Account Hierarchy Paradox – Should Paying Off Debt, Saving for Retirement, Having an Emergency Fund, or Securing Health Insurance Be Your Highest Priority?

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If you point your browser towards Dictionary.com and type in “paradox” in the search field, the following definition pops up:

“Any person, thing, or situation exhibiting an apparently contradictory nature.”

Background on the Paradox

Over the past few months, I’ve been helping one of my friends evaluate his personal finances and get out of debt. In this endeavor, I’ve ran in to a lot of questions involving decisions around the topic of how personal funds should be prioritized as they are received (a decision process I like to call the Account Hierarchy). 


At first, I suspected that these decisions would be quite easy, not thinking much on the matter and advising that he simply follow the My Personal Finance Journey Account Hierarchy that I laid out in the first month I started this blog and consider my most important article for readers to read (and that I follow in my personal finances to prioritize my money). This prioritized list is shown below:


1. Buy or make sure you have adequate health insurance coverage.
2. Invest enough cash in a high-yield taxable money market savings account to cover 6-9 months of living expenses
3. Pay off/get rid of your high-interest credit card debt
4. Pay your monthly mortgage payment (only the minimum amount required)
5. Invest in your employer’s 401k only up to the company match level
6. Max our your IRA (individual retirement account – either Roth IRA or Traditional IRA)
7. Finish fully funding your company 401k account
8. Prepay additional amounts to reduce the principal on your home mortage loan
9. Open up an individual, taxable mutual fund account with Vanguard.com to invest any remaining money
10. Open up a tax deferred higher education savings account for your children and fund it

The Fault in The Original My Personal Finance Account Hierarchy 

However, once I really started to “get my hands dirty” and consider the details of his personal situation, I felt like I ran in to a web of contradictions about how funds should be properly prioritized (hence the paradox title of this post).


What I ended up realizing is that the account hierarchy listed above is really only applicable to someone who is 1) debt free (or almost debt free with very little credit card debt), and 2) has a average level of income that enables him or her to have a sufficient amount of money to meet their monthly needs.


So, in other words, this account hierarchy works great for someone like me (which was probably the reason I created the list the way it is). 


However, the harsh reality of the citizenry of the United States is that paying off debt is simply a way of life. It is and will be a constant for the majority, if not all, of many people’s adult life. This, in my mind, is something very important that we need to accept before moving on.  


Here’s an example:


Let’s say that someone in their late teens to early 20’s racked up $25,000 in credit card debt due to irresponsible spending along with almost $100,000 of student loans for attending a private college. Although it sort of pains me to admit it, in my opinion, these figures are not that far off from reality for many young folks in today’s society. 


And, unless these people have rich relatives or land a job making a very good salary, money will be very tight, and they will most likely be paying off this debt until they are well in to their 40’s. In other words, if they follow the original account hierarchy listed above, they’ll effectively miss out on saving for retirement through their best investing years because they’ll only be focusing on paying off their credit card debt. 


This simply won’t work. Therefore, a new version of the account hierarchy is needed for the copious number of people who have large amounts of debt and cannot expect to pay it off in less than 2-5 years. I always like to liven up sometimes-dry personal finance topics with exciting names. So, in this case, I’m going to call this the “Debt-Payoff-and-Retire Account Hierarchy.”

The Debt-Payoff-and-Retire Account Hierarchy

Note: Before we get started with this list, for the sake of simplicity, I’m going to make the assumption that it is known that prior to embarking on prioritizing funds according to the list below, that you have already met your very basic requirements for survival each month. 


These include paying the rent or minimum required mortgage payment, water/electricity/sewer/gas/trash bills (other bills also), and buying food from the grocery store for your family. However, these basic survival needs do not include cable TV, internet, going out to eat every night of the week, or other frivolous spending. With this in mind, let’s get on with the list!


Part A – The Minimum Requirements


1. Pay only the minimum required payment on your credit card and other loans (student, car, etc). DO NOT PAY MORE (yet)!


In the Debt Free Account Hierarchy (what I’ve decided to call the original listing from now on), you probably noticed that debt payments weren’t addressed until Priority #3. However, if money is very tight and you have large amounts of debt to payoff, the reality of the situation is that you cannot skip out on paying back the minimum required balance on your debts. Well, I suppose you could, but no up-standing citizen wants to have debt collectors calling them up, right?! 


