How to Qualify For a Mortgage When You’re Self-Employed

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If you’re self-employed and have applied for a mortgage, you probably have a sense that you were put through a meat grinder. And if you’re self-employed and have merely heard how difficult it is to apply for a mortgage when you’re self-employed, I’m here to tell you that it’s all true.

I spent more than 15 years in the mortgage industry as both an underwriter and a loan originator, and I saw this unfortunate bias against the self-employed again and again. People who are paid by W-2 can often squeak into a mortgage with a shoehorn, but the self-employed must always be prepared to run faster and jump higher.

And even then there may be no guarantees.

The Bias Against the Self-Employed in the Mortgage Industry

I think most of us understand that the job market has become far less reliable since the financial meltdown, and probably going all the way back to the dot-com bust. But in the mortgage universe that doesn’t matter – lenders continue to view salaried employees as if they have a guaranteed income for life.

The reverse is true when it comes to the self-employed. The mortgage industry views the self-employed as if they’re one step away from destitution.

In a way, this view is not entirely without merit. Something like 80% of businesses fail within the first 18 months of operation; if you’re a lender, this is not a statistic that is easily ignored.

Businesses fail for all kinds of reasons, many of which are impossible to know upfront. This is the reason a mortgage lender will generally look for the self-employed person to be in business for at least two years. By contrast, a salaried worker coming out of college can often qualify for a mortgage simply with a promise of employment letter.

If you’re going to apply for a mortgage as a self-employed person, the first step is to recognize that it will be an uphill fight. The second will be to prepare yourself in advance. It’s not impossible to get a mortgage when you’re self-employed – just more difficult. That’s what you have to be ready for.

What the Mortgage Lender Will Be Looking For

The documentation requirements for self-employed borrowers are extensive. The laundry list reads something like this:

• Evidence that your business has been in existence for a minimum of two years – this may require a copy of a business license, a letter from a CPA, or a letter from a licensing bureau.
• Income tax returns for the past two years – this includes both personal and business returns, and all schedules.
• The lender will also verify your income information with the IRS.
• If any income will be needed from the current year, for which an income tax return obviously has not been filed, you’ll need financial statements provided by a CPA. Under certain circumstances, they may need to be audited statements, which can cost thousands of dollars.
• Your income will be averaged for the past two years. If your net income (not gross) was $100,000 in 2014, and $50,000 in 2013, your income for mortgage purposes will be $75,000 ($100,000 + $50,000 = $150,000, divided by two years).
• If your income for the most recent year was lower than it was for the previous year, your income will be based off of the current year, and not averaged.
• If your income for the most current year is significantly below what it was the previous year, your income may be considered unstable, and the loan application denied.

To put that in perspective, a salaried borrower only needs a copy of a recent pay stub, the previous year’s W-2, a verbal verification from their employer that they are still employed there and likely to be so in the future. The lender will also use current income for qualification purposes (no averaging), even if it has increased substantially from the previous year.

Your Response to Their Demands

If you want a mortgage, your only choice will be to comply with the lender’s requirements. Even if you don’t agree, you will not be able argue around any of those requirements. Since nearly all mortgages are sold to the same agencies (FNMA and FHLMC) or require mortgage insurance from either the FHA or the VA, the guidelines will be the same in all cases.

If you have not been in business for at least two years, you’ll need to be patient and wait until at least that much time has passed. You will also need to make sure that your business shows a pattern of increased earnings from year to year. This is not always entirely within your control, since business cycles can affect your bottom line.

But there is one thing that you can do, and that’s not be overly aggressive with deductions on your income tax return.

All self-employed people have a built-in disadvantage when it comes to applying for a loan of any sort. One of your primary objectives is income tax minimization. You will accomplish that by taking every deduction that the IRS allows. But that strategy works in reverse when you are applying for a mortgage.

The conflict is that filing income taxes focuses on income minimization, while applying for a loan requires income maximization. If you know that you will be applying for a mortgage in the near future, you will do well to go light on your income tax deductions.

Developing Strengths of Offset Your Weaknesses – a.k.a., “Compensating Factors”

A salaried person can often get a mortgage with a minimum down payment, less-than-perfect credit, and even a little bit too much debt. But if you’re self-employed, don’t count on getting similar treatment. Your financial profile will have to present a picture of a stronger borrower.

There is a term in the mortgage industry called compensating factors and while it applies to all borrowers, it’s generally most important to the self-employed. Compensating factors are indirect lending criteria that can make a borrower look stronger, even if that criteria is not strictly required.

Here are some examples of compensating factors that can help you if you are self-employed:

• Making more than the minimum down payment – if this is 5%, making a 20% down payment will make you a stronger borrower.
• Strong credit profile – most lending programs require a minimum credit score of at least 620; yours should be well in excess of 700.
• Cash reserves – this is the amount of cash that you will have available after closing. The typical requirement is liquid savings (not retirement money) sufficient to cover at least two months of the payment on the new home. You should have six months or more.
• More than the minimum self-employment history – it’s generally at least two years, but you should figure to be in business for at least three years.
• Not buy more house than you can afford – many borrowers buy a house that’s up to the maximum amount they qualify for. This is usually based on a debt-to-income ratio (DTI) of not more than 36%, and sometimes it can go higher. Make sure that the home you want to buy is keeps your DTI well below 36% .
• The increase in your house payment should be reasonable – lenders generally consider an increase in your house payment of up to 15% or 20% to be reasonable. A doubling of your house payment could make your loan too risky, and result in a decline.

If you can keep all those factors in mind, and develop a financial profile that largely matches them, your loan will be considered lower risk even though you’re self-employed. No, it’s not fair, but it’s how the mortgage world works. If you are aware of the obstacles – and have a strategy to overcome them – then you’ll get the loan you want.

