An important aspect of having well-rounded finances is charity. Giving is generally accepted by many personal finance experts as an essential part of good money management.
Your giving, however, should be like other aspects of your financial management – an effort should be made to ensure that you are getting the best value for your dollar. Maximizing your charity donations can mean more people helped by a cause that you care about. Here are some ways to maximize your charity donations:
1. Research before you give.
In some cases, only 30 or 40 cents of every dollar given to a charity actually goes toward the people it’s supposed to help. Administrative costs, and other costs sometimes eat up the donations. Inefficient charities tend to enrich a few executives at the top without doing a lot of good overall.
Before you give, research the charities you are considering. Websites like Charity Navigator show you how much of your donation actually goes toward the cause (aim for an organization where at least 70% of the money goes to help others). Choose one to three charities that you really agree with and that are well-run, and more of your money will help more people.
2. Set up regular contributions.
Rather than giving unpredictably, you can set up regular contributions. Some charities prefer smaller, but regular, donations to erratic larger donations. You can commit to monthly donations, or even set up a charitable trust to operate in a way that provides regular income for the charity. These regular contributions can give the charity something it can rely on – and take some of the pressure off in other areas. This allows the charity to better serve those populations that need the help.
3. Go local.
One of the things that I particularly enjoy is going local with my charitable donations. You can really see the effect your donation has in your own community when you give locally. Look for local charities that make a difference right where you live. Smaller, community-based organizations often (but not always) use their resources effectively, and they can have a tremendous impact on the local population.
4. Get personally involved.
If you really want to make sure that your charity donations are doing the most good for the dollar, you can become personally involved. Donate your time as well as your money. You can help by volunteering at charitable events, and performing a number of other tasks. Another possibility is that you could be named to a charity’s board, and help make the decisions.
Becoming personally involved is a great way to maximize your charity donations and improve others’ lives. With a little research, as well as the determination to focus some of your resources on making a better world, it’s possible for you to contribute to a large amount of good in the world.
Try to make savvy decisions about your charitable donations. Look for charities that will use a bulk of your gift to help those who need it, and even take a step further and become involved in the actual workings of the charity.
Do you donate to a charity? Leave a comment and let us know your favorite!
This article was originally published December 18, 2012.
So many contingencies can be addressed with solid financial planning – having an emergency fund, creating a college fund to put children through school while minimizing student loan debt, building a retirement plan, and even having life insurance to care for your loved ones upon your death.
But sometimes things happen that come from outside the realm of finance. We can think of them as life events, and they can be game changers.
Often we deal with these events by going deeper into debt, especially if the event is long-term in nature. That compounds the problem because we can end up paying for that reliance on credit for many years after the fact.
What kind of events can take place and how can we avoid the debt they often bring?
A Lengthy Period of Unemployment
A job loss can turn into a life event when you’re unable to find a suitable replacement job within a reasonable period of time. The longer it lasts, the more likely you’ll turn to debt in order to maintain your lifestyle.
Here is how to avoid unemployment-related debt:
- Make a lifetime habit of keeping your most basic living expenses – housing, cars and debt – as low as possible. Cutting variable expenses like groceries and entertainment can be done in a pinch, but big picture expenses aren’t easily reduced.
- Keep a fat emergency fund – three to six months of living expenses is good, but these days a full year’s worth is much better protection.
- Assume your unemployment will be long-term and begin reducing your living standard immediately.
- Find ways to make money immediately, that way you’ll be in circulation and making contacts and have an income source in place when your unemployment benefits run out.
- Most job losses are preceded by smoke signals – don’t ignore them. That’s your cue to update your resume, renew your network contacts and put out some feelers before anything actually happens.
- Be realistic about employment prospects in your field. If the job market is tightening, develop new skills that will keep you ahead of the pack, or start making preparations for a career change if a new job in your current field looks unlikely.
Major Medical Events
Though we hope they won’t ever happen to us, the possibility is real that at some point you may be hit by a medical event that’s more than just a bump in the road. Heart troubles or a bout with cancer can last for many months. One of the problems of avoiding debt during such an event is that there are so many variables relating to the severity, length of time and ability to earn an income while you’re going through it.
Complete avoidance of debt during a major medical event may not be possible, but you can minimize it.
- Have the first two bullet-point recommendations in place at all times – they’re virtually universal in dealing with any life event.