Because of this, paying only the minimum required balance on your debt accounts is first on the list. Prioritizing the minimum loan payments ahead of health insurance (see below) was one of the paradoxes I ran in to with this exercise. I wanted to place it first, but ultimately decided against it in the end. 


In addition, I would advise you to negotiate a lower APR rate with your credit card company and also discuss your “low-money” situation with your student loan provider (student loans like to see ex-students succeed and may be lenient in pushing back the terms of loan repayment).


2. Buy or make sure you have adequate health insurance coverage.   
   
The next highest priority on the hierarchy is getting adequate health insurance. I cannot stress enough how important health insurance is. If you get in a car wreck or get injured otherwise, medical bills can rack up to be in the $100,000 range or higher, something that could result in financial ruin for the rest of your life. Because of this, you simply cannot afford to go without health insurance. 


The trouble? Health insurance is VERY expensive if it is not provided through your employer, especially if you have multiple part time jobs as a lot of people do these days. Typically, if you have to pay for your own health insurance, you should expect to pay between $150-$400 per month. When you are shopping for health insurance, make sure that you find a policy that features a low enough deductible that you can actually pay it with your emergency fund money (see below for details). I personally like to see my deductible be between $500-$750.


Also, remember – with the new health care regulations, you can still be covered under your parents’ health insurance until you are age 26. This may be a viable option for some of the younger people out there. 

3. Invest enough cash in a high-yield taxable money market savings account to cover 6-9 months of living expenses (Emergency Fund)


After first paying the minimum payments on your loans so that you don’t have debt collectors knocking down your door and securing health insurance, it is now time to focus as much money you have remaining on accumulating a secure, liquid, readily-available source of cash that you can tap in to in the event of an emergency. Often, this fund is used to pay the deductible on your health insurance (or other forms of insurance) mentioned above. It is very important to state also that the purpose of this account is NOT TO MAKE TONS OF MONEY. It is to provide you with peace of mind and security.


In today’s low-interest landscape, it’s important to be very selective in choosing where to park your emergency fund. I prefer to use a high-yield online savings money market account. These accounts offer much higher interest rates/returns than savings accounts at brick-and-mortar banks and are still FDIC insured! A no-lose situation if you ask me!


So, this all sounds well-and-good. However, you might be asking yourself the following question at this point. – “But Jacob, funds are really tight for me right now. If I’m doing this math correctly, at the current $1000 monthly expenses level at which I am operating, this would sum to $6000-$9000 total. I currently have $0 saved up. This might take me 9 years to accumulate! How do I proceed?” 

This is actually a great question! It’s quite tempting to recommend that people only really need a minimum level of an emergency fund (maybe only $500), and after they accumulate this amount, they can move on to higher-earning investments and credit card debt payoff. This is even more tempting given the plethora of options available to people for personal loans in the event of an emergency. For example, you can compare loans online and very quickly narrow down your choices to a loan with suitable terms.   


However, at the end of the day (and although there might be some disagreement on this), I believe that the peace of mind and safety that comes from having a sufficient emergency funds outweighs the benefits of being “debt free.” So, my answer to this would be that if it does take you 9 years to accumulate an emergency fund, then so be it. Your debt balances may accumulate significantly, but at least you won’t experience financial ruin if an emergency occurs and you cannot work.

Part B: Beyond the Minimum Requirements


Having fulfilled the absolutely essential requirements listed in Priorities 1-3 above, you can now shift your focus to actually becoming debt free and saving for retirement.


Enter our next paradox: traditional financial wisdom states that if you had to choose between investing in mutual funds for retirement (which at best can earn you 10-11%) and paying off credit card debt balances which carry a 20% or higher interest rate, the clear choice would be to pay off the credit card interest rate first because it represents an AUTOMATIC and GUARANTEED savings.


