Category Archives: Debt Control

An element of the Financial area in which you control, reduce and eliminate debt in order to increase your available financial resources.

Who is this really for?

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I recently came across an address by Robert D. Hales that shared valuable insights into money and how we perceive it. I thought I’d share some of it here.

All of us are responsible to provide for ourselves and our families in both temporal and spiritual ways. To provide providently, we must practice the principles of provident living: joyfully living within our means, being content with what we have, avoiding excessive debt, and diligently saving and preparing for rainy-day emergencies.

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How then do we avoid and overcome the patterns of debt and addiction to temporal, worldly things? May I share with you two lessons in provident living that can help each of us. These lessons, along with many other important lessons of my life, were taught to me by my wife and eternal companion. These lessons were learned at two different times in our marriage—both on occasions when I wanted to buy her a special gift.

The first lesson was learned when we were newly married and had very little money. I was in the air force, and we had missed Christmas together. I was on assignment overseas. When I got home, I saw a beautiful dress in a store window and suggested to my wife that if she liked it, we would buy it. Mary went into the dressing room of the store. After a moment the salesclerk came out, brushed by me, and returned the dress to its place in the store window. As we left the store, I asked, “What happened?” She replied, “It was a beautiful dress, but we can’t afford it!” Those words went straight to my heart. I have learned that the three most loving words are “I love you,” and the four most caring words for those we love are “We can’t afford it.”

The second lesson was learned several years later when we were more financially secure. Our wedding anniversary was approaching, and I wanted to buy Mary a fancy coat to show my love and appreciation for our many happy years together. When I asked what she thought of the coat I had in mind, she replied with words that again penetrated my heart and mind. “Where would I wear it?” she asked. (At the time she was a ward Relief Society president [ed. leader of the church’s women’s charity auxiliary] helping to minister to needy families.)

Then she taught me an unforgettable lesson. She looked me in the eyes and sweetly asked, “Are you buying this for me or for you?” In other words, she was asking, “Is the purpose of this gift to show your love for me or to show me that you are a good provider or to prove something to the world?” I pondered her question and realized I was thinking less about her and our family and more about me.

After that we had a serious, life-changing discussion about provident living, and both of us agreed that our money would be better spent in paying down our home mortgage and adding to our children’s education fund.

These two lessons are the essence of provident living. When faced with the choice to buy, consume, or engage in worldly things and activities, we all need to learn to say to one another, “We can’t afford it, even though we want it!” or “We can afford it, but we don’t need it—and we really don’t even want it!”

My wife has often been my backstop on financial issues, questioning the criticality of some of my desired purchases. I may not always have appreciated it at the time, but I do appreciate her keeping me grounded. I’m grateful for the partnership we’ve built through the years around managing our money. I do the bulk of the management and bill-paying, and she the bulk of the household shopping. This works well primarily because we share the same goals and we continually communicate.

Of course you don’t need a significant other to establish and maintain financial discipline. One of the key skills is to learn to distinguish between needs and wants, and when considering wants, understanding the root of that want. Developing the ability to police yourself and say, “I may not want this thing for the right reasons” is invaluable.

The bottom line with money is that either we learn to master it, or our money will become our master–or rather, those to whom we end up owing money. The more control we gain over our finances the greater freedom we will enjoy.

Your money or your life? It’s not that simple

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About a month ago I began discussing an article from Wikihow.com on “4 Ways to Be Self Reliant,” by Trudi Griffin, LPC, MS. The article is more about relationships than what I would consider self-reliance, but she still makes some valid points. Today I want to look at her second point, managing money independently. She breaks money management down into six areas:

  1. Learn how to manage money
  2. Get out of debt
  3. Pay cash instead of using your credit card
  4. Keep cash on hand at all times
  5. Own a home
  6. Live within your means

To begin with Griffin warns against allowing others to manage your money. I agree with her basic premise, that you can lose your independence if you lost control of your money, but that depends on the nature of your relationship with that person. In most marriages one of the two usually assumes responsibility for managing the money. If you are good at communicating, have compatible financial goals, and trust one another it’s actually easier to have one partner take primary responsibility and keep the other informed. Her second concern is more valid: if the primary money manager is unable to continue in that role it may be very difficult for the other partner to step in. Even if you are not the money manager in your relationship, make sure you know how to access everything and are comfortable managing money yourself.