- See if you can create a limited work-from-home arrangement with your employer, even if it requires reduced responsibility. That will give you some sort of income, which will be critical if you don’t have (or don’t qualify for) disability coverage.
- It could help to have some type of work-at-home side business in place, in the event that you can’t effectively work outside your home.
- If you’re falling behind on medical bills early in the process, try to get outside help early. Get help from family, friends and charities for expenses not covered by insurance.
- Negotiate lower fees from healthcare providers wherever you can. Many will work with you.
Legal issues can take so many different forms that it’s impossible to generalize. It could be a civil suit that seeks to seize your assets, a regulatory challenge to your business or a criminal charge. When they hit, you may be tempted to tap your credit lines early in an attempt to defend yourself, but that will only compound your troubles.
Ways to avoid the worst and stay out of debt:
- Keeping expenses low and having a huge emergency fund help here too. Think of it as preparing for the worst.
- Keep prepaid legal services in force, even when it seems as if you’ll never need them. This will keep your own legal counsel from draining you during the fight.
- The saying, ‘an ounce of prevention is worth a pound of cure,’ applies here. In all areas of your life, do your best to be a good citizen and to comply with applicable laws. In addition to minimizing your exposure to trouble, a clean track record can be your best defense before a judge. This is especially true if you face criminal charges.
- Negotiate and settle where you can. Some issues are misunderstandings that can be cured by some heartfelt face-to-face discussions. Swallow your pride and do what you can to minimize the damage.
- Keep insurance in place to cover any identifiable legal exposure.
What goes up, must come down, and that can apply to businesses too. One of the biggest problems with a business failure is that you’ll probably have poured all of your time, resources, and emotions into your business, making it very difficult to walk away. You might do anything to save it, and that includes borrowing money.
Here are some ways to avoid that fate:
- Once again, refer to and implement the first two bullet points.
- Do your best to separate your business from your personal assets using a legal perspective.
- Don’t risk or pledge personal assets for your business. If your business fails you’ll need your home and your retirement plan more than ever.
- Keep or develop some employment skills so that you’ll be able to grab a temporary job, either to carry you through a rough spot in your business or to help with the transition to a new one.
- Know when it’s time to fold up the tent. If the business is in its terminal phase any money you put into it to save it will be a matter of throwing good money after bad. You’ll need all the resources you can muster for your next venture.
It may not be possible to completely avoid going into debt as a result of a major life event. But there are ways to keep it to a minimum and that will give you a better chance at rebuilding your life once the event passes.
Have you been through a life-changing event that impacted your finances? Tell us about it in the comments!
This article was originally published October 23, 2012.
If you’ve been wanting to start earning extra money with some of your unique skills then Kimberly Palmer’s new book “The Economy of You” is a good read. One of the things I like about Kim’s work is that she didn’t write it as an observer, she actually went through the process of starting her own side gig and she shares her personal experiences.
I talked to Kim last week after going through “The Economy of You” and asked her a few questions about her business, Palmer’s Planners, and her book.
1) When I asked Kim why she hadn’t started Palmer’s Planners sooner, she had an interesting two-part answer.
The first part of the answer was that she had never thought of herself as an entrepreneur. She had always thought of herself as a journalist. She had interviewed lots of entrepreneurs and written about business and finance but always from the perspective of someone reporting on the topic, never with a mindset of someone who was creating a business. However, one day she was in the process of doing research on Etsy for an article when the idea for her business came to her.
So why had she started thinking entrepreneurially?
One of the common traits listed in “The Economy of You” for people that have successful side gigs is that they’re often motivated by some major life event – such as adding/losing a family member or a loss of a job. In Kim’s case, becoming a mother and buying a home brought new responsibility that set her mind searching for ways in addition to journalism to bring in money to help support her family.
2) As a follow up to the first question I asked about how others could find their own side-gig ideas.
You may want to create a side income or a business but you don’t know exactly what to offer or what you can provide and you’re out there looking for ideas. I asked Kim for some suggestions for people who might want to create a small business or do freelancing or a side gig but they’re not sure what to do.
One of her tips was to go out and search around sites like Elance, oDesk, or Fiverr and look at the wide variety of things that people are doing and the services they’re offering. There’s also a great appendix at the end of her book that lists out the top 50 side gigs for web-savvy professionals. As the section describes it, the jobs tend to have low barriers to entry and high potential for pay.
