Managing Money God’s Way

Last time we looked at Baby Step 5, college funding for your children.  We talked about when to start and some options to use for saving for their education.  Today we look at taking extra money and use it to pay off your home early.  Before we begin, here are the steps we have covered so far:

• Step 1:  Emergency Fund – When It Rains It Pours
• Step 2:  Pay Off All Debt Using The Debt Snowball Method
• Step 3:  3-6 Months Of Expenses In Savings
• Step 4:  Invest 15% of household income into Roth IRAs and pre-tax retirement
• Step 5:  College funding for your children

Baby Step 6:  Paying Off Your Home Early

After having payed off all your debt, saved for your retirement and put away money for your children’s college expenses, the next thing Dave Ramsey suggest doing is paying off your mortgage early.

To start with Dave suggests getting no more than a 15 year fixed rate mortgage, that is no more than 25% of your income.  If you don’t already have a 15 year fixed rate mortgage, now may be a good time to get one by refinancing your home.  A 15 year mortgage will probably mean higher monthly payments, but it also means you will pay the home off sooner, and pay less in interest.

Why Should I Pay Off My House?

• Interest Savings:  You will be saving thousands of dollars in interest payments on the mortgage.  For example, on a 200,000 dollar mortgage over 30 years at a 6% interest rate, you will end up paying over $250,000 in interest.  Cut that time frame to 15 years and you will only pay $115,000 in interest!
• Peace Of Mind:  Having paid off your house means having peace of mind.  Having debt of any kind is extra weight on your shoulders, and it can weigh you down.
• Less Stress:  You will have less stress in your life when you need to deal with a job change (or loss), or want to have a spouse stay at home to raise your kids.
• Getting a Raise:  Without that large bill every month, it’s like getting an instant raise!

Why I Should Not Pay Off My Mortgage

• Investing Returns Could Be Higher:  Yeah right, in this economy?  But at times this may be the case, and if you can get a better return on your money, than maybe this might be a better choice.
• Inflation Works With You:  As you know, inflation goes up by 3-4% a year, so by not pre-paying your mortgage you will be paying it off with cheaper money.
• I Will Lose My Tax Write Off:  And you are giving the government a free loan for what reason?

Conclusion

When I look at both sides of the issue, there are valid points to debate.  To me it comes down to weighing the benefits, the risks, and the emotionl/psychological sides of the equations.  I am still leaning towards paying off the mortgage early.  Have I been able to do that yet? NO, but it is a goal I will be working on!

What do you think about paying ogg your house early?  Good or bad idea?

Last time we looked at Baby Step 4, investing 15% of your gross income into Roth IRAs and other pre-tax retirement accounts.  Before we dive head first into step 5, here is a review of the Baby Steps we have covered so far:

Dave Ramsey’s 7 Baby Steps

• Step 1:  Emergency Fund – When It Rains It Pours
• Step 2:  Pay Off All Debt Using The Debt Snowball Method
• Step 3:  3-6 Months Of Expenses In Savings
• Step 4:  Invest 15% of household income into Roth IRAs and pre-tax retirement

Baby Step 5:  College Fund For Your Children

Now that you have your debt paid off, and saving 15% towards your retirement, it is time to start thinking about saving some money for your children’s education.  You should only start this step AFTER completing steps 1-4.  Here are some options for saving for that college education.

• Education Savings Account (ESA):  With this you can save $2,000 (after tax) per year, per child that will grow tax free!  Money must be used for education purposes only, otherwise a 10% penalty and taxes will apply.  Money must be used or rolled over to a qualifying family member by age 30 or a 10% penalty and taxes will apply.
• 529 Plan:  If you do not meet income limits for an ESA, or if you want to put additional money aside, you can use a 529 plan.  With this plan you can save up to $12,000 per year, per child.  The money must be used for higher education only, otherwise a 10% penalty and taxes will apply to the gains.  Many states offer a 529 plan, and you do not necessarily need to live in that state to use their 529 plan.
• UTMA/UGMA Plans:  This stands for Uniform Transfer (Gift) to Minors Act.  According to Dave, this one is not as good as the ESA or 529 plans.