Griffin also encourages everyone to get out of debt, though what she really focuses on is keeping your debt manageable. According to her, your total long-term debt payments (mortgage, auto and school loans, and credit card debt) shouldn’t exceed 36% of your monthly income. If your debt payments exceed this level you should make every effort to get that debt load paid down as quickly as possible.

As a corollary to that, Griffin also advocates paying cash for everything, and to keep cash on hand (and in savings) at all times. This seems primarily to be to keep your credit card debt low, and I somewhat agree with this. If you have difficulty paying off your credit cards, or can’t resist charging more money on them, then by all means you should avoid using those credit cards. But if you have developed financial discipline and never miss making your payments because you’re able to set money aside to make those payments, there may be a way to make your credit cards work for you.

I recently read I Will Teach You To Be Rich, by Ramit Sethi. The man has some good ideas about acquiring, building, and managing wealth–and some ideas I’m less keen on. But one suggestion he makes is to put your regular expenses, as much as possible, on your credit cards and then set that money aside to pay the bill off quickly. If you get the right credit card you can earn travel miles or cash back rewards that amount to free money. I’m disciplined with managing my budget, and so I decided to try it. I haven’t put as much on my card as I could, but already within the past several months I’ve picked up nearly $250 of cash back rewards. It’s free money. But if you’re not so good at managing your credit card debt and paying off your account monthly, it’s best to follow Griffin’s advice and avoid credit cards altogether.

Griffin’s next suggestion is to own a home. I’m not as sure about this one as I once was. Right now interest rates are low, so you may only pay about 50% more than the cost of your house in repaying the loan. Depending on how long you live there, the value of the home may increase well beyond that. Our first house did just that. But you don’t always control how long you live somewhere these days. We had to move when I lost my job ten years ago, and the timing was terrible–the housing market had collapsed and I owed considerably more on that house than I could sell it for.

There’s also the maintenance costs and hassle of a house to consider. So far since moving into our house nine years ago we’ve replaced the roof, replaced the furnace, air conditioner, and water heater, and bought high-efficiency windows. Granted, that last purchase was voluntary, but that was easily an additional 30-40% the cost of the house we had to find within the first six years of buying it. That, on top of a myriad of other maintenance expenses through the years. If you don’t like or can’t afford doing your own maintenance, or if you can’t be sure how long you’ll be staying where you live, a house may not be the best option. Everyone needs to evaluate their priorities themselves in this area.

Last, but by no means least, we should live within our means. That usually means several things that have to happen. First, you need to know (or learn) exactly how much money you spend each month and where it goes. Second, where at all possible, and perhaps not matter what the sacrifice, you need to adjust your spending to where it is less than what you earn. Third, you need to continually monitor your spending and your justifications for spending and see how you measure up against your budget. You need to be willing and able to adjust your spending to remain below your means–and save the difference religiously.

Frankly, learning how to budget and how to stick to that budget is one of the most important skills one can develop for self-reliance. That’s pretty much the key to achieving financial independence and taking care of “future you.” Or perhaps your spouse and children after you’re gone. Usually in life there are only two choices: either your master your money or your money masters you. Money is seldom a kind master, but it can be a real friend when you learn to master it. Mastering your finances is a key step toward true self-reliance.

Refinancing – Crunching the numbers

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Interest rates are really low right now–which is one of the reasons I lost my job at the beginning of the year. But my loss may also be my gain. Mortgage rates are also pretty low right now. I have about 24 years left on a 30 year mortgage, and the fact that I’ll be 74 when that’s paid off doesn’t sit well. Yes, I have other plans to deal with that, but I wouldn’t mind also doing something now. So I set out to find out if rates are low enough that I might actually benefit.

First of all I tried one of those internet loan sites. I didn’t get far before I quit. RocketMortgage wanted every bit of information needed to apply for a loan before I could even find out what terms I could get. I refuse to give out that much information until I know they’re really going to need it. Bye-bye, RocketMortgage. I went back to the brick-n-mortar reliables. Kinda.

My current mortgage servicing company has been after me for a while now to see about refinancing (and adding on a home equity loan if they could talk me into it), so I decided to hear what they had to say. I wasn’t impressed. They could do a 20-year loan that would cost me about $300 more a month.

Then I called the local broker I went with the two previous times. He actually had access to a 20-year loan for a lower rate than most 15-years. The net increase would be about $17 a month. Now THAT could be doable. But…should I? Was I forgetting something? After all, there would be fees, which they would try to get me to build into the loan. Would it be worth it to cut only six years off my loan? Time to crunch the numbers!