How about you all? Have you ever applied for a mortgage when you are/were self-employed? What kind of roadblocks did you run into?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/nikcname/4893848354/sizes/q/

Can Ryan Broyles Inspire You to Spend Less Than You Earn?

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

What’s the rock bottom salary that you can have to support you and your family?

If you’re like most Americans, your rock bottom salary is what you’re currently making.

Perhaps you scrimp along, barely making ends meet. You’ve paid your dues living on a low salary. As your income increases, you spend more, year after year, after year.

“After all, don’t you deserve to reward yourself with an SUV after years of driving a compact clunker? The tendency to spend more as you earn more is known as lifestyle inflation—and it can affect you whether you make five figures or seven” (Forbes).

If those of us on an average income have trouble managing lifestyle inflation, imagine that you’re a millionaire, and you’re surrounded by other millionaires. Would you be able to live off of a “typical” salary? Would you be able to resist the urge to keep up with the millionaire Jones’ next door who are spending their money, as the proverbial saying goes, as if there’s no tomorrow?

Think, for just a minute, about the challenge to resist lifestyle inflation when you have money. . .lots of money.

So is the case for Ryan Broyles, the Detroit Lions wide receiver who signed a contract for $3.6 million in 2012. Yet, he and his wife live on just $60,000 a year.

ESPN reporters, when discussing Broyles’ financial decision, share that “78 percent of NFL players and 60% of NBA players file for bankruptcy within 5 years of retirement.” The reporters go on to discuss the lavish spending of other pro players including Jalen Rose who spent $60,000 once on a cell phone. A cell phone!!

Yet Broyles and his wife (and new son), despite the constant financial temptation around them, are living on $60,000 a year, just $7,750 more than the median American income of $52,250 according to Business Insider.

If Broyles can live on so much less than he earns despite his surroundings, can you, too?

Simple Strategies to Live on Less Than You Earn

Before you complain that you can’t possibly live on less than you earn, think about the 78% of NFL athletes who also believe they can’t live on less than they earn. After all, they have managers, gardeners, personal assistants, trainers, housekeepers. . .They can’t possibly cut corners. Many of them are used to a certain lifestyle and have trouble imagining their lives without all that they now have.

Regardless of your current income, you, too, are used to your current standard of living. Changing it, imagining living on less, when all you want to do is to live on more, is difficult. So, start slowly. Don’t make all of these changes at once, or you’ll be miserable. Instead, slowly change over the next year or two.

Make a budget

I know; I know. Making a budget is about as pleasant as having a root canal. However, making a plan for your money helps you avoid the temptation to overspend. The best way to succeed is to make the budget realistic. If you currently spend $300 a month eating out, don’t drop that amount to $0. Instead, drop it to $250 this month, then $200 next month, then $150 the month after.

Stick to a budget

Once you make the budget, you must stick to it. There are thousands of ways that you can pitter away your money without thinking much about it. You might buy a candy bar and a pop when you get gas. Maybe you pick up a magazine at the grocery store checkout. If you find that you’re overspending, take a month to write down all of your purchases or track them on your smartphone. You may be surprised to see the many ways you’re leaking money.

Cut your grocery bill

Besides your mortgage or rent, groceries are often the second largest expense for a family. I’ll be honest, for our family of 5, we used to spend $900 to $1,200 a month. I bought all organic—meat, veggies, fruit, etc.

Over the last two years, I’ve whittled our grocery spending down to $500 to $600 a month. It’s not been easy, and I’ve had to give up some of my food preferences (like eating all organic). Instead, I found changes we can live with.

• We eat more bean meals now.
• We eat organ meat, which is still a challenge for me.
• We always buy organic for the dirty dozen, but I will buy conventional produce, too.
• We buy in bulk when items are at rock bottom prices.
• Most importantly, I learned to shop from the pantry and freezer, choosing to make meals based on what we already have at home.

I have always meal planned, but if you don’t regularly, start with this simple step. Make a meal plan. When it’s 5:30 p.m. and you have no idea what to cook for dinner, simply look at the meal plan and start cooking. You’ll save yourself a drive to the local fast food restaurant.

Another good strategy is to make some freezer meals, so if you have a crazy week, you will have food at home waiting for you.

Kick the dining out habit

I know how hard this is. I once had a blog exclusively devoted to dining out, so I know how convenient it seems to eat out and how enjoyable it can be. But you will save so much money if you don’t eat out or you scale back on the frequency of dining out. And I promise, after a while, you won’t miss eating out. And when you do dine out, you’ll enjoy it all that much more because it will be a treat.

Curb your entertainment bill

Entertainment costs many families quite a bit of money, but it doesn’t have to. There are plenty of low cost entertainment options.

• Get movies from the library or through a Netflix subscription.
• Have a family game night.
• Cook restaurant quality meals at home together.
• Attend local free events.

With some creativity, you’ll find that entertainment can become a very small line item in the budget.

Lower your utility bill

You can save money on your heating or air conditioning bill by making gradual changes to the temperature. We live in Arizona where air conditioning is needed six to eight months of the year. Last year we kept the air at 80 degrees. This year, we’ve kept it at 81 degrees. Next year we may try to raise it to 82 degrees. Gradually change the temperature you’re used to, and you can save money.

If you look at this list of cost cutting strategies and think, “If I do all of these things, I’ll have no life”, I just want to reassure you, you’ll have a life. You’ll have a good life; it will just be different than the life you’re currently living.

Think of Ryan Broyles living on $60,000 a year. He’s not hurting by living on that income, but I’m sure he’s not dining out every night, either. He’s certainly not living lavishly like his teammates. But he’s building for his future through his investments. You can do that, too.

