SWB: Alan B. Rowley II - Success Coach - ECoaching - Email Coaching

ING's Christmas Present

I just received an interesting email from ING.  For Christmas, I can get a loan with an additional 1/8th of a percent off of a home loan.  I can also give this gift to someone else as a Christmas present.  Nothing says Merry Christmas like going into debt by a couple hundred thousand dollars. 

Christmas spirit can now be yours at a reduced rate.

Anyone want a home loan or refi?

You want some SWB small print on this?  This isn't on the coupon.  This is just Success Warrior's take on this wonderful deal.

They are going to give you an 1/8th percentage off but I'll bet you that the Fed lowers the interest rate by 1/4th on the 11th.  ING is willing to cut you in on half that break but you have to act fast.

The Fed will probably cut another quarter percent off on January 22nd too.  And again on March 4th. 

But if you act now, you can lock in their great discount price.

Operators are standing by.

Act now because this deal won't last.

Don't forget to take my presidential poll.

Weekly Meeting: Lots of Little Bits

We had our weekly meeting last night.  We thought about skipping it because Tia has a bad cold and I'm coming down with a cold.  I hope it doesn't get as bad as hers.  She was miserable last night. 

We went through the basics of the meeting and didn't follow up with much discussion like we usually do.

I check all our accounts each week and put the numbers down for us to review.

Have you heard of Universal Default?

If you haven't, you will.  Even if you weren't a reader of this blog, you would eventually hear about this little scam that's going on in the credit card industry.

Here's the deal.

If you pay one credit card late, all your other credit cards can increase their interest rate on you because now you're a higher risk.  This can happen even if you have never made a late payment to the other cards.

Make one late payment to one card and the interest on all your cards might go up.

One oops.  One, "No, I didn't send it in.  I thought you paid the Visa bill."  One mistake by the US Post Office.  One . . . well, you get the idea.

Is that scary or what?

I think it's a sign.  No, not a sign of greed.  A sign that the credit card companies feel that they have people by the short and curlies.  This is blatantly unethical and the word "lame" doesn't even come close to stating what kind of excuse they are using to raise interest rates on people.

The bottom line is that nearly every agreement has a little line where they can change your interest rate with 15 days notice.  Sure, you agreed to pay 12% interest when you got the card but at any point they can raise that rate as long as they give you two weeks notice. 

I think it's a sign that the credit card companies believe that they have consumers trapped.  Obviously, anyone with the ability to get out of an interest rate hike is going to.  No one is willingly going to stand for that.  But where will they go?  Transfer the balance to another credit card?  It's going to be the same story.  Refinance your house to get the equity to pay off your credit cards?  Not in today's housing market? 

The bottom line is that they are doing it because they can.  People have sold their financial soul to the devil and the devil gets to do what he wants.

There is an answer. 

The plan can work slowly if you like

To make this plan work, the bottom line is that all you have to do is not borrow money again.  Don't get loans and especially don't use credit cards.  It's been a while since I've mentioned credit cards so I'll probably have to do a post on them soon.  Credit card companies are getting more predatory every day.  You have to free yourself from them.

If you don't want to make the sacrifices that we've made, you don't really need to.  We put all our extra money toward our debts but you don't have to do that.  You can spend it on anything you want.  If it scares you to go without, then don't go without but only buy what you can afford.

The thing about going without for a little while and putting the money toward your debts is that you free up more cash on a monthly basis.  Think about how much more money you would have each month if you didn't have any credit card bills.  What if you didn't have any car payments?  What if you didn't have a house payment?

My wife and I are probably going to take a couple months off from paying things down as quickly as possible after we have paid off the student loan and the car.  All we'll have left to pay off is the house and we're going to reward ourselves by seeing what it's like to live without the debts that we've paid off and have the extra cash just laying around.  Then we'll get to work on the house because there is going to be so much freedom for us when that's paid off.

The other benefit to going as quickly as possible is the tens or hundreds of thousands of dollars that you save in not paying interest.  The less interest you pay, the more money YOU have.  A simple fact that most people just don't seem to realize.