3) The next question I asked Kim was how she dealt with setbacks?
Another common trait of successful solopreneurs listed in the book is that of resiliency in the face of setbacks. One of Kim’s setbacks was the lack of sales when she first launched her planners.
The way that Kim pushed mentally through those disappointments was by taking things one day at a time. When she came home at the end of the day she forgot about what went on and any setbacks or failures. She shut off her phone and spent time with her family. That mental break gave her time to reset and start the next day fresh without getting down or discouraged.
Something else that came up as part of our conversation was that between her first book (Generation Earn) and this latest book she invested significant time in another book proposal that wasn’t picked up by a publisher. Although it was discouraging Kim saw it as a setback and not a “failure”. The content and ideas in her proposal went on to be a big part of her first money planner in her new business that continues to sell today. (I didn’t ask Kim this but my guess is she probably makes more off the sale of each planner than she would have made off the sale of each book had a publisher picked it up).
4) How does Kim manage her time between her job, family, and her business?
For Kim family is her number one priority. The way that she’s found success juggling everything and keeping those priorities straight is by having a routine and being pretty strict about sticking to it. There’s time built in every week for work, family, and Palmer’s Planners.
That being said, one of things that she likes about the concept of having a side gig is that it can fit into her life schedule – she can adjust her hours up or down based on everything else that’s going on in life.
5) Looking back, what would Kim do differently when getting started in her side-gig?
Her biggest mistake was spending too much money on startup costs. She spent money printing a batch of planners before she knew whether anyone would buy them. The bad news is she still has many of those original planners sitting unsold in a box. The good news is that sales of the digital version of the planners are going great!
This is a useful lesson for anyone thinking about starting their own business. Avoid spending a lot of money upfront based on assumptions. Try and get actual customer feedback before you go and spend a lot of money right away.
If you want to read more about Kim’s lessons learned, examples from other entrepreneurs, and ways you can develop your own side income I recommend checking out “The Economy of You”.
When someone dies, where does their money go? It’s an important question.
Figuring out where an inheritance goes can be a difficult process, depending on the situation and what kind of instructions the deceased has left relating to their assets. What actually happens depends on the wishes of the person who has passed, tempered by state and local inheritance laws, as well as other rules.
Here are some of the parties that can expect a share of an inheritance when a person passes on:
In many states, if there is a surviving spouse, most of the assets pass to that person, without probate, if the assets are owned jointly. In some cases, though, probate might be necessary even for spouses. Some bank accounts opened in the name of the deceased, but not jointly owned, might not have a beneficiary names. These assets end up going through probate.
Additionally, if someone other than the current spouse is named as a beneficiary, it is the beneficiary that receives the assets. Joint assets pass on without being taxed in most cases.
The government, of course, wants its cut. For estates of certain sizes, there are estate taxes, and in many cases the heirs pay inheritance taxes. Realize that there are federal taxes to pay, and many states also have their own taxes. These taxes can reduce the size of the estate before it is passed on to someone else.
If a person dies owing money, then the estate is responsible for paying those debts. Assets of the estate might be liquidated in order to meet those obligations. If there isn’t enough money in the estate to go around, a judge might decide how much, and in which order, the creditors are paid. The assets that heirs receive are only divided up after the creditors have been satisfied. As a result, a great deal of debt can impact how much you leave to your posterity.
The people named in wills, or listed as beneficiaries on different accounts receive their share of the estate when someone passes on. A will and other estate planning documents can be very useful in helping the executors of the estate assign assets.
In addition to the information listed in estate planning documents, the beneficiaries listed on accounts also receive their share. It’s important to note that the beneficiaries listed on an account trump what’s in the will. So, if you make it clear in your will that your children should receive the benefit of your life insurance policy, but you haven’t removed your ex-spouse as the beneficiary on the policy itself, it doesn’t matter what your will says. Your ex gets the money.
The same thing is true of retirement accounts and Health Savings Accounts and many other types of accounts. This is why it’s so important to review your beneficiaries regularly and make sure all of the information is up to date.
You can choose to leave assets to organizations as well as individuals. It’s possible to leave a portion of your inheritance to a charity, your alma mater, or to some other organization.
Because your inheritance can go to almost anyone, it’s important to think about how you will dispose of your assets when you pass on, including the legal steps you can take to reduce the tax liability of your estate. Get the help of a knowledgeable estate planning attorney and make an effort to use various tools to make sure most of your assets go where you want them to go.