How about you all? Do you routinely spend less than your income, or do you constantly feel like you’re trying to make ends meet? What is your favorite way to keep more money in your pocket?

Share your experiences by commenting below!

***Photo courtesy https://pixabay.com/en/piggy-bank-saving-money-young-woman-850607/

8 Compelling Reasons to Have Your Own Business

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If we’re honest, we have to admit that the job market isn’t as secure as it was just a few years ago. There’s not much that we can do about that – but that doesn’t mean that we’re helpless. One of the best ways to remedy an unstable job market is to have your own business.

And here are eight compelling reasons why you might seriously consider doing it for yourself.

1. Unlimited Earnings

It’s regrettable that in jobs your income will be determined by a certain very limited range. For example, even if you do the best job possible in your job classification – even if you exceed expectations – if the salary range for your position is between $40,000 and $50,000, there is very little chance that you are going to earn more than $50,000.

If you have your own business, no such limits exist. You can literally earn as much as your time, efforts, and talents will carry you.

2. Having Creative Control Over Your Work

When you work for someone else, that person or employer will not only have control over the work you do, but often you how you do it. Very few jobs operate as true democracies. There will almost always be parameters and rules – some that are incredibly specific – that will dictate exactly how you do your job. Even if you suggest what might be a better way, the idea may be rejected by the employer, since it is “not the way we do things around here”.

When you have your own business, you have complete control over your work. You can eliminate any process that you think is not entirely necessary, or modify it so that it is easier to do. You can also choose to work on those areas of your business that are most productive, and most fulfilling to you on an emotional level. That alone could make day-to-day work less of a chore.

3. You Can’t be Fired or Downsized

While it’s true that you can always lose clients or customers when you have your own business, you can’t be fired or downsized out of your position. When you have a job working for someone else, either you are employed – and everything is fine – or you are unemployed, and your life has been turned upside down.

When you have a business, there may be times when it takes a downturn, but you can then make every effort to find additional sources of income to make up for what was lost.

4. You Can Blend it With a Full-time Job

You don’t necessarily have to start a business that will become a full-time venture. You can choose to make it part-time, at least until you get to the point where you are willing to take the leap of faith into full-time. But you can also decide that it will remain a part-time activity, and blend it with your full-time job.

5. Choosing Your Own Income Sources

If given a choice, most of us would probably choose pursuing certain income sources over others. If you have a job, that choice will not be yours to make. But if you have your own business, you can choose to pursue whatever income sources are most agreeable to you.

And in most cases this will work to your advantage. People typically earn more when they are doing what they like, and what they believe in. In that way, you can earn more money while getting more satisfaction out of your work.

And speaking of satisfaction…

6. Personal Satisfaction

It’s usually easier to create a work/life blend that works for you on a personal level when you’re self employed. You could not only choose to work as much or as little as you want, but you can also control the specifics of how that comes about. That control that you will have for your professional activities is likely to translate into greater personal satisfaction.

7. An Asset to Sell to Fund Your Retirement

Certain types of businesses can be sold, often for a large amount of cash. For example, a business may have a substantial amount of capital invested in property, equipment, or inventory. The cash flow of the business may even be salable – businesses often sell for X times their annual gross revenues.

The point is, if you have an established business, and you would like to retire, you could probably sell your business to provide additional capital to add to your retirement portfolio. This could the an amount that enables you to take early retirement, or at least to have more funds available for retirement at more traditional ages.

8. An Additional Income Source in Retirement

There are two possibilities here. You can choose to slow down your business activity so that you can semi-retire at whatever age you choose. The extra income can supplement your Social Security income and retirement investment income, and provide you with a very comfortable life.

But the second possibility actually works in conjunction with selling your business. Very often, when a business is sold, the previous owner continues to work in the business in order to ensure a smooth transition from himself to the new owners.

Under such an arrangement, you might be able to make your employment into part-time situation, or you may even be able to make it permanent.

Either way, this will enable you to draw a continued income from your business in retirement.

Considering all the above, there are certainly compelling reasons to have your own business – especially these days, when the job market seems to be permanently unstable.

***Photo courtesy https://www.flickr.com/photos/9731367@N02/6988137520/sizes/n/

From Enrollment To Investment: My HSA Experience

The following post is by MPFJ staff writer Travis, who blogs at Enemy of Debt where he candidly shares his family’s financial struggles, failures and successes. As a father and husband, he provides a unique perspective on balancing debt, finances, and family.

Last year I made a major change regarding my health insurance, switching from a low deductible preferred provider organization (PPO), to a high deductible PPO with a health savings account (HSA) It wasn’t what I originally intended to do when I began investigating my health insurance options for 2015, but after hours of research I made the decision believing it would not only be the best choice for my family for the following year, but for long into the future.

Flexible Savings Account (FSA) vs. Health Savings Account (HSA)

I originally intended to keep the high deductible PPO that I’d had for over a decade. My intent was also to add a flexible savings account (FSA) which have the following characteristics:

• Funds are contributed pre-tax from my paycheck
• Funds are front loaded meaning if I indicate I will contribute $200 a month, the full year’s contribution of $2400 is available on January 1^st.
• Funds must be used by the end of the year, or the funds are lost
• Low deductible medical coverage
• Great medical coverage including preventative and general office visits
• High monthly premiums

This option was attractive to use because our daughter needs braces, and the FSA would allow us to have our full year’s FSA contributions available at the beginning of the year. We could move forward with the braces on January 1^st should we wish to do so.