Dave also notes several ways he would NEVER use to fund a college education.  These include:

• Insurance
• Savings Bonds
• Pre-paid college tuition
• Zero-coupon bonds.

Why Complete Steps 1-4 Before Funding College For My Children

Many people will disagree with this being step 5, and that you should only start this step after completing steps 1-4, but listen to the logic behind this.

Your kids can always help pay for their own college education or get scholarships, grants or loans.  But if you don’t pay off your debt and start saving for retirement, you might not be able to catch back up.  It is better to get your own financial house in order first.

Personally, I think that even if you are able to pay for your child(s) education, it is still a good idea to have them participate in paying for their own schooling.

What is your opinion of paying for your kid’s college?  Are you saving for their college funds now?  Should they even go to college?

Today we talk about investing 15% of your household income.  So far, the steps we have covered in the Dave Ramsey’s 7 Baby Steps series are:

• Step 1:  Emergency Fund – When It Rains It Pours
• Step 2:  Pay Off All Debt Using The Debt Snowball Method
• Step 3:  3-6 Months Of Expenses In Savings

In Babystep 4, Dave Ramsey suggests saving 15% of your household income in good solid long term investments.  No more (for now) and NO LESS.

Why Should I Save 15%?

Because this is your nest egg.  This is what you are saving for your future, your future when you are retired and no longer working.  If you are anything like me, I want to save as much as I possibly can for our retirement.  I am not counting on Social Security to even be around when I retire, and I DO NOT want to eat dog food.  The point to all of this is that 15% is usually going to be adequate to get you to where you need to be.  The longer you have until retirement, the bigger the gains you will see through compounding interest.

If you are older nad have less time until retirement you may need to be investing a higher percentage than 15%.  You started late, so you have some ground to make up.

What Should I Invest In?

Dave Ramsey suggests the following investments:

• Company 401k or other plan up to the match
• Roth IRA for you and your spouse
• Back to the 401k or other plan

What you invest your money into within these types of accounts, I am not going to try and give you any advice.  You should make that decision as a couple.

Will 15% be enough for your retirement?  Do you think you should save more or less?

It has been a few days since I last posted.  That is because I am on vacation with my family at the beach for a few days, but I wanted to continue with my series on Dave Ramsey’s 7 Baby Steps.  Here are the steps we have covered so far:

• Step 1 – Emergency Fund – When It Rains It Pours
• Step 2 – Pay off all debt using the Debt Snowball Method

Baby step 3 build upon the emergency fund you established in baby step 1 and takes it to the next level.  In this step you are building a fully funded emergency fund of 3-6 months of living expenses.  The reason for so much money?  With this reserve you are building a safety net against major life events so that you do not have to go into debt again.

Once you have 3-6 months of expenses saved there are not very many things that can happen that you can’t pay cash for outright.  Lose your job, unplanned surgery, your emergency fund should have enough money in it to cover these expenses.

Why Bother To Build An Emergency Fund?

Many people think that this step is a big waste to build an emergency fund that is so large.  Why not use the money for something better?  I personally can think of a few reasons why this is a good idea.

1. Stuff Happens:  You will have things come up that are most unexpected and I think it is better to have planned for them than to just stick your head in the sand like an ostrich.  You will be glad that you have enough money to pay cash instead of having to whip out the old credit card and go further into debt.
2. Stress Management:  When you have an emergency fund saved, life is a lot less stressful.  You will not have to wonder how you are going to pay for something unexpected, you have the cash available to you.
3. Risk Is Reduced:  When you have an emergency fund, along with the proper insurance(s) you have a lot less risk of having a bad situation turn worse.  You manage the risk that comes along with those big negative events, and stop them from turning into life changers.

How Much Is Enough?

That decision lies with you and your family.  The amount may vary based upon your living situation, number of children, job stability and other factors.  Dave Ramsey speaks of a baseline of 3-6 months of expenses.  So if your family has a minimum of $3000 in expenses every month after getting rid of all the un-necessary bills, your 3-6 months of expenses would be between $9000 and $18,000.

Where Should I Put My 3-6 Months Of Savings?