Are you dealing with inheritance issues or questions? Leave a comment!
This article was originally published December 7th, 2012.
Balance transfer cards can be a useful tool for reducing your interest rate and helping you pay off your debt faster. With the right balance transfer offer, more of your monthly payment can go to the principal, and you will pay less over time – in addition to getting out of debt quicker.
Unfortunately, as with so many financial tools, when used improperly a balance transfer card can actually cause more problems. In some cases, a balance transfer can result in a delay to paying off debt – and can even lead to an increase in debt.
Understand Balance Transfer Terms
Before you sign up for a balance transfer, make sure that you understand the terms involved. The terms of the balance transfer can have an impact on how effective it is when it comes to paying down your debt:
First, look at the length of the introductory period. When that period ends, your interest rate might go higher. A six-month intro period may not give you a lot of time to make progress on your debt. You need to be aware of that, and do what you can during the 0% APR period. Your best results will come from a longer period. If you qualify, a period of 18 months can be very helpful indeed.
Balance Transfer Fee
Many balance transfer cards charge fees of between 3% and 5% of the balance transfered. If you have a large balance, and the fee is 4% or 5%, the fee will impact your interest savings – especially if you have a shorter six-month or nine-month intro period. Run the numbers to make sure that you really are coming out ahead.
May Not Get 0%
Sometimes, instead of receiving a 0% balance transfer rate, you might end up with 1.99%, 2.99%, or 3.99%. This can still be a good deal, though, if you have high interest debt. In some cases, you might be better off choosing a 3.99% lifetime balance transfer than going with a 0% transfer that takes effect for only six months. Carefully consider the options and the realities of your situation.
Understanding the terms of the balance transfer can help you make a more informed decision. However, you want to plan it so that you pay off as much as possible during the intro period so that when the interest rate heads higher, you aren’t stuck paying so much in interest that your debt repayment efforts slow to a crawl again.
The Real Issue: “Freeing” Up Room for More Spending
The largest trap associated with balance transfer, though, is the fact that once you move your balances to a new card, it can be tempting to view the “freed up” credit card as “available” money. You could actually end up in worse shape that you were in before.
If you get a new credit card with a 0% balance transfer offer, you might move your high interest balances over. Now that your old debt is on the new card, you have room on your old credit card. If you don’t cancel that card (canceling a card comes with its own credit score implications), you need to be careful about using it. Otherwise, you’ll start racking up the high interest debt again – before your old debt is retired.
Your best defense against this problem is to cancel the credit card. If you are reluctant to take that step, though, you should lock the card away. Put it on ice, or lock it in your fireproof safe. Put it out of the way so that you aren’t tempted to use it.
The reality is that a balance transfer will only really help if you are making true changes in your financial behavior. As long as your money habits remain the same, you will not be able to get out of debt – no matter how many balance transfers you use.
Have you ever transferred your balance to a new credit card? Leave a comment!
This article was originally published November 5, 2012.
Debt can ruin a marriage, so how can you beat debt before your wedding day? Although you many not be able to eliminate debt before tying the knot, there are steps to prepare for debt in married life.
Dating and Debt
When you get married, your two families become one and so do your personal finances – the good and the bad. It’s important to find out what your spouse-to-be’s likes and dislikes are, and it’s just as important to find out about their personal finances.
Uncover this information while you’re dating and hammer out your plans for the future during your engagement. Waiting until you’re married to discover bad financial habits and low credit scores can add financial stress to your relationship.
How to Talk About Debt
Money is one of leading causes of divorce so talking about your finances should rank as a high priority. You don’t want your marriage to end before it begins, so make time to talk about finances with your significant other.
Share the debts and expenses you have and ask what debts and expenses they have. People are often embarrased by the debt they’ve accumulated so if you explain your financial situation first then they’ll probably feel more comfortable sharing.
You can also learn a lot by watching spending habits and observing certain behaviors. If they always pay with a credit card rather than cash or a debit card, this may be a red flag of credit card debt. Inquire if they pay off the balance each month.
Of course he might put your mind at ease when he says he uses his credit card to earn points, but he pays off the balance in full. Or a red flag may pop up if she says she only makes the minimum payment each month.