Indeed, this is the wisdom that applies for myself and many others who are lucky enough to be consumer debt-free. However, if you have large amounts of consumer debt that you cannot possibly pay off in less than 5 years, the choice becomes much harder. On one hand, we need to pay off our credit card debts to capture the automatic savings on the extraordinarily higher interest. However, if you are 24 years old and will be paying off your huge debt balances for 20 years to come, you cannot put off saving for retirement until that time. That would be both very unfulfilling and unwise due to the power of compound interest over long periods of time. 


Because of these facts, in the Debt-Payoff-and-Retire Account Hierarchy, I now recommend the following hybrid approach:


4. With the money leftover from Priorities 1-3 above, split the balance in to two (2) sub-accounts – one for paying off debt and one for saving for retirement. 

4.1 Use the debt-payoff sub-account to pay off your various debt accounts beyond the minimum balance


In this exercise, funds should be prioritized to pay off your highest interest debt balances (probably credit cards) first and then moving down the chain from there.


4.2  Using the funds in your “saving for retirement” sub-account, invest in your employer’s 401k only up to the company match level


Matching employer contributions represent free money, and we should all take advantage of this! After that, continue working your way through the priorities listed below. This order pretty much remains the same from the original Account Hierarchy.


4.3 Max our your IRA (individual retirement account – either Roth IRA or Traditional IRA).
4.4 Finish fully funding your company 401k account.
4.5 Prepay additional amounts to reduce the principal on your home mortage loan (if you have one).
4.6 Open up an individual, taxable mutual fund account with Vanguard.com to invest any remaining money.
4.7 Open up a tax deferred higher education savings account for your children and fund it.

Conclusions

So, there you have it folks – the updated, new, shiny, revised, and expanded My Personal Finance Journey Debt-Payoff-and-Retire Account Hierarchy priority order! 


As you saw in this post, a very different priority order is needed depending on whether or not you have large amounts of debt. But, I believe that this list will be very helpful for the millions of Americans out there who will be dedicating a large portion of their adult lives to paying off debt. While it’s definitely true that being in severe amounts of debt will drastically hinder the speed at which you accumulate wealth, overall, it is not the end of the world. I firmly believe that you can still live a happy, fulfilled, and meaningful life even if you are paying back debt.


And, I sincerely hope that this updated priority order will help you on your way to becoming debt free and also living the fulfilled lifestyle we all hope for! Thanks for reading!


PS – I’ll be sure to update the original account hierarchy page with the details of this alternate priority order so that everyone can easily find it!


How about you all? Should paying off debt, saving for retirement, having an emergency fund, or securing health insurance be your highest priority? Does the answer to this question change depending on whether or not they have loads of debt?


Do you agree with the order of priorities listed above?


Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/wlscience/2121691688/sizes/l/in/photostream/

Best of Money Carnival # 116 – "Who Dropped a Bomb on the Stock Market?" Edition – August 15th, 2011

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Welcome to the Best of Money Carnival (a weekly listing of the top 10 personal finance posts)– August 15th, 2011 “Who Dropped a Bomb on the Stock Market?” Edition!  

I hope you enjoy all of the posts I’ve selected for this week’s edition – and then come back to visit My Personal Finance Journey on my non-carnival days too.


It was very interesting to see that a good portion (probably 30-40%) of the post submissions this week were either inspired by or focused on the significant drop in the stock market that has occurred over the past week or so. As a passive investor, I was happy to see that most of these posts were advising readers not to panic and hold out while the dip plays out. 


And, being the personal finance nerd I am, the drop in the market by some miracle caused me to think of the insanely awesome 1982 music video/song by the Gap Band called, “You Dropped A Bomb on Me”. Please don’t ask me to explain how I thought of this, just enjoy the attached YouTube video below!  


For this edition, we had 66 articles submitted. Below are my choices for the Top 10 Personal Finance posts of the last couple of weeks (that were submitted properly of course) in order from 1 to 10.  A big congrats to all of this week’s winners!


1. Jim Yih presents The science of building a diversified investment plan posted at the Retire Happy Blog, saying, “The problem with diversification is it has been treated more like an art than a science. For most people, diversification is more about quantity rather than efficiency.”