Armed with my current rate, number of payments left, and my current principal and interest payments, was able to calculate the total interest over the remaining life of the loan. That came to just under $100,000. I then calculated the total interest I’d pay on the proposed 20-year loan (figuring in financing the refi-fees, which I likely won’t do). That came to just over $56,000. Not a trivial difference! But I’ve heard that it can sometimes work to your advantage to pay extra principal on your loan to get it paid off sooner. I decided to look into that, even though at this point I’m not sure I would really want to take that money from other projects to do so.

I played with several different models. I first tried applying $100 per month toward principal and discarded that option. It barely moved the needle. Increasing the pay-down, I found that if I paid an extra $400 a month toward principal for first 120 months I could get the total outlay on my current loan down to about $23000 more than I’d pay with the 20-year, and pay it off 42 months earlier–in just over 16 years instead of 20. And if I paid $400 a month for 173 months I’d have it paid off entirely–in around 14 years. That would be right before I hit retirement age–good timing!

But wait. Assuming that’s even $400 I have, I’ve also had people tell me it would be better to put that money into an investment that earns higher interest instead, have it build up faster, and use that to pay the mortgage off early. In any case, in my MBA program they taught us that when looking at any project you should compare what they called the “opportunity cost,” or what you might lose with this option over some other bench-mark option, such as a long-term fixed-return investment. You might do well with this option, but what if you did something else with it instead?

My financial advisor usually tosses around 6% as a fairly safe rate of return on long-term investment-i.e. bond funds with little to no risk, so I used that to calculate how much I would have if I invested the same $400 a month for the same length of time. In the 198-month scenario, where I put in $400 a month for 120 months I would have $64,827. In the 173-month scenario, investing $400 a month for 173 months, I’d have $108,648. Compared to my proposed refinance, by paying down my mortgage I’d be losing the additional principle I paid, but also losing the gains I might have realized by investing it. It’s something of a double-whammy.

But wait again. In both those scenarios I would be done making mortgage payments earlier than if I went with the 240-month refinance. Being done sooner would mean I could turn that $1007 monthly payment toward investments. What about the opportunity cost of that money? More quick calculations, and under the 198-month scenario, investing my monthly payments for those 42 fewer months, it would come to $46,943, and in the 173-month scenario, investing for 67 months, it would be $78,527. If we put that back into the picture we end up with a significantly smaller gap from the $241,336 total paid out on the 240-month refinance; about $19,000 to $28,000.

Of course these two scenarios really do depend on the availability of the $400 a month to apply toward principle. The opportunity cost is real, as the only prospect for finding that money would be to take from what I’m currently saving each month to invest. The savings in interest doesn’t keep up with the amount put in to pay down the principle, let alone with the interest earned on investing it.

Bottom line: My 20-year refinance would save me about $40,000 over paying out the rest of my 30-year mortgage, and about $19,000 to $28,000 over money-to-principle scenarios. The value of investing that proposed extra principal payment early on (i.e. over a longer period) is hard to beat, even versus a shorter term but larger amount later. Slow and steady wins the race, but more money up front gets you there even faster.

While the over-all benefits aren’t as high as I had hoped, in this case, the value of refinancing is pretty clear. I save four years and about $40,000, plus I get to take that proposed added principal payment (I still don’t now if I could swing that), and invest it at at least twice the rate of what I pay on my loan. I’d have to say it’s worth it to refinance.

Of course I’m no financial adviser, I haven’t given you all my details here, and I don’t know your circumstances. This isn’t really meant to tell you whether or not you might benefit. This is primarily an exercise to help you evaluate for yourself. Just remember to look at all angles, not just the most immediate. I probably missed something here, too, but I’m going into this much more sure of what I’m doing than if I had simply thought, “Four fewer years is always a good thing, right?”

Are we free if we are in debt?

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Karen Boroff raises the question in New Jersey Voices:

Which one of us can be free when we owe others sums beyond our ability to repay? How as a nation can we be free with billions and trillions of debt? Years ago, singer Tennessee Ernie Ford had a hit with “Sixteen Tons,” telling the tale of a miner who “owes his soul to the company store.” Each day, the poor soul got deeper in debt. That is the track on which we are traveling.

Key quote:

People who see no end to debt lose their self-reliance, almost addicted to the next round of handouts. Addiction does not free ourselves nor does it make us brave.