I was ready to pull the trigger, then I started reading about the high deductible PPO with an HSA also offered by my employer which has the following features:

• Funds are contributed pre-tax from my paycheck
• $500 of automatic employer contributions
• $1100 of additional healthy living incentives offered in the form of additional employer contributions
• Funds can be rolled over from year to year, and invested for growth
• High deductible
• Only preventative care is covered until deductible is met
• Low monthly premium

The HSA option appeared to fit our family’s needs perfectly. Doing the math, I found the premium for the high deductible PPO plus a $250 monthly contribution to my HSA would result in an almost identical monthly payment as my health insurance premiums in 2014.   The difference is that the $250 a month contribution, or $3000 for the year, would go into an account that I could use for medical expenses. Add to that the $1600 of total potential contribution from my employer, and my family would have $4600 available to pay for medical expenses.

My medical records show that the billed amounts (prior to insurance payouts) of our medical expenses for the past two years barely added up to $1000 per year. This clearly indicated that the high deductible PPO with an HSA was the right choice for our family.

Was an HSA the Right Choice?

As we approach the end of summer, how has my decision worked out for us? Here’s a breakdown of the numbers thus far in 2015:

• Total pretax contributions : $1900
• Total Employer contributions: $650
• Total Medical Expenses: $1487

Current Balance: $1063

At first glance it would appear that our medical expenses are higher than the last few years. However, what the numbers don’t reveal is that we used our HSA funds to pay for glasses and contact lenses for our family. This is something that has traditionally been paid for out of pocket. With the HSA, I actually feel more prepared for having a family member need to go to the doctor because I know that I have funds available to pay the bill, and don’t have make several phone calls to our medical provider and insurance company trying to make sure I know what’s covered, what’s not, and why.

Additionally, I have $950 worth of incentives that I haven’t earned yet. I’ll easily have those taken care of in the next couple of weeks, giving our HSA balance a nice bump.

Time To Invest My HSA Funds

Now that I’ve accumulated a healthy sum of money in my HSA, it’s time to revisit one of the advantages of having it; investing the funds for faster growth. I saw that I earned a few cents in interest from my HSA balance since it’s sitting in the default savings account for fast access. Surely I could do better than that!

My HSA allows me to search for a stock symbol, plug in an amount, and in the touch of a button a purchase is ordered. It also allows me to choose from a wide variety of stock and bonds. Finally, it let’s me create something called a basket in which I can buy and sell a grouping of stocks (which I specify) as a single entity.

While I like the flexibility of the investment options offered by my HSA, I’m not all that thrilled with it’s simplicity. I much prefer the investment options offered by my 401K program in which I can choose from investment funds that the managing brokerage creates, and tracks it’s performance. There certainly is room for improvement here.

Note: The inner workings of my HSA is specific to the product offered by my employer. If you have an option of having an HSA, check with your employer or HSA administrator for details of your specific HSA.

It’s often suggested that a person keep some amount of their HSA in the default savings account for fast access. For my personal situation I don’t see that as necessary since my medical provider sends everything to insurance before a bill shows up in my mailbox. From the time I receive the bill until it’s due is another couple of weeks, giving me plenty of time to sell some of my investments if necessary to pay the medical bill.

I’m not planning on needing the bulk of the funds for many years, so I could go a little more on the high risk side with my investments to try to achieve maximum growth. Unfortunately, due to the way my HSA is administrated, I may end up going with something on the low risk side, or consulting a financial advisor regarding how to best invest my HSA funds.

I know I made the right choice regarding my health insurance options by enrolling in a high deductible PPO with an HSA. But it’s now time to move on to the next step and maximize the growth of the funds in my HSA.

How about you all? Do you have an HSA? What investment options does your HSA offer, and how have you invested your funds?

Share your experiences by commenting below!

***Photo courtesy phasinphoto at FreeDigitialPhotos.net

Five Stay at Home Jobs For Moms to Earn Money

The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.

Women are becoming more educated, are getting paid more, and are rising stars in the workforce. While it is nice to see that workplace equality is finally catching on, working mothers are still having difficulty juggling both motherhood and their career. While some are enjoying their work in Corporate America, others are almost forced to work so their family can survive.

Many women, if asked, would rather stay home to take care of their young children than become a powerhouse at work. So what’s holding them back from ditching their job? What else? Money. But what if these women could find a source of income while staying at home? Would this be possible? Would the earnings be enough to cover the family expenses (with the help of the husband’s income of course)? After much research, I have discovered five jobs that women can do that will allow them to both mother and provide an income for their family.

1. Gardening/Farming

If you have just a little bit of property to work with, gardening is a wonderful tool to save money as well as earn some! By gardening and using rain water to nourish the plants, it can be a very cost effective way to produce groceries in your very own back yard. One simple garden can produce hundreds of dollars’ worth of groceries with only $20 worth of seeds.

If you wish to earn a little money, start looking into what plants are in high demand in your area. As a general rule of thumb, tomatoes are always a quality vegetable to plant and sell (perhaps at the local farmers’ market or to friends). House shrubs and trees also yield a hefty profit if you have the space. Best of all, the growing is mostly done by itself, so you can continue to parent like a pro even while you earn the money.

2. Craft and Sell on Etsy

My wife and I recently got married and decided to save money by making the table decorations ourselves. We saved our tin cans, spray painted them white, drilled designs in them, and made some pretty awesome candle holders. In addition to this, her mom figured out how to make some pretty realistic looking flowers out of fabric that matched our wedding colors perfectly. The entire display probably cost us $100 and looked phenomenal. And, in the end we sold the entire set-up for $600. Not only did we save money by doing the decorations ourselves, we made $500 in the process!

If you like to craft, check out Etsy and test a few products of yours. If they sell, you might just have a little business on your hands.

3. Babysit

If you’re a mom and have children that you’d like to stay at home with, why not offer to watch your friends’ children for them instead of having them sent to daycare? They know they can trust you and would likely end up paying you slightly less than the daycare for better, more personal care. This way, you can earn some cash, see your child all day, and provide them with the social interaction that they need as well!