2. Mike Piper presents Tax-Loss Harvesting posted at Oblivious Investor, saying, “One thing you can do while the market is down: take advantage of tax-loss harvesting opportunities.”


3. Melissa presents How One Family Survived Unemployment, Part One posted at Mom’s Plans, saying, “A true story told in two parts about how a family of 6 survived nearly 18 months of unemployment.”


4. Jeff @ Stay Thrifty presents How I Beat $20,000 In Credit Card Debt posted at Stay Thrifty, saying, “Credit card debt can paralyze your finances and take a real toll on your emotions. When you have a huge balance it can seem hopeless, but I’m living proof that you can get out of debt… and live to tell the tale.”


5. Neal Frankle presents Successful Entrepreneurs – 7 Unconventional Tips To Become One posted at Wealth Pilgrim, saying, “If you own or are thinking of launching or buying an existing business, here are 7 potent and unusual tips to help you reach success much faster.”


6. Darwin presents US Loses Triple A Credit Rating – It’s About Time posted at Darwin’s Money, saying, “Curious which countries have a AAA credit rating now that America doesn’t? I was shocked; I never even heard of some of these countries.”


7. Sarah Minton presents Day 292 – A Letter To My 18-Year-Old Self posted at The $60K Project.


8. Jason Price presents Ask the Readers: Can You Live Well on $40,000 or Less? posted at One Money Design, saying, “You may not think it’s possible, but this family is living very well on less than $40,000 per year.”


9. Money Beagle presents Career Tip: Become An Expert At Something (And It Doesn’t Have To Be Big) posted at Money Beagle, saying, “One thing is sometimes all it takes to separate you from the pack.”


10. Money Cone presents Market Meltdown, What Should You Do? posted at Money Cone, saying, “What should the U.S. investor do now that the market has taken its worst tumble in two years? Here are some options.”

Well, that concludes this week’s Best of Money Edition. To all participants – it was a pleasure reading your articles this week!

Please submit your posts to the next edition of the Best of Money Carnival using the carnival submission form. The next carnival (#117) will be hosted by Pastor Personal Finance and is scheduled for August 22nd, 2011. 

Also, If you’d like to host a future carnival, send FMF an email asking for a slot.

***Photo courtesy of http://www.flickr.com/photos/karanj/31469695/sizes/z/in/photostream/

Help a Reader – Should You Continue to Fund Your 401k With the Recent Market Downturn?

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Happy Friday everyone!

Yesterday, I received the following great question/message from a reader about the recent market downturn we have experienced:

Considering the current plight of the stock market, do you still recommend for 20-somethings to max-out contributions to their 401k retirement accounts? Or, should they invest in a high-interest cash savings account instead? 

I am a 29-year-old with a lifecycle mutual fund with Fidelity and just lost $2,000 in the past two days and am wondering what to do. Thanks for your help!

Reader Financial Details:

• Already has adequate medical, dental, and vision insurance.
• Has 6-9 months worth of living expenses in a cash savings emergency fund. 
• Employer does not match 401k contributions.
• Currently maxes out 401k with 100% of contributions going to the Fidelity 2050 Freedom Lifecycle Fund.
• Does not have an IRA.
• Is currently satisfied with the asset allocation offered by Fidelity through the 2050 Freedom Fund. Also prefers the “hands off” approach offered by lifecycle funds.

***Photo courtesy of http://www.flickr.com/photos/dimi3/3096166092/sizes/l/in/photostream/

How to Start Planning for Your Retirement Early

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post on behalf of Debt Advisory Centre. Enjoy!

How to Start Planning for Your Retirement Early 

How about you all? What method do you use to save for retirement that you find easiest to stick to / is the most effective? What % of your income do you generally target to save for retirement each month? 

For you, is paying off debt or saving for retirement a higher priority goal?

Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Putting off/delaying planning for retirement – 
• Being in my early-mid 20’s, I’ve seen my fair share of young people who find excuses to put off saving for retirement. 
• In my experiences, the most common reasons that people put this off is because 1) they have a significant amount of debt (credit card and/or student loans) to pay off, or 2) they simply don’t understand investing enough to save money intelligently. This turns them off to the idea of putting away money for use a long time down the road.
• @ Saving for retirement consistently each month –
• In my opinion, saving for retirement is simply too important to put off until the last minute. Furthermore, there are numerous tax-privileged account options that make the avoidance of saving for retirement almost a foolish notion.
• The best way I’ve found to save for retirement and not miss contributions is to do the following: 1) Decide what % of your monthly salary you can save for retirement, and then 2) set up an AUTOMATIC, recurring, monthly deduction of that amount from your paycheck (either on a pre-tax basis or post tax if you are using a Roth IRA). The transfer has to be automatic so that you trick yourself in to thinking that you don’t actually have that money in your possession.
• @ Account hierarchy / monetary needs priority order –
• Analyzing the priority at which different accounts (debt, retirement, emergency funds, insurance, etc) need to be funded is a very interesting topic. 
• To address this issue in a general sense, I’ve developed the My Personal Finance Journey Account Hierarchy, which details the order I personally use to prioritize my funding of different needs in life.
• One question in particular that is rather difficult to address is if it is a higher priority to pay off debt (especially credit card debt) or save for retirement? On one hand, it’s tempting to recommend tackling the debt payoff first since it would represent an immediate monetary savings  on the interest charges. However, it would be rather demoralizing to spend your entire 20’s paying off student and/or credit card debt and not have anything to show for it in retirement savings. 
• Because of the complexities surrounding this question, I’ve decided to put together an upcoming post analyzing this topic. It should be on the way soon! Stay tuned!
• @ How much to save for retirement each month – 
• The answer to the question of “how much should I save for retirement?” is about as variable from person to person as answers can get. 
• In an effort to help people find an answer to this question, I developed a Google Docs Spreadsheet-based calculator, which can be accessed by clicking here. The various inputs that go in to figuring out this amount are as follows: current age, current salary, years to retirement, and your expected standard of living during retirement.
• However, as a general guideline, if you are saving 10% of your income each month for retirement, you are doing pretty well. On the other hand, if you can save 30% of your income, you are considered to be “on the road to wealth.” 

***Photo courtesy of http://www.flickr.com/photos/jcapaldi/4918597810/sizes/l/in/photostream/

Need Some Help Getting Out of Debt? Consider Debt Eye!

The following review is sponsored by DebtEye.com*.

Recently, through being a Yakezie Personal Finance Blog Network member, I was exposed to a brand new online debt payoff/management tool, called Debt Eye.

The full version of the tool is currently being rolled out (due to launch fully in the next few weeks), so I wasn’t able to try out all of the features that Debt Eye has to offer, but I was able to get the feel for what will be available. Below are my experiences thus far:

Overview of Debt Eye

So, at a high level, Debt Eye’s goal is to help you pay off your debt. However, how exactly do they help with this? Furthermore, what makes them different from the hundreds of other “tools” available on the Internet to help you reduce your debt?

Well, let’s take a look in more detail at what Debt Eye offers to seek out an answer to these questions.

Getting Started with Debt Eye

To get started using Debt Eye, you simply input your specific information in to the secure online system. The information you need to provide is listed below:

• Name (first/last), address, phone number, etc.
• Desired username and password.
• In order to have Debt Eye pull a free copy of your credit report from the credit agency, TransUnion, you must enter your Social Security Number (SSN).
• However, if you are unsure about whether or not you want to enter your SSN, then you can elect to list out your different debt accounts manually.
• Once you have entered your SSN, the Debt Eye system will automatically generate a list of all of the debt accounts you are currently carrying (or you can enter your debts manually if you choose).
• Included in this list will be the amount of debt owed, status of payments (whether they are past due or not), time frame of payback, and interest rate.

What Tools Does Debt Eye Offer?

Once you confirm a comfortable payoff amount, Debt Eye then allows you to interface with your checking and/or savings account from which to transfer money to your creditors.

Debt Reduction Plans Offered by Debt Eye

Once you enter all of your personal information in to Debt Eye’s system and your list of debts has been generated, the interface will then recommend one of 3 types of debt reduction plans, including debt snowball, debt settlement, and debt management plans. A screenshot of the different plan options is shown below:

Debt Snowball Plan

As described in a previous post on my site about helping a friend get out of debt, the overall aim of a debt snowball plan is to pay off your lowest balance debt account first. In order to do this, you will set up your debt payments so that you pay the minimum required amount for all your debt accounts EXCEPT for the one with the lowest balance.