***

By popular demand, I have started a new blog about events in my life.  The first post is about a chat I had with Don Rickles and can be found at http://successwarrior.typepad.com/chronicles

A tool for people with mortgages or are going to get one

I have looked around now and again for a mortgage calculator that I like and I finally found one.  So I'm going to share it with you.

http://www.apimagazine.com.au/calculators/mortgage/

This calculator will show you how much your monthly payments will be including your insurance and taxes.  It will show you how much interest you're going to pay if you just make your house payments.

Under that is the part that is eye opening.  You can put in an amount that you want to add to your house payment each month and it will tell you how much money you'll save and how much quicker your house will be paid off.  This calculator has a couple features that I haven't found on others.  You can add the extra money at any point in the calculation.  If you have been paying on your mortgage for 3 years, you can tell the program to start adding extra money at month 37 and note how it changes things.

It also has a pretty blue and green graph.  =)

Here's a couple quick examples but I really encourage you to go to the site and play around yourself. 

If you have a $200,000 mortgage at 6% and you pay an extra $100 a month from the start, you will save $50,000 and pay off the loan 5.5 years early.

If you can pay an extra $250 a month from the start, you'll save $91,000 and pay it off 10 years early.

Just about everyone can get to the point where they can pay these amounts.  In fact, most people with houses can probably get to where they can add an extra $1,000 a month to their house payment.  Play with the calculator and see if that doesn't encourage you to put some extra money where it counts.  Paying a little bit extra saves you thousands of dollars and years and years of your time.

Reversing the flow

I think this year is going to be a good year for my wife and I, so let me throw out a disclaimer to start things off.  I don't post this blog to brag about what we are doing.  Anyone can do it.  In fact, that's the reason that I post this blog.  If my wife and I can go from where we were and succeed with this plan, then just about anyone can do it.

Okay, let's get on with it.

I have a 401k through my employer.  I'm not really a big fan of 401k's but that's a personal thing.  That being said, my employer does a 50% match and there is no way that I'm going to turn down 50% free money.  Even if I take a 20% hit to get the money out when I quit, I'm not going to find a place where I can absolutely get that kind of return on my money so I put in the max that they will match. 

That money also earns interest or at least it should.  One of the things about my plan is that we are trying to change our life from paying interest to earning interest, even by just a little bit.

It didn't work out that way for the quarter ending in June of last year.  I got my statement and my money had earned me -$1.47.  I lost a buck and half in interest.  Even putting money into a 401k, I was still paying interest.  Now with the 50% match, I'm not going to quit.

I didn't get a statement for September for some reason.  I wasn't worried about it but it does mean that I didn't have any information to report to you at that time.

I got my statement for the quarter ending in December and the market has turned around.  Last quarter my money gained $198.52.  How cool is that?

Yes, it's not that much.  $65 a month hasn't change my life today.  It does however fit the philosophy of the plan and that's important and over time the interest is going to have a huge impact on my money.

Interest is a powerful force in this world and you get to choose whether it works for you or against you.

Here's a different way to think about your money

I had this thought last week and now I want to share it with you.  It's not completely valid but there are several reasons that I want to share it with you. 

First, it is a great illustration and may help people see their money in a better way.

Second, a couple of days after I had this thought, an odd thing happened.  I didn't tell anyone this thought as I was still thinking about it.  I had never read this before so I was contemplating its usefulness.  My wife came home a couple days after my initial discovery and told me a story.  Someone at work was talking to her about money and while listening, my wife had the exact same thought.  That kind of serendipity means something.

Third, I'm going to include this when I compile all this information into one spot so this gives me a chance to think out loud, a rough draft of sorts.

The thought that occurred to me and then to my wife is simple and probably not original even if I haven't seen it before.  It's this.  Add up all the interest rates that you are paying.

Add up the interest rate from your house, your cars, your credit cards, and anything else that you have that carries an interest rate.  If you want to have an idea of where your money is going, add them all up.  It doesn't have to be exact.  Round the numbers off and add them up.