A soon-to-be spouse that never seems to have money is another sign of a problem. It may be a sign of living beyond their means – spending more than they’re making. The way to get to the root of the problem is to ask the questions that give you the answers you need. Before you marry someone, you need to know everything about them including income, expenses and credit history.
Credit History and Debts
When you’re married, your credit history, credit scores and debts affect your ability to make major purchases. If your partner has a bad credit score and you’re buying a house, lenders may require a higher down payment or charge you a higher interest rate. It can even cause you to get denied for the mortgage.
In the current economy, credit scores and credit history play an even bigger role than ever before. It’s important that you enter into marriage with full knowledge of the debts and credit history that comes along with your spouse. It affects your ability to reach milestones in your relationship, such as buying a home and your day-to-day finances.
Avoid Wedding Debt
Definitely avoid starting your marriage in debt because you threw a wedding you couldn’t afford. You can have a wonderful wedding and still be conscious of the amount you’re spending.
Throwing a smaller more intimate affair is back in style. This helps couples to save money on everything from the venue space and the number of invitations to the food and beverages served at the reception.
Shopping for gently used wedding dresses at high-end consignment shops or borrowing gowns from friends and family members help brides to save thousands of dollars on buying a new gown. Remember you only wear it once.
Marriage and Debt
Finances are a leading cause of divorce because money problems can cause fighting and stress that trickle into the other areas of your marriage. If you go into your marriage with your eyes wide open, you can alleviate this problem in your marriage. Talk about your finances with your soon-to-be spouse before you get married. Don’t dwell on the past and hold it over their head. Instead make a plan for how you’ll handle your finances going forward together!
This post on debt and interest rates is part of a series on credit and debt in marriage. You can also read about credit scores and interest rates, improving your credit score, and free credit reports.
How are you going to handle debt in your marriage? Leave a comment!
This article was originally published May 12, 2009.
Living in the shadow of debt can be frustrating and difficult. As a result, many are anxious to get rid of debt as quickly as possible, choosing to tackle the debt before they start saving for retirement.
This might help you feel better, but does it always make sense?
High Interest Debt vs. Low Interest Debt
My mom once asked me why I hadn’t started destroying my student loan debt at a faster pace. My husband had just finished his Ph.D. and was making some money as an adjunct. My freelance business was doing well. Shouldn’t we be on track to be rid of student loan debt in almost no time?
I told her that I was fine with the situation because I was boosting my investments. With my student loan interest rate below 2%, any extra money had better potential earning the greater returns that come with investing. Plus, student loan interest is tax-deductible.
My reason for not being fussed about paying off my mortgage early is similar. Why should I? I’ve got a low rate and a tax deduction, and that money is better put to use with investments.
High-interest debt might be another matter, though. When you’re paying 15.99% APR on credit cards, you aren’t likely to make more with your investments. It can make sense to put a little more effort into paying down your debt in those cases, since there aren’t a lot of advantages to high-rate consumer debt.
Long-Term Retirement Accumulation
Even if you have credit card debt, though, it might still make sense to divert some of your intended debt reduction payment toward your retirement account. This is just so that you can put the power of compound interest to work on your behalf. The longer you put money in, the better off your retirement account is.
This is especially true if you work for a company that offers a matching contribution. That’s free money that you can use to help fund your retirement. Perhaps contribute as much as you can to get the match, and then use the rest to pay down the credit card debt. Once the debt is paid off, you can boost your retirement account contribution, and pick up the pace, partially making up for lost time (although it’s difficult to ever truly make up for the lost time).
Of course, this means that you might be in debt longer, and that you pay more in interest than you would like. It can be a result that you might not be willing to live with.
Over time, you might still benefit from putting a little bit in your retirement account, even though you still have high interest debt – it depends on how much you have, and what it’s costing you.
What do you think? Does it every make sense to contribute to your retirement when you have debt hanging over your head? Leave a comment!
Improving your credit score can be simple if you know what steps to follow. If you have poor credit, bad credit, or simply want to improve your credit score, there are specific steps you can take to make it happen. Your credit score is computed mainly using:
- Payment history
- Type of credit you have
- Length of your credit history
- Your outstanding balances
- New credit you’ve established
Each of these items is weighted differently, but tweaking all of them can play a role in increasing your credit score. If you can take these steps you should see your credit score improve.
1. Make payments on time and pay down your balances.
The biggest contributor to your credit score is your payment history. This means that if you do nothing else, you have to make your payments on time. Find a payment system that works for you and make sure your payments are received on or before the due dates.
