Category Archives: Debt

Debt

2nd Mortgage Payment Plan Underway

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I am happy to announce that we have begun our 2nd mortgage payment plan. We used $191 from my wife’s commission check this month to make an extra payment to the principle. I know, it might not seem like much, but we have only paid down $637.49 in 2nd mortgage principle since we refinanced a year ago. Taken in that context, this extra $191 payment is the equivalent of 4 months of regular monthly payments.

And it doesn’t stop there. We plan to make another $1700 payment to principle this month using my extra paycheck. This will get our 2nd mortgage payment plan off to an awesome start for 2008.

Debt

Vehicle Depreciation

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You may have noticed that our vehicle values in the assets section of our Net Worth Updates have remained the same since March. We take good care of our cars, but they still depreciate. Therefore, we must make an adjustment to our balance sheet to account for the current value of the vehicles.

I had planned to adjust our vehicle values annually using the Kelly Blue Book value. However, now that I am faced with taking a $4,800 adjustment in one month. . . I’m rethinking my plan. For the first time since beginning this blog, we will post a negative change to our net worth in December.

To avoid this big hit and the associated sorrow every year, we will begin depreciating our vehicles in January at $200/month.

Debt, Goals

2nd Mortgage Payment Plan

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One of our big goals is to buy a house in 5 years and hopefully keep our condo as an investment property.

Currently, our monthly condo expenses (mortgages, taxes, HOA fees, and insurance) total $2,697, Unfortunately, that is way more that we can rent our condo for. Therefore, we have decided to focus on paying off our 2nd mortgage ($52,755.81 balance) to help bridge the gap.

Of that $2,697 in total monthly expenses, our 2nd mortgage payment represents $411.33. The interest rate is 8.55%, so only $36 is currently hitting principle each month.

Here’s the plan:

We will use what we consider “extra” money each year to knock down the principle:

$2,000/year from my wife’s two extra paychecks
$3,761.40/year from my two extra paychecks
$1,219.11/year from cashing in 6 days of my vacation
$5,000/year from my wife’s commissions

This would result in $11,980.51 in extra principle payments per year, or $47,922.04 in 4 years, allowing us to pay off the 2nd mortgage by 2011. We may be able to pay it off even sooner because $5,000 is a very conservative number for my wife’s annual commission and we will likely receive annual pay raises.

Once the 2nd is paid off, we will focus on increasing our savings for a house down payment and create a reserve fund for maintenace of both properties. In addition to the $411.33/month we will save after paying off the 2nd, my wife’s car will be paid off in April of 2012, allowing us to bank an extra $450/month. My car will be paid off in June of 2013, helping with our cash flow once we buy a house.

Our condo is next to a major UC school, providing large pool of renters. We hope to be able to rent the unit for $1,800/month. We’d be taking a loss each month initially, but a combination of paying off the 2nd mortgage and tax deductions should help us get within a couple hundred dollars of our rent target.

If we are sucessful in our plan to pay off the 2nd, but find the numbers don’t work out for renting the unit, we will sell the condo and buy a house. In the very least, we will have increased our equity in the condo and saved ourselves a lot of interest.

Debt, Goals, Investing

What A Difference A Couple Of Years Make

Over the weekend, I was looking at an old copy of our financial spreadsheet from 2 years ago. It brought me back to a time of financial struggle and uncertainty.