The object of the game is to be paying at the very most 0% interest.  You want to get to the point where you are being paid interest but for now, let's aim for 0%.  How close are you to paying no interest at all?

My wife and I are at 21% and that's 21% more than we would like.  But when we look around, there are people who are paying more than that on just one credit card.  Yikes!  And they have several of these cards.  Double Yikes!

Make a commitment today, if you haven't already, to start reducing the total amount of interest that you are paying out.

Looking ahead to 2007

My wife and I had our weekly meeting last night and I'll give you some of the highlights.  It had been a couple of months since our last meeting so there was quite a bit to go over.  We usually meet each week but we put everything on hold for the holidays.

One of our biggest goals for this year is to reverse what I call the financial inertia of our money.  Essentially, we want to stop paying interest and start earning interest.  We are going to work on both goals at the same time during this year.

To slow down paying interest, we are going to pay off my student loan and the car loan.  That will leave us with just a house loan which we will start paying extra payments toward.  Every payment to principle lowers the amount of interest that you pay for the rest of the loan.  I'll be talking more about this in the future.

To start getting more interest, we are going to do a few different things.  I'll continue to put in the max amount that my company will match in my 401k.  It's a percentage and I'll be getting a raise this week so that amount will go up.  We are going to move most of our saving from our bank where it's earning a whopping .7% interest to ING where it will be getting 4.5%.  We are going to start investing in mutual funds and stocks.  I will also continue to play around with Prosper which probably won't make tons of money but I think it's valuable for now.

We reviewed our goals and changed a lot of the dates that we are aiming for.  Most of the dates, we moved closer.  For instance, we previously had that we wanted to be completely debt free by the year 2016.  Last night in looking over everything, we decided that we could probably do it by 2010. 

We reviewed our daily activities to remind ourselves of the small things that can be done daily that will help us.  Every week, we pick one that we think is the most important to work on for the next week.  This week we picked "Monitor Expenses Daily".  We want to make sure that we get out of "holiday mode" right now.

We usually review our weekly spending next but we haven't been keeping track so there was nothing to review this week.

We looked at what's coming up in the next week as far as appointments go.  I have a meeting with the HR director and my wife has a couple of appointments.  Nothing financial but we keep track anyway so that we both know what's going on.

We have a miscellaneous notes section that we left blank this week.

Next is to list everything that we didn't get done from last week which was left empty because we didn't have a meeting last week.

The next section is things that we want to bring up next meeting.  This is for things that wouldn't or can't be done in the next week and so won't be included in the "Weekly To Do" list.  We left it blank last night but I remembered something today that we were going to do in January so I have added "Review FICO" to bring up in the next meeting. 

The last section on the page is the weekly to do list.  We put down that we will invest $100 and move our savings to ING.  We also put down a couple of non-financial things down.  We list everything for the week, again just so that we can stay on the same page.

When that was done, I shared a sketch of a floorplan for a house with my wife.  I drew it last summer and we looked it over and made some small changes to it.  We are going to be moving in a few years and will probably build a house.  I'm drawing the house that we would like to live in.  Whether we are in a position to build it or not is still up in the air but we have found that magical things can happen if you have a clear picture of what you want.

Bad credit? No credit? No problem!

In fact, that's probably how some lenders prefer it.  After all, that means they get to charge you more since they are taking on more risk.  They probably relish the small nicks to your credit.  It's a fine line of course, as most things in life are.  How much on a credit report is just a mistake and how much shows irresponsibility with money?

We ended up paying an extra 1% in interest on our last house just because the bank could do that.  My ex completely and utterly destroyed my credit to what some would say was nearly beyond repair.  But my current wife and I set about repairing it and the lender was quite surprised to see just how much we had repaired it.  All our payments were on time, errors had been taken off my report, and a fraud watch put on because it appeared that for a while my ex continued to include my name and social for credit applications. 