Where you save your emergency fund is really up to you, but I would say you need to make sure that you can get to it right away if you need to.  My personal preference, and where we have our emergency fund is in a high-yield savings account at ING Direct.  Whatever you decide, DO NOT put your emergency savings into things like real estate, or the stock market that could be tied up for a while.  KEEP IT LIQUID!

So, my question to you is this:  Do you think saving up 3 to 6 months of expenses is enough?  To much?  Let’s discuss.

In Baby Step 1 we talked about saving up an emergency fund of $1000.  The most important reason you are saving up that money is so you do not go further into the debt hole by using your credit cards while you are paying down your debt.  As a review, here are the steps we have covered thus far:

Step 1 – Emergency Fund of $1000.

Baby Step 2:  Pay Off All Debt Using The Debt Snowball Method

This step more than likely will be one of the longest in the 7 step process.  If your dealing with alot of debt from student loans, credit cards, auto loans and other things, you might be at step2 for a couple of years or more.  Remember, the key here is to pay off your debts.  Bankruptcy should not be an option.

So how does the debt snowball work?

• Put all your debts in order from the smallest balance to the largest.
• After all your necessities (food, gas, utilities, etc.) are paid, make minimum payments on all your debts.
• Put any extra money towards paying off the debt with the smallest balance.
• Once you have paid off the smallest balance, you roll (snowball) all that money towards paying off the next smallest balance.
• Repeat until all your debts are paid off.

This may not be the quickest way to pay down your debt, but I know this works because I am using it with great success.  Using this method also gives you a great psychological boost from the quick “win” you achieve by paying off the smallest debt.

Do Not Go Into New Debt

The key to making the debt snowball method work, is to make sure you don’t go into new debt, while you are paying down the old.  Here are a few tips:

1. Quit borrowing more money.
2. Take your credit cards and put them in a plastic cup with water and freeze them at the back of your freezer.  This makes them very difficult to get to.  While they are thawing out you can really think hard if you need to use them.
3. Have a yard sale.  If your like me, you have a garage and house full of stuff you don’t even look at anymore.

Get serious about paying off your debts, and in no time you will be debt free!

Next Up:  Baby Step 3:  3-6 Months of Living Expenses in Savings

I have been writing about personal finance for oh, just about 4 days now and realized that after posting yesterday’s comments about establishing an Emergency Fund I actually put the cart before the horse as they say.  What I should have done, which is what I am starting today is a series on the 7 baby steps Dave Ramsey recommends in his book The Total Money Makeover: A Proven Plan for Financial Fitness.  So today I’ll be starting a series of posts about his system.  In this series I will be going over the 7 baby steps in depth, talking about each one and going over what you need to do to achieve each step.

Who is this Dave Ramsey Guy?

Dave Ramsey is a personal money management expert, radio talk show host and TV personality who has helped thousands of people become debt free and change their financial lives forever.  He gives no-nonsense advice to people who are in debt, gotten in over their heads, and need help finding their way out.  My wife and I bought his book and have been following his steps, so I can tell you from experience that they really work.

Dave Ramsey’s 7 Baby Steps

1. $1,000 to start an Emergency Fund: Before you get started with the rest of the plan, you need to save some money in an Emergency Fund.  We opened an account at ING Direct for our emergency fund.  This is to be used in case of an emergency like flat tire, medical, etc.  You need to do this so you will STOP using your credit cards.
2. Pay off all debt using the Debt Snowball Method: Basically you list your debts from smallest to largest.  You pay the minimum payments on all of your debts and any leftover money you have you pay extra on your smallest debt until it is paid off.  You then roll (snowball) that amount over to the next smallest debt.  I found a great Excel spreadsheet I used for this that does most of the work for you.
3. 3 to 6 months of living expenses in savings: Dave recommends that you save 3-6 months of expenses in case of job loss, illness, or other long term problem.
4. Invest 15% of household income into Roth IRA’s and pre-tax retirement: Save for the future, unless you want to eat cat or dog food.
5. College funding for children: After saving for retirement you can save for your kid’s education and college expenses.
6. Pay off home mortgage early: Make extra payments on your mortgage.
7. Build wealth and give!: Continue building your wealth through mutual funds and real estate, and GIVE IT!