At the time, we were renting an apartment, in a lot of debt (my fault), and had little in the way of assets. Comparing the numbers from 2005 with 2007 reminds me how greatly we have been blessed. Here is a brief breakdown of where we were financially in August 2005 and were we are today:

August 2005

Liquid Assets
$5,157.00 401(k)
$1,547.00 Cash & Savings Accts
$759.00 Taxable accounts
$7,454.00 Total

Credit Card Debt
$10,630.56 (9.99%- 15.49% interest rate)

Net Pay Every 2 Weeks
$1,390.00 (Husband)
$1,180.00 (Wife)
$2,570.00 Total

August 2007

Liquid Assets
$12,805.68 401(k)
$3,326.97 Cash & Savings Accts
$6,278.41 Roth IRA’s
$838.79 Taxable accounts
$23,249.85 Total

Credit Card Debt
$1,249.49 (0% interest rate)

Net Pay Every 2 Weeks
$1,880.70 (Husband)
$1,200.00 plus bonuses and commissions (Wife)
$3,080.70 Total plus Wife’s bonuses and commissions

Debt

Financial Education

My wife and I started attending a bible study on Wednesday nights a couple of months ago. It runs just under 2 hours, and attracts a large group of people. We’ve enjoyed attending immensely, but I have to say, last nights class was my favorite discussion yet.

FINANCES! I would have never expected that this would be one of the topics we would cover. I expected it to focus on tithing, but it was equally, or more, focused on getting out of debt.

Did you know in the bible:

Faith is mentioned under 500 times
Prayer is mentioned about 500 times
Money is mentioned more than 2000 times

So, I guess it’s an appropriate subject for bible study.

The pastor explained how he and his wife were in debt $250,000 at one point, living in a rental home, with creditors calling daily. Here’s how it happened:

He landed a great graphic design job right out of high school (he went to a vocational school) and a couple of years later, he and his new wife moved into their first home. He began to fill that home with expensive toys. He took pride in these material objects, enjoying being the guy on the block with all of the cool stuff. He got in the habit of spending more than he earned, ended up getting over his head, and losing everything. He lost the house, the cars, the boat, etc. He said it was the lowest point of his life, and that he could understand why people consider suicide. He began working two additional jobs so they could pay down their debt. During this time, he also began praying, going to church, and even tithing. In fact, the week he began tithing, he was called into his boss’ office and fired. He couldn’t believe it, he felt like he should be getting blessing that week, not fired.

The owner explained that they hadn’t made money in 3 years and he was sick of losing money because of the company. Not sure what to do, he pleaded for his job and explained to the owner numerous ways that he thought he the business could be improved and made profitable. After hearing him out, the owner said, “if you think you can do such a great job, why don’t you take over the company’? He told the owner that he didn’t have any money, and the owner’s response was, ‘I didn’t ask you for money’. He ended up making more that first month he was running the company than he made in all three of his jobs the previous month. That allowed him to quit his two other jobs, and spend more time fixing his relationship with his wife, and getting involved in the church.

They focused their income on paying off all of their debts, and succeeded in paying everything off, including their mortgage, in 7 years. They then bought a new house, and began renting their other house. The $1,200 of monthly rental income was added to their mortgage payment, and they paid the new house off in 8 years. They used that same technique with another house, and now have 3 homes paid for. Now financially independent, he became a full time pastor.

He didn’t give us his testimony to brag. He wanted to show that having even a basic understanding of finances can improve your life dramatically.

I could see that he was getting people in the room excited to pay off their debt. He even provided a debt reduction worksheet to help people get on a plan. This was a real world financial education being taught in bible study. He was careful to explain that where your treasure lies, your heart will follow. And that you don’t want to be in love with money, but to be a good steward with what God has provided you.

401(k), Budget, Debt, Early Retirement, Emergency Fund, Investing

Stong Financial Foundation

Simple ideas for a strong financial foundation:

Live below your means
I believe this is one of the most important steps to a strong financial foundation and, for me, one of the hardest. If you try to keep up with your rich looking friends and associates, you may end up like most of them: lots of nice stuff, but a low net worth. Every dollar that you save is worth more than an extra dollar earned because the extra dollar earned is taxed.

Start an emergency fund
Job loss, health issues, and expenisve repairs are financial blows that can affect us all. Open a high yeild savings account (Emigrant Direct, ING, etc.) and start saving for the unexpected.