Still, when it came time to tell us what our interest rate would be, it went something like this.  "Here's the current interest rate.  See this on your report, we are adding a quarter percent.  And this too.  This one here is going to cost you half a percent.  So your final interest rate is 1% higher."

Now, understand that they were going to give us the loan.  And understand that it meant they thought we were going to pay it back.  And understand that, in fact, they thought we could pay more than the asking price because a higher interest rate means a higher payment. 

They knew we were going to pay and the charged us for being a "higher risk" just because they could.

This loan officer was very nice, saying nice things and using KY while he bent us over, but we promised to never be in that position ever again if there was any way around it.

Tomorrow, I'll tie this back to Prosper.com.

Crossing "The Line"

I have mentioned it before but I thought I would talk a little bit more about the line.  The line I'm talking about is the line between paying interest and earning interest.  Obviously the goal of this plan is to get us to the point where we are earning interest . . . exclusively.

Like most lines, there is a broad gray area.  In reality, most people aren't doing just one of these activities.  It isn't an either/or situation.  Most people are paying interest and earning interest.  The problem of course is that they are paying more interest than they are earning.

The object of the game is to change that and then eventually get away from paying any interest at all.  We need to get to the point where it's normal to not have debt.  Right not, no one thinks twice about using a credit card because "everyone does it."

If all your friends jumped off a financial cliff, would you jump too?

It's not even so much about peer pressure but just a sense of "that's how things are."  It has been ingrained in our culture.  We need to ungrain it.

Crossing the Line

It's going to be a short post today because I have to get ready for my trip tomorrow.

I just want to restate that the goal of this plan is to cross the line.  To go from paying interest to earning interest. 

That's one of the reasons the rich get richer and the poor get poorer.  For many people, it is possible to cross the line but it's going to get more difficult in the future from the sounds of things.

Start now.

Just Out Of Curiousity, I Had To Check This

I like to look at the options that I have for my money.  I think that it helps me keep things in better perspective.  I can't make use of all the options yet but I think I make better decisions now based on what could happen in the future. 

Take for example, our house payment from yesterday.  The one where we would be paying $1,300 in interest a month for the first year.  I had to wonder what would happen if I was investing that money instead.  What would it be like if I was earning interesting instead of paying interest?  What would the difference be.

Well if you put $1,300 into a mutual fund for 30 years, you would end up with over $1.5 million if the market continued to act as it has for the last 50 years.  I could live on that.  And it sure beats the heck out of the hundreds of thousands I would be paying in interest. 

I know that you don't actually pay that much per month over the life of the loan.  Principle goes up and the interest goes down.  Still it's a good thing to to see, at least for me.

Most people could pay off their house in about 5 to 7 years if they wanted.  If you took the house payment and invested it for the last 25 years, you wouldn't make as much money but you would still have $1.1 million.  That's still not too bad.  If you were able to keep making the payments for 5 more years, you'd have $1.8 million.  And the calculator I'm using suggested an 8% return.  Some people say that over 30 years, it would be closer to 10%.

For me, this shows just how important it is to cross the line between paying interest and earning interest.  Life changing.

Do people think about it? Do they want to think about it?

Let me start off with something that I forgot to do the other day and that's to tell you how the interest has changed on the loan that we are paying off.  When we started our plan we were paying $6.68 a day in interest.  That really doesn't sound bad until you times it by 365 days.  We would have been paying $2,438 a year in interest.  Quite frankly, I have better things to spend a couple grand on.  Right now, we are paying $2.12 a day in interest and every week we try to bring it lower.

I think this is something people don't really look at with their money.  And quite possibly, the don't look at it on purpose.  Maybe they don't want to know how much money they are paying in interest.  Out of curiosity, I decided to look at a new house purchase pulling info from the net.  One source listed the average house at a cost of $264,000 and interest rate quotes for this area were right around 6%. 

That would give you a house payment (without pmi, taxes, and insurance) of $1,582 and for the first year you would be paying around $1,300 in interest. 