7 pretty simple, yet effective steps, but if you don’t ever take the first step you will not take the other 6.

Getting Started

Before you even get started, I think it is important to understand why you really want to do this.  It is also important that you discuss this with your spouse and get him/her on board and committed to making this change.  My wife and I finally came to the realization that we needed to change our habits on day while talking over the phone about our financial situation and how much credit card debt we had.  We decided right then that we needed to do something, so I ran right out and bought Dave’s book.

No More Credit Cards or Debt Period!

When you finally make that decision to change, you need to begin immediately and decide as a family that you are not going to incur any more consumer debt.  Credit cards, store credit cards, home equity lines are off limits.  If you want something new like a LCD TV or Laptop you are going to have to save up the money to buy them.  Freeze your credit cards in a cup of water and leave them at the back of the freezer!

I will be skipping to step 2, “Pay off all debt using the Debt Snowball Method” tomorrow, since I already wrote about step 1 in yesterday’s article.

I am sure we have all heard that phrase “when it rains it pours” sometime in our lives.  But if you are like me, it seems to have happened more times than I would have liked.  Usually we say that because multiple things happen all at one time (car breaks down, dryer breaks down, etc) that cause us to have to use our credit cards to fix.  When I looked back at those times I realize it is because I did not have an emergency fund.

One of the questions I hear most often, and one I asked myself is “How much should my emergency fund be?”  The answer in just about every personal finance book you read or financial “guru” you listen to will tell you “Three to six months of expenses.”

But families do have a need for some savings behind them, whether they’re in debt or not.   As our Lord states in Proverbs 21:20 “The wise man saves for the future, but the foolish man spends whatever he gets.” If you’re going to break the cycle of credit-card dependence, after all, you will need to have some money available for Life’s little rainy day’s. Otherwise you’ll turn to that trusty credit card again and again. You’ll be just as dependent upon it as you ever were.

What you need is a “beginner” Emergency Fund.

The Beginner Emergency Fund

When it comes to “beginner” Emergency Funds, many people have found success with Dave Ramsey’s approach. I, too, am an advocate of his methodology.

In his “Baby Steps” plan, Ramsey advocates that folks start with an Emergency Fund of only $1,000. (Or $500 if you make $20,000 or less per year.) You should keep this amount in your Emergency Fund, and no more, until all your debts — other than your mortgage, if you have one — are paid off.  This is exactly what my wife and I have done.  If you want to read more about Dave Ramsey’s “Baby Steps” you can get the book here:

So How Large Should My Emergency Fund Be?

The bottom line is there is really no right or wrong answer to the question.  What we did was to put $1000 into our Emergency Fund and start paying off our debt.  Am I satisfied with that amount?  No, I will be adding to it after we have paid off all of our debts.  I will probably end up with around 3-6 months worth of expenses in the fund.  That is my comfort level.  Yours will probably be different.

Where Should I Keep My Emergency Fund?

This question is more important than you might imagine. If your Emergency Fund is too easy to access, you might be tempted to dip into it for things that are … well, not emergencies.

At the same time, though, it needs to be liquid (easily convertible to cash) and kept somewhere that allows fairly prompt access. After all, they call them “emergencies” for a reason.

So make an assessment of the banking and brokerage resources available to you. You’ll want the account to:

1. Pay decent interest,
2. Be devoid of fees,
3. Not be too easy to access, and
4. Not be too difficult to access.

A money-market account at a bank across town, or at a brokerage, might be the right fit. Perhaps a second savings account (usually not attached to a checking account) at your credit union or bank would work.

Or you could do what many, many savers are now doing: store your money at online-accessible banks like HSBC Direct, or ING DIRECT.  If you select ING DIRECT, please send me an email and I will email you back with a code that will get you an extra $25 dollars deposited into your account (Note:  I will also receive $10 for your referral).  Savings deposited in these institutions have historically paid much better interest than most other savings accounts, for one thing. Their minimum initial deposits are typically very low ($250), and there are no fees.

But most importantly: Access to your money is restricted … just a little. Once you make a transfer request, the funds generally can be wired into your current checking account and available within two working days.

