQ, but not by his standards.

What we've learned:

• Any type of debt can turn out to hurt you financially, e.g. getting into a mortgage that requires two incomes to sustain, taking out excessive student loans and then not being able to find a job after graduation
• Teaching our kids that they can have what they want but they have to save for it
• Finding that it's more pleasurable to save than it is to spend
• Finding satisfaction when making a large purchase that we saved for
• Knowing that we have enough money in an emergency fund to handle nearly any financial emergency
• Having more money in our checking account than the current value of the car I drive to work
• Knowing that as we put money in retirement, we can maintain our standard of living after we retire
• Knowing that our kids will be set for college, and that we will be able to fund their high school expenses and weddings
• We should consolidate our IRA accounts and our Roth IRA accounts to make them easier to manage
• We should regularly take classes and stay informed on investments, learning all we can before investing our money
• We have a will and life insurance in place in case one or more of us passes away
  

Based on the list above, I think we'd do pretty well on any Financial IQ test.

Home Refinancing - Part 2

Back in December 2008 I wrote about the process we took to refinance our home into a 15 year loan. I also wrote an update where we decided to back out of the refinance, because of the associated out of pocket costs.
Just over two years later, we decided to go down that path again. On Friday, April 1, 2011, we signed the paperwork to refinance to a 15 year fixed rate loan at 4.375%. Our monthly payment will be the same. We have been in our house for 7 years, so we have 23 years left on our 30 year loan.
While punching numbers into a couple of online calculators, comparing our old loan with our new loan, while just making the minimum payments each month, we are going to save around $75,000 in interest payments. That is significant enough that our investment of $5000 in closing costs ($3100 out of pocket) will provide a great return on investment.
Comparing the two refinances: in 2008 we were offered a 4.875% interest rate, this time we almost locked in a 4.5% rate, but for one week the rates dropped and we were able to lock in a 4.375% rate. This reduced rate means that our monthly payment will be within $50 of our current monthly payment. I believe our appraisal came back the same (around $190,000). Our closing costs were the same, although this time we had the cash available.
We should be able to recoup our closing costs within just a couple of years, while making minimum payments. We plan on paying extra each month, starting later this year. We should have our house paid off in less than 12 years.
In conclusion, we decided to refinance while rates were low. This will automatically force us to pay off the house sooner, or if we decide to move in a few years, we would have much more equity available, because more of our monthly payment will now go towards paying down the principal.

Preventative Maintenance for Your Finances

Have you ever been driving down the road, and seen a blue cloud of smoke billowing out of the exhaust pipe from the car in front of you? You feel like you are going to suffocate as their fumes begin to blow through your car's vents, so you pass them as quickly as possible. As you pass, you notice that the car isn't that old, it could even be newer than the one you are driving?

Many of us own cars, and those cars require regular maintenance. Regular oil changes, tire rotations, inspections and emissions testing allow your car to run at peak performance for many years. In most cases, the car blowing blue smoke wasn't maintained on a regular basis, and the owner's neglect is beginning to show.

Preventative maintenance keeps our cars running longer without major overhauls on the engine or transmission. The same can be said of personal finance. Regularly reviewing your budget, maintaining an emergency fund, setting savings goals for purchases, and contributing to retirement helps you prevent major issues down the road.

For example, as I wrote back in my post entitled 'Another Debt-Free Christmas,' regular contributions to our gifts account allowed us to avoid the regret that comes with a January credit card bill. My wife and I planned ahead, and limited our purchases to our budgeted amounts (although we spent more for Christmas 2010 than we have for prior Christmases).

For our budget, we review and if there is a larger expense coming, we may divert more funds into that account temporarily. This allows us to reduce the impact on other budget categories and avoid using our emergency savings to pay for these items and events.

Another financial maintenance item we're considering is whether to refinance our house from a 30 year loan (we have 23 years left), to a 15 year loan. This will allow us to 1) get rid of our monthly private mortgage insurance (PMI) payment, 2) reduce the term and 3) increase the amount we pay each month towards the principle, so if we sell in 5 or 10 years, most of the principle will be paid down. With today's low rates, our monthly payment will most likely be only $100 per month more than we pay today. Small adjustments we make to our mortgage today will have lasting impacts on our finances down the road.

Regularly maintaining your finances allows you to reduce the time that you spend paying down loans, avoid finance charges by saving and paying cash, and prepare for retirement.

Another Debt-Free Christmas

As you can probably tell from my recent post on my tech blog, we had a great Christmas. A new TV, new phones, new Xbox games and accessories, and the kids got everything they wanted.

This Christmas was another debt-free Christmas. For our gifts, we either paid cash in the store, or purchased them online with our debit card (tied to our checking account). No regrets, no January credit card bill hangover, no worries.

Next stop, revising our budget for the upcoming year...