I wonder if most people just accept this as being the "house" payment.  Would it be more helpful to people if they understood that the house payment was $200 and the interest payment was $1,300?  Do people consider this or do they turn a blind eye to it.  Do they go one step further and figure that $1,300 a month is $15,600? 

Probably not until tax time, eh?  Then they somehow see it as a good thing because it means that they won't have to pay four grand in taxes. 

"Honey, we are so lucky that we gave the bank 15k or we would have had to pay the government 4k.  Whew!"

I don't know about you but 15k in my hands would be a nice thing.  Even after taxes, I could probably do some good things with 11k.  And if I couldn't think of anything to do with it, I wouldn't complain about just having it around, just in case I thought of something that I needed to buy . . . like a food dehydrator.

"But I can't afford it"

"Success Warrior, I understand what you're saying, I really do.  I see how buying things with cash allows me to buy more and gives me more control over my life but I can't afford it.  I don't have enough cash on hand."

My reply might seem over-simplistic but here it is.  If you can't afford to buy the object, how in the world can you afford to spend more for the same thing?

If you can't afford $1,000 for a TV, how can you afford to pay $1,300 for the same TV (if you get 8% interest)?

If you can't afford $100 for groceries, how can you afford to pay interest on those groceries for 20 years?

If you can't afford to go out to eat, why are you going out to eat?

If you can't afford the vacation to Disneyland, then...

Obviously, if you can afford 6%, 12%, and even 25% (with the new bankruptcy laws in place) in interest, then you really can afford to pay 0%.  People just don't want to.  Not wanting to is not the same as not being able to.

And the bottom line is that for smaller purchases (less than cars and houses), people can afford them.  Banks wouldn't allow you to buy stuff if they didn't think you could afford it plus the interest.

The bottom line is that you can afford it.

Tomorrow: Do it in reverse

Which question is more important? Which one is asked?

I think that we agree that no one in their right mind would pay 3X what something is worth right up front.  No one is going to pay $20 for a value meal.  What kind of value is that?  But people do pay $20 for a value meal.  They pay $9 for a gallon of milk.  They are paying $7 a gallon for gas.  Everytime you put something on a credit card, they are imposing a rate hike of phenomonal proportions.  And they are choosing to do it.  What good little consumers they have become that they are willing to charge ourselves way more than things are worth. 

And why do they do it?  Either through ignorance or from putting the blinders on intentionally and asking the wrong question.  They are asking a question that advertisers and banks want them to ask.

How much are the payments?

What a devilish question designed to trap humans in financial bondage for their entire working careers. 

The question that people should be asking is, how much will this cost me?  That's the important question.  That's the one that matters.  Payments, schmayments.  How much is that value meal going to cost you?  $6 if you pay cash right now or $6 at 15% interest for 30 years.

I am being kind when I say that people pay 3x as much when they charge.  If you bought the value meal above with a 15% credit card and you were allowed to make minimum payments on $6, you would pay the credit card company $50.08 for that value meal.  That's some good value...for the bank.

But you are allowed to make minimum payments on a value meal aren't you?  When you add it on top of a card that you are already paying more than the minimum monthly payment.  You better savor that $50 Whopper like it's the best steak in town.

Tomorrow: "But I can't afford it"

What are the options to not settling?

If settling kills dreams, we should definitely be looking at ways not to settle.  Dreams, hope, and excitement make life so much more fulfilling to experience.  If you're going to live, you might as well have fun doing it.

So what options do we have at our disposal to combat settling?

1.  Credit.  You can buy what you want and need on credit.  Simple enough and it can work for a couple of years.  After that things kind of have to slow down because your credit cards are maxed and your house hasn't appreciated enough.  You live like you want for a year, maybe two, and then you try to just get by for a few years until you can get to that next sinister refi.  Then you can do it again.  This will work as long as your house continues to appreciate and you don't take any paycuts.  One or two good years followed by 3 or 4 very, very long years.