It also helps to pay down the balances of your outstanding debt. This doesn’t mean paying off the debt completely. It’s about your ability to manage your debt, so making payments that reduce your outstanding balances also raises your credit score.
2. Leave your credit accounts open.
The longer your relationships with creditors or lenders, the better off your credit score is. Do not fall into the trap of closing unused accounts or completely paying off credit and loan accounts thinking it will increase your credit score. Leave your credit accounts open, if you don’t use them.
The longer your credit relationships are, the higher your credit score. It’s important to note that you also have to have a good relationship – a good payment history – combined with the longevity of your relationship with the creditor.
3. Diversify the types of credit.
Again, your credit score is an evaluation of your ability to manage your credit, so another way to give your credit score a boost is to diversify the types of credit and loans you have. A good mixture of credit cards, mortgages, car loans, and student loans – a variety of credit – illustrates your ability to manage various types of credit. If you only have one type of loan, apply for different types of credit to diversify your mix.
This doesn’t mean run out and start applying for various types of loans, but apply where appropriate. For example, when you buy your furniture, apply for the furniture store credit account instead of buying it with your credit card or paying cash. You can then simply pay off your store card with your cash.
4. Clean up your bad credit.
Review your credit report at least once a year. Look for negative items such as late payments, collection accounts and discharges – all items that drag down your credit score. If these items appear on your credit report and they are accurate, make arrangements with the creditors to pay off this bad debt.
If these items appear on your credit report but are inaccurate, dispute the items with the credit agencies to have these items removed. Over time, getting rid of these negative marks on your credit report increases your credit score.
5. Create new credit.
As much as your credit score depends on long-term credit history, it loves new credit too. Applying for new credit once in awhile also gives your credit score a boost. Combine your application for new credit with diversifying your mix of credit and you can accomplish two goals at once.
Credit scores can seem complex at times but since they’re determined by a formula that means there’s a formula you can follow to help improve your credit score.
Before you make any changes, get your free credit report so you can see where your score stands today. Then start working on these five steps and you should see your credit score increase over time.
Can you think of additional ways to improve your credit score? Leave a comment!
This article was originally published May 16th, 2009.
Should you pay off your mortgage, pay down your mortgage, or simply just make regular mortgage payments? This is a decision facing many of us because one of the biggest purchases we make in a lifetime is a home. Since few of us can afford to pay cash for a house, most of us use a mortgage for the purchase so the majority of homeowners owe money to a lender.
It’s been a long debate among professional money advisors on whether homeowners should suck up making the monthly mortgage payment, pay down, or pay off a mortgage early. The short answer is that it depends on the personal situation and financial situation you’re in as the homeowner.
Financial experts and authors, such as Jane Bryant Quinn advise homeowners to stop considering their home as an investment vehicle and instead see it as a place to live. This is especially true if you are buying a starter home or just starting out with a mortgage, where your payments in the first few years are almost all interest anyhow.
If you’re halfway through your mortgage, such as the 15th year of a 30-year mortgage, you’re starting to reach the point where the proportion of the payment switches from mostly interest to mostly principal – thus reducing the mortgage balance.
In the recent turbulent times of the housing and lending market, many homeowners have found themselves owing more on their mortgage than their home is even worth. Most experts agree that defaulting on your mortgage and facing foreclosure is not the option to rectify the situation. If you are unable to obtain a mortgage loan modification with your current lender, continue to make the payments on your mortgage because each mortgage payment brings you closer to building more equity in the home and reaching the end of the mortgage.
Pay it One Way or the Other
Getting financial experts to agree on when a homeowner should simply make the monthly mortgage payment, when they should pay it down and when it may be beneficial to pay the mortgage off early is not a one-size-fits-all solution. The best-selling personal finance author Dave Ramsey suggests that homeowners should apply any additional money they can to paying down the balance on their mortgage. Other personal finance experts argue that a home mortgage is one of the biggest tax deductions most homeowners have.
When you do the math, however, your mortgage interest tax deduction may not be benefiting you as much as you think. Assume you are in the 25 percent tax bracket and pay $10,000 in mortgage interest during the tax year. This equates to a $2,500 tax deduction on your personal tax returns, leaving you with a difference of $7,500 ($10,000 – $2,500 = $7,500). If your mortgage is paid in full, then you would pay $2,500 more in income taxes, but you would be walking away with $7,500 more in your pocket.