4. Network Marketing Consultant

Network marketing often gets a bad rap. We’ve all had the friend that calls us over for a business opportunity and it’s what we refer to as a ‘pyramid scheme’, where people try to get their friends into business so they can make money on their product sales and become a millionaire. Most of the time the presentations are pretty cheesy and people are left eyeballing the door all night.

I’ve been involved in network marketing businesses. Some were bad, but some were not. For stay at home moms, network marketing can be a great way to earn the extra money that’s needed for their family. Avon, Tupperware, and Mary Kay are great examples of businesses that could earn you money without scaring your friends away. If you get involved in a business like this, you must first love the product, and secondly you must go in with the mindset of supplementing your income and not becoming a millionaire.

By selling product that you love, you can earn some extra dollars from the distributor. If some friends happen to love the product and want to sell it too, then sign them up. If not, then you don’t need to shun each other for life.

5. Photography

I have seen quite a few moms take to photography, and for good reason. By working a handful of hours on a couple of Saturdays and then editing photos on random days in between, a stay at home mom can earn over a thousand bucks a month and watch her kids for much of the time as well! If you have a talent for shooting photos, then consider photographing a couple of weddings, family portraits, or senior pictures. The money is good and for the most part you can make your own hours.

How about you all?  Are you ready to ditch your job to become a stay at home mom? What jobs have you (or someone you know) have done to make a little money on the side while taking care of your/their children?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/mararie/6405056867/

How Much Money Are You Wasting on Insurance?

The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.

In my opinion, insurance is a necessary evil. Many of us shell out thousands of dollars a year for that ‘just in case’ disastrous moment, and it might never come. All those payments seem like a waste, but we all know that without it, we could be devastated in a moment. For this reason many of us have a wide variety of insurance policies, and it makes us feel responsible and secure in our everyday lives. However, so many of us are overpaying these insurance companies that it’s flat out ridiculous. Just last year I discovered I was overpaying, and I bet you might be too.

How I Made My Discovery

A wise man once said that ‘you can’t get to where you’re going if you don’t first know where you are.’ I mean think about that. If you wanted to drive to Chattanooga, Tennessee, but you didn’t know if you were currently in Cleveland, Ohio or St. Louis, Missouri, you’d have a pretty tough time finding your way wouldn’t you?

The same is true with your insurance. If you don’t know how much you’re paying in each month or what your coverage details are, then how on earth can you expect to save money on your insurance? I never thought about this until I actually started budgeting last year. By budgeting, I was forcing myself to look at all the dollar figures and gain an understanding of why each expense was the amount it was. To say the least, this was an eye-opening experience.

Escrow

When I first dug into the numbers, I discovered that a portion of my house payment was going toward an escrow account that was set up by my bank. This is simply an account where the bank stock-piles your money for your property tax payments, which means that you don’t get hit with a hefty bill once a year. And, it gives the bank the assurance that you’ll have the funds to pay the tax and continue to make your mortgage payment rather than defaulting on your loan.

The whole set up sounds well and good, but many of these banks take a small cut to manage this escrow account for you. Plus, this means that a portion of your money (often to the tune of thousands of dollars) is inaccessible by you for an entire year. Finally, to cover their butts, the banks often overcharge you each month to make sure that the account has enough money when tax time rolls around. It’s something that no one really thinks about, but it’s quite the raw deal for you, the customer.

To get out of your escrow (which means you’ll have to budget and save for your taxes on your own), many banks require you to own at least 20% of your home. When you get to this point, you can simply make a phone call to the bank, have them close the account, and then mail you a check for the account balance. In my experience, this small move saved me about a hundred bucks a year.

Private Mortgage Insurance

Private Mortgage Insurance (PMI) is another way that the banks cover their butts. They’ll allow you to take out a loan by paying only 10% down (or less) on your house, but by paying less than 20% of your home’s value, you’re allowing the bank to charge you extra as an insurance policy to your default. In other words, they’re trying to get as much money out of you now because they’re not so sure that you’re going to pay them all that you promised. If you end up defaulting on your loan, then they hope that your PMI will cover the expenses of them repossessing the house and reselling it to the public.

Want to stop paying PMI? It’s simple. Just pay off enough so that the bank owns less than 80% of your home’s value. Then, let them know it and by law they need to stop charging you for private mortgage insurance.

Auto Insurance

Everyone has auto insurance, but very few of us shop around regularly. I even admit that I went a couple of years before considering another insurance company to cover me and my Honda Civic. When I looked at my monthly bill and realized that in one year, I was paying nearly half of my car’s value just for insurance, I quickly searched around for something else. Sure enough, I was getting screwed. By getting just two quotes, I was able to reduce my payment of $85 a month down to $55 a month. That was an easy annual savings of more than $300, just with a few minutes of my time.

Home Owners Insurance

Home owners insurance is pretty standard and is typically paid once a year. Asking around for quotes is simple, but if you still have an escrow account, switching insurance providers can be a pain in the butt (which is another great reason to just pay your tax bills yourself) since you have to coordinate the switch with more than one entity. First ditch your escrow, then see what kind of deal you can find out there.

Life Insurance

If you don’t have a spouse or kids or anyone that depends on you or your income, then you don’t need life insurance. If you are married with no kids and both you and your spouse work, then you probably still don’t need much life insurance. So when do you need it? The answer to that is simple. If someone would be financially impacted upon your death and would have a difficult time surviving if you were gone, then you likely need life insurance.

The next question is typically, “What type of life insurance should I get?” Almost always, the answer is, “Term Insurance.” At this point in my life, I’m 30 years old and have a spouse. We both earn enough to take care of the bills on either one of our incomes and therefore wouldn’t be financially strapped if one of us tragically passed away. Therefore, there’s no need for us to have insurance.