2.  Have more money on hand.  There are a couple of ways to do this with the most obvious being to earn more money.  The other option is to have less debt.  Having less debt automatically means you have more available money.  Sometimes it's easier to have less debt than it is to make more money. 

Don't forget that when you pay cash, everything is cheaper.  Even if you want to buy the best, it's going to be cheaper if you pay cash.  In fact, it can be argued that the more something costs, the more you will save compared to someone who finances it.  An expensive items means that more interest will be paid to finance it.

You get to choose which plan you want to follow.

Tomorrow: stress

Interest, PMI and the sinister Refi

I have seen a pattern in the people around me play itself out several times.  It's a pattern that ensures their financial slavery.  The five year refinancing of their homes.  The trap has so many factors going against people that it is surprising that people do it...but they do and so we will discuss it here.  What's wrong with the 5 year refi?

1.  We have talked about what a complete waste of money PMI is.  When you keep your loan from going below the 80% mark, you are making sure that you are always paying PMI.  You can't continue to throw money away if you want to make money.  PMI is a gift from you to the bank.  Does that bother you at all?

2.  Do not ever be confused by the "great interest rate" that you are getting.  If you have a 6% interest rate, there is only one way to pay that amount of interest.  You have to pay off your house in one year.  If you don't, you are paying more than 6%.  The longer it takes, the more interest you are paying.  If you are going to pay for 30 years, then you are talking about something in the range of 180% interest (30 years X 6% a year).  Is there anyone out there that wants to pay 180% interest on anything?  But that's a discussion for another post.

What I want to get at is this.  Take your payment and subtract your PMI, your home insurance, and your taxes.  What is left is the amount of interest you are paying.  What you will see is that each month, you are paying something in the area of 80% interest in your first few years.

Everytime you refinance your house, you keep yourself paying this incredibly high amount of interest.  Think about it each time you make a payment.  80% of your payment is profit for the bank and doesn't help you.  Can you really afford to throw away 80% of your money?

3.  The last part of this trap is the icing these people put on their cake.  They do a refi so that they can pay off all their other bills that have accumulated over 5 years.  Pay off medical bills, pay off credit cards, and pay off the old car.  They now have a lower overall outgoing payment.  This can be good!  It really can, if used correctly.  It's not great but it can still be worked into a great thing.

But that's not what happens, is it?  Gee, now they have more money left over each month so what do they do?  Go buy a new car.  Run up the credit cards.  Live life like they make more money for a year or two and then what?  They try to hold out for a few years while the value of their house goes up so that they can get it refinanced and do it all again.

Each refinance doesn't get them ahead, it puts them further behind until there is little chance of ever achieving financial freedom.

Tomorrow:  Keeping up with the Joneses.

Interest: those that understand it receive it, those that don't pay it

That's what one of my economics professors told me about 20 years ago.  It has stuck with me even if it has taken me this long to figure it out completely.  It's a lesson that I want to pass on to anyone that will listen.  Interest is one of the biggest factors when we talk about the rich getting richer and the poor getting poorer.  There are other factors such as PMI which just outright penalizes people that don't have enough money but I think interest may be the single most important factor.

You are either losing money or you are gaining money.  This quickly tells you which side of the line that you are on.  If you are investing money and paying interest at the same time then you have to figure out which one of the two you are doing more of to find out where you stand relative to the line.

Quite frankly, the object of the financial game is to be on the side of the line where you are earning interest.

If you want to take control of your financial future, you can't just give money away to banks. 

On top of that, it just makes no sense.  Why would people pay more for something than it's worth? 

There are several answsers.  To satisfy instant gratification.  Conditioning.  Everyone buys things on credit right?  Because that's the only way they can afford it (now there's a joke).

If you can't afford it, can you afford to pay extra for it?  If you can't afford a $500 TV, can you really afford a $600 TV?

But people do it and banks are ready to "help", while they stiffen up bankruptcy laws to make it harder to get out of the trap.

And it all comes back down to interest.  Are you paying it or receiving it?

Tomorrow, we visit PMI again.