The bottom line is that if you intend on living in the home for the long haul and you can afford to do so, the interest tax savings does not cancel out the interest you end up paying in the end. Experts also agree that you should focus on paying off high interest debt and debt that is not tax-deductible before focusing on paying off your mortgage.
3 Mortgage Pitfalls to Avoid
While it may be your goal to pay a mortgage off early, three mortgage-related actions to avoid include biweekly payment programs, pre-payment penalty fees and reverse mortgages.
Payment Program Fees
Biweekly payments, where you break your monthly mortgage payment into two payments, can help you to pay off the mortgage sooner. The problem is that this program typically requires an up-front fee that ranges from $200 to $400. You can accomplish the same goal by simply making one additional principal reduction per year or making additional principal payments with your normal mortgage payment.
If you do plan to pay your mortgage off early, contact your mortgage company about prepayment penalty fees. Most prepayment penalty fees occur if you pay the mortgage off or down within the first one to five years the mortgage is in place.
According to financial guru Dave Ramsey, a reverse mortgage is another pitfall to avoid because it puts you back in debt. In addition, the rates and fees on these mortgages can be very high. According to the Federal Trade Commission (FTC), reverse mortgages are one of the largest fraud outlets.
While a home purchase is one of the biggest purchases you make in a lifetime and it may be one of your biggest tax deductions, financial experts agree that if and when you can, paying off your mortgage makes sense. Make principal reduction payments, but avoid accomplishing your goal by using biweekly payment programs or incurring prepayment penalty fees.
While each personal financial advisor, accountant and family member may offer you an opinion on whether you should pay off your mortgage early, in the end you are the only one qualified to assess your personal situation and make the final decision.
Are you planning on paying off your mortgage early? Leave a comment and tell us why or why not!
This article was originally published August 4th, 2010.
Are you trying to pay off debt? It can seem like a long slog sometimes . . . especially if you haven’t developed personal traits that can help you in your efforts.
If you want to pay off debt there are some essential personality traits that you need to develop (if you don’t have them already):
The first thing you need to develop if you want to pay off debt is self-control. You need to be able to say no to things – even if you think you want them.
If you plan to pay off debt, the very first thing you need to do is have the self-control to stop digging the debt hole deeper. You need to stop buying things with debt, and say no to your spending preferences if you expect to make serious progress.
On top of that, you need to be self-motivated. You have to be able to keep yourself going.
Sometimes, trying to pay off debt can be disappointing. It is difficult to get used to telling yourself no all the time. Additionally, at the beginning, it can take a while to see real results as you pay down debt.
The high interest charges tend to reduce the effectiveness of your payments. You need to be self-motivated to keep yourself going and paying down debt.
It also helps to be organized when you want to pay off debt. You need to be able to order your debts, and create a system to help you pay them off. A good debt reduction plan is essential if you want to rid yourself of these types of obligations. Organize your debts, and then systematically pay them off.
Part of being financially organized during the debt pay-down phase is also creating a budget or spending plan. You need to know how your resources are being used, and organize them so that you can pay off your debt as quickly as possible.
Sometimes, it’s not about the impetuous and grand gesture. Sometimes it’s about patiently sticking to your plan for the next three years. It can be hard to keep moving forward when you want the problem to be solved right away.
However, unless you are willing to take extreme measures, chances are that your debt reduction plan will last somewhere between two and five years, depending on how much debt you have. You need to be patient as you forge new financial habits, and get used to making your regular debt payments.
In the end, your patience will be rewarded, since you will have done more than just pay off your debt. Living a different lifestyle tends to help you more permanently change your habits. At the end, you will be less likely to fall back into the practices that led to your debt in the first place.
The creative person can find new ways to improve the debt pay-down process. If you want to turbo-charge your debt pay-down, you can look for creative methods of saving a little more money each month, and putting that toward debt reduction. A really creative person can look for additional ways to make more money, so that can be applied to the debt pay-down efforts.
Creativity can also help you find other activities to occupy yourself so that you aren’t upset about the fact that you are practicing self-control and organizing yourself to pay off debt. Find creative and inexpensive ways to pass the time, and you will not feel as though you are giving anything up as you improve your financial situation.
What are some additional personality traits you think might help? Leave a comment!
This article was originally published December 13th, 2012.