Debt Management Plan

Debt management plans work by getting all of your creditors to agree on one low(er) monthly payment and reducing your interest while you are on the plan. It usually doesn’t impact your credit when you start, and your credit will improve once you complete the plan.

Debt Settlement Plan

The premise of a debt settlement plan is to save up enough of a lump sum amount to offer your creditors at one time to get rid of your debt balances completely. Extreme caution should be used when proceeding with this option because debt settlement can have a large negative net impact on your credit score. However, when someone is getting behind on their payments and is struggling to meet their monthly demands, having a lower credit score probably isn’t the worst thing in the world.

How Much Does Debt Eye Cost?

According to the Debt Eye site, the service is free to sign up for and to use. On the “How it Works” page, it mentions that it is free of charge to set up a debt management, settlement, or snowball payoff plan. However, it does mention that you can choose to have Debt Eye manage your debt payments for a small fee.

Unfortunately, it never talks about the detail about what is or isn’t involved in having Debt Eye manage your payments nor does it discuss the exact definition of the “small fee.” Additional detail is needed in this regard to the service.

Conclusions

Overall, I was nicely surprised by how easy the Debt Eye interface was to use, especially in regards to how easy it was to manually enter my various debt accounts. I also liked that Debt Eye seems to offer the majority of their tool free of charge. In this way, it could serve as a great tool for people wanting some guidance in paying off their debt, but whom do not want to seek the help of a formal debt counselor.

Lastly, since the complete version of the interface wasn’t rolled out yet during my investigation, I’m very curious to give Debt Eye another run through once it officially “goes live.”

How about you all? Have you tried Debt Eye yet? What did you think? 

Have you tried any other type of debt management/payoff tools? How did you like or dislike them?

Share your experiences by commenting below!

*Disclosure – I received monetary compensation for writing this review. However, as with all of the reviews I do, I offer my fair and honest opinion about the service/product.

Are You Clueless About Mortgages? Start Here!

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post. Enjoy!


This post was selected as an editor’s pick in the August 15th, 2011 (32nd) Totally Money Blog Carnival “A Flood of Great Articles Edition.” Be sure to stop by the carnival page to read all of the interesting and educating posts!

Purchasing a house is probably the biggest purchase most people make in their lives. To make the process less stressful, it is important to know a few pertinent facts first.

Utility of Mortgage Calculators

It is always useful to use some form of mortgage calculator to give a rough idea of whether or not it is affordable before making applications to mortgage lenders.

What’s Needed to Get Approved for a Mortgage?

In today’s difficult financial climate, lenders are very specific with their financial requirements before they will consider making a mortgage offer.

Minimum Requirements

As a minimum, a lender will require two years employment history, proof of assets in your bank account over at least a three month period, and three current finance lines, e.g. credit cards, car finance etc.

Debt to Income Ratio

Decisions are based on several factors, including down payment and credit scoring, as well as the all-important Debt to Income Ratio (DTI). This is a measure that compares income against certain monies owed.

To complete the DTI calculation, all monthly commitments or debts are listed. This includes mortgage or rent payments, loan repayments (secured and unsecured), minimum payments for credit and store cards, bank charges (for overdraft), insurance premiums, child-care, and student loan payments. Next, all monthly income is listed and totaled. This includes basic salary or wages, commission, overtime, bonuses, tax credits, state benefits, child-care, pensions, and any other documented income.

The debt to income ratio is then calculated by dividing the total of monthly debt repayments by the total monthly income. When a DTI calculation is used by mortgage lenders, it is to check that the monthly mortgage repayment does not exceed 30% of gross income.

Different Types of Mortgages – Fixed and Adjustable Rate

Once an application is successful, a decision must be made as to the most suitable type of mortgage (Fixed or Adjustable Rate) for the individual. A mortgage broker can often assist with this, but having an idea of what is available will help.