Aviod credit card debt
Credit card debt is the path to financial ruin. Been there, done that. Believe me when I tell you that digging the hole is very, very easy and climbing out is often a long, hard fought battle. The only thing we use credit cards for now are monthly bills because we get cash back from our Citi credit card. Don’t do this if can’t pay off the balance in full each month.

Track spending / create a budget
It’s easy to overspend if you don’t know what you’re spending. Track spending for a few months and use this information to create a budget. The budget will help keep you on track and hopefully help you find areas where you can reduce spending.

Learn all you can about investing
Most financial planners are more interested in their commission, rather than what is in your best interest. If you educate yourself, you can save A LOT of money and probably do just as good a job, if not better.

Invest at least 10% of your gross income
The future is coming whether you want it to our not. The magic of compound interest can make your consistent contributions grow into a large nest egg. Take advantage of tax sheltered retirement account such as a 401(k) and/or Roth IRA. If your employer offers a 401(k) with a company match, take advantage of the free money.

Credit Cards, Debt

Paying off credit card debt from years past

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I had little credit card debit during college and was actually very fugal. My parents get the credit for that, as they taught me early on to appreciate the value of a dollar. After college, however, I moved from the central valley to San Diego and the wheels fell off the cart. I started using credit cards to help make ends meet. The credit cards were addicting, and eventually, I was using them to fund a lifestyle well above what I could afford. I went out with friends nightly, traveled, and got expensive new hobbies. . . all on plastic. I remember one truly low point, when I received a new credit card in the mail with a $5,000 limit, and maxed it out buying accessories for my truck the same day. Astonishing? Irresponsible? Probably even more so if you knew that my truck was barely worth that much before I bolted on all of the new “make-up”. I got to the point that I was paying only the minimums each month on all six of my credit cards. I was never late on a payment, but I was also sinking further and further in debt.

Fast forward to 2004
As my relationship with my girlfriend was developing, and it was obvious that marriage was in our future, I had to share with her my terrible secret – I was bringing over $30,000 worth of debt into our relationship, and no plan of how to pay it off. I must be better looking than I thought because she stuck around, and has been extremely supportive and understanding. As of today, my credit card debt is only $3,475.38, and dropping at an amazing rate. As weird as it sounds, I actually enjoy making credit card payment now because I love seeing the balance whittle towards zero.

The approach I’ve taken to paying off my unsecured debt is as follows:

  • Quit making charges to the credit cards

  • Apply 90%+ off my disposable income to the highest interest rate card (while paying the minimums on the other cards)

  • Once the highest interest rate card is paid off, do the same with the next highest interest rate card (repeat until all credit cards are paid off)

  • Whenever possible, transfer debt to lower interest rate cards, or better yet, 0% interest rate cards

  • Request cash gifts for holidays/birthdays and apply them to credit card debt

  • Sell useless items on craigslist.org or ebay.com and apply proceeds to credit card debt

  • Increase income (easier said than done, but I went from $40K per annum in 2004 to $66K+ per annum in 2007)

Some other suggestions I have heard, and why I choose not to use them:

  • Cut up all credit cards – Not for 1MansMoney because we do not have an emergency fund yet.

  • Pay off the small balances first (for a sense of achievement), then attack larger card balances – Not for 1MansMoney because I can do math and know that you want to pay the higher interest rate cards first, regardless of the balance size.

  • Debt consolidation – Not for 1MansMoney because there are too many debt consolidation horror stories.

  • Store credit cards in the freezer to eliminate impulse purchases (the cards supposedly can’t be swiped for a few hours after freezing) – Not for 1MansMoney because this gimmick wouldn’t stop me from purchasing online.

To get an idea of how vigilant I have been with my debt payments, check out the one year payment history for a credit card I just paid off (click on spreadsheet below):

* NOTE: As you can see in the balance column, some charges were made to the card from time-to-time. Hey, nobody is perfect.

Sacrifice, sacrifice, sacrifice. It’s worth it to get out of the strangle hold of debt and start building your net worth.