If however, we had two kids, then the answer changes. If I passed away, my wife would still have to work, but she would also need to put them in daycare while she was away during the day. Due to this expense, I might take out a 20 year, $300,000 term insurance policy to take care of those many years’ worth of expenses.

To reduce your insurance costs severely, do your best to put yourself in a position where you don’t need it – either by living cheaply or by having a large net worth.

Medical Insurance

Everyone should have medical insurance, but how much should one be paying for it? Just like in the auto insurance example, you should choose the type of coverage that works best for you. If you have a bunch of money stashed away for a rainy day and you are never sick, then get the high-deductible insurance. You’ll almost certainly save yourself money in the long run and you might even get the benefit of some HSA funds from your company.

If you’re constantly sick or have a history of medical problems, then you might want to get some better coverage and pay a little extra per month. It can sometimes be tough to save money on your medical insurance, especially if you only have the option of one company through your workplace, but you can still alter the deductible to attempt to save some money here and there.

The Extras

Having a lot of stuff can be expensive. Not only does it cost more in maintenance, payments, and storage, but it can also cost you in insurance! That boat, snowmobile, and sports car are adding to the amount of money that you’re throwing away in insurance. The more stuff you own, the more expensive and stressful life can get. Sometimes it’s best to wait on all the toys until you’re actually wealthy and can afford it. That’s what we’re doing, and let me tell you, it’s allowing us to get wealthy quite quickly.

How about you all? Have you saved money on your insurance costs lately? What did you do?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/pictures-of-money/17307624302/

Quick and Frugal Summer Meals

The following is a post by MPFJ staff writer, Jeff.  Jeff writes about reducing waste, saving money and building freedom at his website, Sustainable Life Blog.

I have been living on my own for over 10 years now, and after a bit of thought, the one thing that can save you loads and loads of money over time is to eat food that you prepare at home, instead of purchasing take out or heading out to a restaurant. While I still eat out more than I like (which honestly pains me because I live in a small town and honestly think I’m a better at cooking than every dining establishment in my town but 1), I’ve cut way back over the years.

This has saved me a boatload of money over the years and I’ve really grown to like cooking. it’s turned into a fun and fulfilling hobby for me.

So, now that it’s summer time and it seems like there’s always a party to attend or some other function to take advantage of the nice weather everywhere around you it makes cooking at home much harder. I get that, and I’ve fallen victim to that same struggle just this week.

However, since I know it costs a ridiculous amount of money and I’ve been cutting back HARD, I wanted to share a few easy to prepare and quick recipes with you that you can throw together in less than 15 minutes. These dishes are all great and fairly cheap. Without further complication, here are some of my favorite recipes (taken from a New York Times article quite a while ago).

Crab Sandwiches

Combine crab meat (can use real or imitation) with a bit of mayo, Dijon mustard, chives, tarragon and salt and pepper in a bowl. Mix well. Serve mixture in a sandwich – tastes great if you toast the bread first – with potato chips on the side. I really like this one because aside from the crab meat, I typically have all of these laying around the house. I also try and keep some crab meat in a can on hand so I can whip this up for dinner quickly. The crab meat makes this a bit more expensive than other recipes in this list, but it’s still cheaper than eating out.

Tuna Pasta

This is one of my favorites. As soon as I tried this recipe, I fell in love with it and I started making it for dinner guests. One of those guests was my wife, and she soon fell in love with the pasta (and with me). Very quick to prepare and cheap, it’s fantastic. The cornerstone of this recipe is the tuna, and you need to make sure you get tuna in olive oil, and not tuna in water. I’ve found the most common brand is this genova tonno, and you can get it for about 2 bucks a can. Here’s how you make it:

Start your pot boiling with water and add pasta. The best pasta for this is rigatoni, farfelle, penne or similar. Spaghetti or similar does not work well with this. Boil your water add your pasta then get to the rest of the dish. Combine your tuna, halved grape tomatoes, black olives (whole or slices), chopped mint, lemon zest (I usually forget about this and don’t add it) and red pepper flakes. Season with salt and pepper and adjust spices as necessary. Toss pasta with tuna mixture, cut with olive oil as needed.

These are two of my favorite recipes to eat during the summer. Both are quick, easy and cheap! They also don’t need anything that you cant store in your pantry for a while (except for the cherry tomatoes) so you can keep ingredients for this on hand and use it as a go to recipe if you’re out of ideas.

How about you all? What are some of your go-to recipes to make sure you eat at home? Do you have other ideas for saving money on at-home meals?

Share your experiences by commenting below!

***Photo courtesy http://cdn.morguefile.com/imageData/public/files/m/MaxStraeten/07/l/1406189189fgnxh.jpg

3 Money Scams To Watch Out For

The following post is by MPFJ staff writer Travis, who blogs at Enemy of Debt where he candidly shares his family’s financial struggles, failures and successes. As a father and husband, he provides a unique perspective on balancing debt, finances, and family.

We all work extremely hard for our money.   By the fact that you’re reading this blog I’d be comfortable in guessing that you also put an effort into managing your money as well.   You may create a spending plan, be on a constant lookout for ways to get the most for your money, and save for retirement. But there’s something else we all need to pay attention to.

I’m talking about money scams. There are people out there that want to take your hard earned money instead of putting in an honest day’s work. Here are three scams that I’ve personally experienced .

Free/Cheap Vacation Scam

College kids are notoriously broke. Scam artists know that and try to take advantage of it. In January of my second year of college I got a call from someone that offered me a 3 day 4 night cruise for the promotional rate of $149 a person.  All I had to do was get myself to Florida. I instantly envisioned using this trip for Spring Break for my girlfriend at the time and myself. I thought I was being careful, I asked several times if there were any additional fees, taxes or costs that he wasn’t telling me about. He emphatically denied it, until I gave him my credit card number. Then he said that there were a few things that I should know about, and started rattling off a long list of things that I would be responsible for paying. My heart sank.