Fixed Rate mortgages ‘fix’ the interest rate at a certain level for a pre-arranged period of time. This is usually for anything from 2 to 10 years (note from Jacob – in the USA, it’s either 15 or 30 years), although longer periods are available. A mortgage calculator can be used to work out the repayments for a variety of periods. The main advantage is knowing what the repayment will be each month, but disadvantages include paying a higher rate of interest and missing out on savings if the interest rate should fall.

Adjustable Rate mortgages periodically adjust the monthly repayment based on an index that reflects the cost to the lender of borrowing on the credit market. The borrower benefits if the interest rate falls by having reduced payments, but pays more if it increases. Mortgages of this type should be ‘index-linked’ or ‘capped’ to avoid payments being inflated by unscrupulous lenders.

Miscellaneous Mortgage Fees to Consider

Other than the mortgage repayments themselves, there are other initial costs to take into account that need to be budgeted for. These include arrangement fees, a lender’s or broker’s charge for setting up the mortgage, valuation fees, and legal fees.

Mortgage Repayment

It is essential to make each repayment in a timely manner in order to avoid additional financial penalty, or at worst, foreclosure. It is also worthy of note to add that whilst it is a good thing to overpay monthly payments, thus reducing the term of the loan, some lenders will charge exit fees for early redemption.

Conclusions

A mortgage is an important and very long term commitment. Use a mortgage calculator to help work out what repayments will be. And, before agreeing to anything or signing a binding contract, it is essential to ‘read the small print’ to protect your interests. Best of luck!

How about you all? What do you look for as a crucial aspect of a mortgage? 


What’s your opinion of Adjustable Rate Mortgages vs. Fixed Rate? Which is better?


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Mortgage calculators –
  • In my opinion, mortgage calculators are quite essential. There is an ENORMOUS selection of online mortgage calculators created by different organizations. If you decide to use one of these, you will definitely want to make sure it is from a reputable source.
  • Personally, I use a mortgage calculator that I derived myself. I actually wrote a post about this in April of 2010 when I was preparing to buy a condo and was applying for home loans. You can view the complete post at the following link and create your own calculator (I recommend making your own calculator because it is a very valuable learning experience)! – How To Create Your Own Home Mortgage Calculator
• @ Getting approved for home loans in today’s post-bank crash economy –
  • It’s almost annoying how hard it is to qualify these days for a home loan. Gone are the days of loose banking where almost any one with any type of income could qualify to buy a house because “the housing market never goes down.”
  • Personally, last year, I tried and failed to obtain a home mortgage loan since my graduate school employment didn’t appear solid enough for a 3 year minimum time period. You can read all about that experience at the following post – Can Graduate Students Obtain a Home Mortgage Loan?
  • Even though it is more difficult to obtain a loan, it is far from impossible/futile. Furthermore, there are several steps you can take to improve your chances of being approved for a home loan.
  • In a post I wrote in April of 2010, I detailed 7 ways to improve your chances of being approved for a home loan.
• @ Debt to income ratio and how much house you can afford vs. how much you can qualify for –
  • In the post above, it mentions that 30% is the highest debt-to-income ratio that mortgage issuers will look for in prospective mortgagees.
  • However, what I’ve read is that here in the United States, a debt-to-income ratio of 28% is generally accepted as the level at which you can comfortably afford house payments, but that you can be approved for home loan which correlates to you having up to a 40% debt-to-income ratio. Quite interesting! The mortgage issuers want to get you in to the biggest loan they can it seems!
• @ Fixed rate vs. adjustable-rate mortgages –
  • In the United States, adjustable-rate mortgages got a terrible “rep” after the financial sub-prime crisis of 2008-2009. However, this type of mortgage is not as devilish as the press would make them out to be, provided that you use a little common sense and vigilance when investigating your options.
  • Personally, I would probably prefer a fixed-rate mortgage loan, just because I really like the idea of being able to predict what my loan repayments will be for the entire course of the loan.
  • However, I would also consider the possibility of an adjustable-rate mortgage loan in the following circumstances –
    • The introductory “teaser” rate was very low / a really good deal.
    • There was a cap in how much my loan interest rate could increase, both per year and total.
    • There were no balloon repayment requirements.
    • I was only planning to live in a house for 3-5 years.
• @ Mortgage pre-payment and biweekly mortgage payment plans – 
  • This post bring up a very important point about loan repayment.
  • When you are signing up for your loan, you will want to make sure that it does not contain any penalties for prepaying/paying off your loan early.
  • In the US, most loans these days do not carry this type of fee. However, it is worthwhile to check.
  • Another good option to investigate is a biweekly mortgage payment plan option. I could go in to a lot of detail about how this works, but essentially, a biweekly plan forces you to pay the equivalent of one extra month’s worth of mortgage payments spread throughout the entire year.
  • In this way, paying this extra amount lets you get ahead on your principal payments and decrease your home loan balance sooner, saving you thousands of Dollars in the end.
  • Theoretically, a person could do this type of plan by himself or herselft, but life almost always gets in the way, and people have a lot of trouble sticking to their plan if they are not forced to pay the extra payment with the structure of a biweekly payment plan.