Now, Just Fund it Already!

If you already have an Emergency Fund, how much is in it?  If you don’t want to share numbers, just tell us how many months of expenses you have saved up.

MicroPlace - A place to give back

I was in the process of doing some daily reading when I came across a great review of the MicroPlace social business site by Jonathan over at My Money Blog that I wanted to share some of my thoughts and a brief review with you.

What is MicroPlace?

It is a site owned by eBay who’s mission is to alleviate global poverty by offering investments that enable loans to hardworking poor people.

How Does MicroPlace Work?

According to the MicroPlace website:  “A loan of $20 can allow a poor woman to start a business and work her way out of poverty.”  You start out by opening an investment account (just like at Schwab or another online broker).  You can fund your account with either PayPal or your bank account.  You then use the search tools on their site to find an investment(s).

Is Your Money at Risk?

According to the statistics at their website, historically 97% of poor people have actually paid back their loans.  So there is some risk to your principal investment.  MicroPlace does perform due diligence on the institutions that actually make the micro loans to make sure they meet certain business and regulatory requirements.  They state that to date “none of our institutions have ever defaulted on their payments to investors.”

What Impact can You Have?

Well, I think that is the easy part.  You can help a poor person start a business and work her way out of poverty.  You are also participating in a solution that can help alleviate global poverty by helping people help themselves.

The Bonus

Do we really need one?  I feel just being able to potentially make a difference in someone’s life is enough for me, but they are offering a free solar powered flashlight for investing as little as $20.

Conclusion

I personally have not invested any money yet.  I plan on sitting down with my wife and determining the amount we will initially fund our account with.  I will follow up with another posting to let you know what we do with our investment.

But as Christians, should we always expect a monetary return on our investment?  Maybe, just maybe the return we should look for sometimes is not necessarily monetary in nature.  As those that have much, maybe knowing we helped someone escape poverty is return enough?

For as our Lord said “Instruct those who are rich in this present world not to be conceited or to fix their hope on the uncertainty of riches, but on God, who richly supplies us with all things to enjoy.  Instruct them to do good, to be rich in good works, to be generous and ready to share, storing up for themselves the treasure of a good foundation for the future, so that they may take hold of that which is life indeed” (1 Timothy 6:17-19).

It has been said that nearly half of American workers are living paycheck to paycheck.  Combine this with the news in recent months of housing foreclosures, late payments on credit cards, and other types of loans and it is easy to see why so many Americans are struggling with their financial lives.

What is Living Paycheck to Paycheck?

I am not sure if there is a true definition of “living paycheck to paycheck”, but I know I have been there myself.  If I can sum it up by example, it is the day before payday and I am breathing a sigh of relief after logging on to check my balance in my checking account (first time in 2 weeks) and realize that I am not overdrawn, and there is still a few bucks in the account.

The Statistics

• 70% of people in North America live paycheck to paycheck.
  - The Wall Street Journal
• 17% of Americans do not have enough savings to cover 1 week without a paycheck. 55% could not live for 3 months or less without a paycheck.
  - USA Today
• The estimated average credit-card debt per US card-holding households in 2005 was $9,312.
  - Time Magazine
• The personal savings rate in the US has now fallen to -2.2% — the lowest in 60 years.
  - The Department of Commerce

The numbers tell all.  Most of us spend everything we make each month.  In fact we spend more than we make, because we carry a balance on our credit cards.  I imagine a large percentage of us could save something every month if we just cut back on our lifestyle.

Save Something, Anything

I used to fall into the category of saving nothing because the amount of money I had left over at the end of every month was so small I thought it would not make a difference.  How wrong I was!  Even $20 a month adds up over time.  In just a few short months you could build up a $100 cushion in your emergency fund.  Here are a couple of ideas to get you started on the road to saving:

1. Find one or two monthly expenses you can live without and get rid of them.
2. Open a high-yield savings account.
3. Set up automatic transfers each month in the amount you saved by reducing your monthly expenses.
4. Earn extra money (work part-time, start a blog, etc.)

The point I am trying to make is to start saving something.  Saving nothing this month leaves you right where you started, living paycheck to paycheck.

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