I listened to the rest of his pitch, and hung up. I immediately called my credit card company, told them what had happened, and asked to stop the charge, which they happily did. The company offering me the cruise tried to call back a few times, but I simply didn’t answer the call.

Lesson Learned: If it sounds too good to be true, it probably is. The question you have to ask yourself is, “Why is this company calling me unsolicited wanting to give me a ridiculous price on a cruise?”

Computer Virus Scam

This one is going around right now; I’ve personally received this phone call several times. The caller claims to be from Windows support, and states that your computer is likely infected with a virus. They go on to tell you that they’ve been receiving error messages from your computer and want to verify that they are indeed calling the right person. They have you run a few commands that supposedly give you an identification number that is unique to your computer. What they’re really having you display is a simple version number of a piece of the Windows Operating System. It’s the same on every computer running the most recent version of Windows. But it sounds legit, and people continue on convinced that they are indeed infected with a computer virus.

My dad was one of these people. He followed their instructions to allow them access to his computer, at which time they actually infected my dad’s computer. Then they offer to help him by selling him their software for $100. My dad eventually caught on and hung on them. I’m glad he didn’t waste $100 on their product, but it took my brother and I a few hours to reverse the damage that these scammers did to his computer.

Lesson Learned: The thing that should instantly raise a red flag is that the caller used the term “Windows customer support.” They never used the company’s name, Microsoft. I’ve gotten this call several times, and asked them flat out if they were from Microsoft as I know they would be liable for a lawsuit if they said they were. They danced around the issue, continuing to repeat they were from Windows support. Never give someone access to your computer that you cannot verify their credentials.

Automobile Extended Warranty Scam

I recently received a postcard in the mail stating that a Technical Service Bulletin had been issued for my mini-van.   TSBs are a real thing that auto manufacturers use to communicate to consumers defects or recalls to their vehicles, so I called the number on the postcard.

The man who answered the phone had me repeat the TSB number printed on the mailing and then asked me if I had purchased an extended warranty on my van. When I indicated that I had, he apologized for the inconvenience, said that he would update their database, and they would not be calling again. There wasn’t anything wrong with my van; they were simply using the term TSB to get me to call them in an attempt to sell me an extended warranty.

Lesson Learned: Look over any mailing that prompts you to call a number very carefully. If you get a mailing regarding an automobile you own, ensure it was sent from the manufacturer. Looking at the postcard again, there was no indication that it came from the manufacturer, nor was the number for my local dealership which is what has happened in the past when I was alerted to a TSB.   Also, on the bottom of the post card was some print stating I received the postcard because I had requested to be put on the national do not call list. That in itself indicates that it is simply a solicitation.

There are people out there that are looking to prey on people’s lack of knowledge, or failure to pay attention to details. Guard your money closely!

How about you all? Have you come across any of these or any other scams? What other scams are out there that people should be aware of?

Share your experiences by commenting below!

***Photo courtesy Stuart Miles from freedigitalphotos.net

Stay at Home, Return to Work, or a Bit of Both? What To Do after Baby Is Born

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

Before you have a child, you may think that you’ll continue your career through retirement with no stops. For some, that is the exact path that they take. For others, once the baby is born, decisions become much more complicated.

Often, parents find themselves asking, should I stay home with the baby, or should I return to work?

Unfortunately, the decision in almost every case is variable. There are so many individual circumstances to consider.

When Staying Home Makes Sense

Low salary

If you make a fairly low wage, you may find that once you pay for childcare, work clothes, and transportation, you’ll be bringing home very little. (Even worse, some people find that they would actually be paying to work!)

Dislike for the job

Do you like your job? Does it energize you? Do you look forward to the upcoming work week? If the answer is no, you may find it makes more sense to quit your job. After all, why spend money putting your child in daycare if you’re just going to be miserable at your job?

Desire to stay home with your child

Children are only young once, and as the saying goes, “The days are long, but the years are short.” If you have a strong desire to stay home with your child (or your spouse does) and you can financially afford it, staying home can be very rewarding. There is nothing like being home to watch your child say his first words, take his first step, etc.

Ability to make money at home

More and more people are finding that with some hard work and ingenuity, they can make a good living right from home. Is there a skill you have that would be a way to make money from home? Could you be a freelance writer? A virtual assistant? Could you create crafts and sell them on Etsy? Could you tutor or sell lesson plans online? There are so many ways to make money from home that often the only limitation is your imagination.

When Staying Home Doesn’t Make Sense

Fast-track career growth

Are you on the fast-track for career growth? Would staying home for a few years set you back several years on your career track? If so, you may want to consider staying in your career even if paying for daycare causes a financial hardship for a few years.

Love of your job

Do you enjoy your job and find personal satisfaction from it? Does it energize you? In that case, you may be better off continuing to work. Without your job and the enjoyment you gain from it, you may not be happy as a stay-at-home mom.

Need for social interaction

Of course, stay-at-home parents can get social interaction from play dates and other activities with other parents and their children, but for some, that isn’t enough. I met a woman who experimented this year with being a stay-at-home mom, and she was miserable. She needed time during the day for herself. She also needed adult interaction without her children, which she found at work. Without time to herself and with other adults, she found herself snapping at her children and feeling less and less like a good mother than she did when she worked.

Matching retirement savings

Does your employer match your retirement savings? If so, how much is the match? Are you able to save at that level on your own? When I was employed full-time, my employer automatically took 8% out of my gross pay to invest in retirement, and then the employer matched my savings, so I was able to save 16% of my gross salary per year in retirement. After I quit my job, this retirement savings and match was one of the perks of my job that I missed most, especially because I have not yet been able to save at that rate on my own.

How to Have the Best of Both Worlds

The good news is, you don’t have to exclusively choose to return to work or stay-at-home. Sure, you can do the financial calculations to determine which decision makes the most sense, but you also can’t rule out the emotional side of the decision. If you find that financially you need to work, but emotionally you need to stay home with your child, there are ways this can be done.

Work opposite shifts

If you’d like to stay home, you and your spouse can work opposite shifts. One person may work the night shift and the other works the day shift, or one may work during the weekdays and the other works nights and weekends. While this situation isn’t ideal for your marriage, many couples make it work until their child is in school. The benefit is that you still have two incomes, but you don’t have to pay for childcare.

Work part-time

If you don’t want to leave the workforce entirely, a nice option is to work part-time. You’re still brining in money, yet you get to spend quite a bit of time with your child. Even better news is that a recent study, conducted at the University of North Carolina at Greensboro that examined women who worked full-time, part-time and stayed at home, found “the part-timers were less depressed, had better health, were more sensitive to their children and were better able to provide them with learning opportunities. That may be a function of employment, which improves people’s social skills and increases awareness of what’s going on in the community. ‘Maybe that translates to the experience they bring to their children,’” says lead author Cheryl Buehler, a professor of human development and family studies (TIME).

Work from home

Thanks to the Internet, the possibilities for work-at-home moms are endless. There are plenty of bloggers who’ve make a full-time living or even make enough that their husbands can quit their jobs. But blogging isn’t the only career available. There are job opportunities for tutors, teachers, writers, virtual assistants, graphic designers, accountants.  The list goes on and on. If you have a skill (and we all do), there is a way to funnel that into a work-at-home job.

My Experience

My husband and I decided after our third child that I should quit my job. At the time, we had two children under two, so quality daycare in our area was going to cost $1,600 a month. In addition, we had to pay after school care for our oldest child. We decided that I should work from home to recoup the difference I would have made in what I would have brought home if I had stayed at work and paid nearly $2,000 in care costs for daycare and after school care.

We haven’t looked back from this decision. While I still work from home part-time, when our children get older and more independent, probably in the next five years, I plan to ramp up the amount of work that I do.

Deciding whether to keep your job or leave it to care for your child is never an easy decision. However, there has never been a better time to make that decision thanks to the many alternative ways there are to juggle work and family life.

How about you all? What affected your decision to stay home or to return to work after having a child?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/26923422@N07/4068093834

What’s the Big Deal About Getting Out of Debt?

The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.

I have officially been debt free (including my home) for 7 months now. I typically don’t tell too many people about this milestone because they either look at me like I’m a superhero that has done the impossible, or they think I’m an idiot because I’m forgoing all those tax benefits by not having any debt. Either way, the conversation gets awkward, so I naturally just avoid it.

So what was the driving force for me to do such a crazy thing? And is it all that I imagined it’d be?

Why the Fight to Get Out of Debt?

I have had a few queezy-ache-in-the-pit-of-my-stomach feelings in my life, and at least one of them had to do with debt that I could not pay. I was 24 and newly married. Bills seemed to be coming in left and right and we simply couldn’t handle another one. And then (of course) that new bill came in the mail – it was our student loan bill of $75. I knew we didn’t have the money to pay it and I felt completely worthless, broken down by all the debt. From that point on, I knew that I never wanted to be in debt again.

…And then life happened.

My wife (the spender) decided that she just couldn’t live with me any longer. She left the house and demanded half of our net worth (which was mostly tied up in the house). Since I didn’t want to sell the house, I was officially in debt again – to the tune of $21,000. Ugh.

I was required to come up with the full amount in 6 months. It wasn’t easy, but I did it. Not only was I debt free again (besides the house), but I quickly understood what amazing things could be accomplished with a plan and a deadline. This payoff got my brain thinking a little more than usual, and I started asking myself some strange questions:

• What if I paid off the home mortgage?
• Would that be possible?
• And how would this benefit me?

Ultimately, I decided to set a goal to become completely debt free in one year. The plan was to completely rid myself of debt for the following reasons:

1. Peace of mind – no bank can take this house from me
2. Increased cash flow – no payments means that my money stays with me each month
3. Save on interest – paying off the debt means saving thousands of dollars in interest payments
4. Invest heavily to create options for myself later in life

My Perspective Today

Now, over a half a year into my debt-freedom walk, has my perspective changed at all? Absolutely not. Since that last payment, I have been able to cash flow a $10,000 wedding (that’s right, I found a wonderful lady that also likes to save), buy $2,500 worth of windows for my home, and just enjoy life in general. Plus, I still have a healthy amount of cash in the bank. If I had car payments and house payments, how do you think I would have had to pay for all of these things? With credit of course, which then would have put me into more debt, which would have made me even more strapped for cash! It’s a vicious cycle that only keeps dragging us down.

What I Am Most Excited About

The absolute best thing about being completely debt free is the options that come with it. By having absolutely no payments, my future wife and I are banking thousands of dollars every single month. With this extra cash, we soon plan on investing in a rental property, which will then provide us an even larger cash flow. By doing this just three times, we will effectively replace my wife’s working income and she will be able to stay at home with our future kids!

With debt, the only way to make this possible would be to cut our everyday expenses dramatically. We would have to constantly watch our pennies and spend money only after checking the bank account first. This is certainly not how I’d like to live my life. By getting out of debt, investing heavily, and creating a passive income, my wife and I can continue to live comfortably and provide a stable, stress free environment for our family.

How about you all? Are you ready to get out of debt? What motivates you to get out of debt?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/59937401@N07/7214450550/