***Photo courtesy of http://www.flickr.com/photos/truliavisuals/5241592552/sizes/o/in/photostream/

Petsmart vs. Petco – Which Is More Affordable?

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• Purina Dog Chow (34 lb bag)
• Petsmart = $23.99
• Petco = $21.99
• Winner = Petco = $2 less

• Science Diet Cat Food – Light Version (17.5 lb bag)
• Petsmart = $32.99
• Petco = $34.99
• Winner = Petsmart = $2 less

How about you all? Do you shop at Petco or Petsmart? Which do you prefer? Does store layout play a role in which you prefer? 


Share your experiences by commenting below!

***Photo courtesy of http://img.docstoccdn.com/thumb/orig/2374207.png

Investment Ideas

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post on behalf of Bullion Vault. Enjoy!

Saving money and being economical is important, as we all know. However, after working hard to rack up some savings, the next step is finding ways to make that hard-earned money work for you!

Do Your Homework

It is important to do your research. There are so many options out there, in terms of banks and savings accounts. Compare, make telephone calls, ask questions! Choose something that will bring you the most interest.

Consider Investing in the Stock Market

If you have a head for the global economy, you could get into the stock market. This requires more effort and involves more risk than a savings account, but it can also be more rewarding. Putting your money in the right place at the right time can really earn you much more than you were expecting!

By diligently keeping yourself informed about current events, and with practice, you will find that it is perhaps easier than it looks. There are books and websites galore that can teach you more about investing intelligently.

Consider Gold as An Investment Option

If stocks and shares are too uncertain for you, and you would prefer something a little more solid in your portfolio, why not consider gold? These days, it is looking like one of the safer choices, since it is highly likely that it will only earn you money in the long run. It is easy to purchase, via your bank or online resources. Buying gold is simple and quite profitable, without the riskiness of stocks and shares.

Conclusions

Consider all your investment options and choose something that fits your lifestyle, and helps you towards your personal finance goals. Finding the right way to make your money grow while you focus on other things will move you closer to financial freedom. Start looking into it today!

How about you all? What are your thoughts about investing in gold as part of your portfolio? 


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Investing in the stock market –
• While a lot of people swear that investing in individual stocks is the way to go and that there are tremendous opportunities, I am still not convinced.
• However, I always keep my ear open for new stock trading methods that seem to take some of the emotional pitfalls out of individual stock investing.
• The most promising stock trading method I have studied to date is Phil’s Town’s Rule Number 1 system. Because I liked the system’s methodology, I performed a 6 month analysis of his system, and ultimately found that it didn’t offer any benefit when compared to merely investing in index mutual funds.
• So, long story short – I don’t promote investing in individual stocks. Instead, I think that individual investors are much better off investing in low cost index mutual funds. This strategy is called passive investing.
• @ Investing in Gold – 
• This is actually a pretty difficult question/issue. And, ultimately, I have not yet decided whether or not gold needs to have a place in your portfolio. 
• Because of this, I’ve put this topic on my list of posts to research and write about. Just off the top of my head, if I were to invest in gold, I would most likely try to do it through a low cost mutual fund or ETF.
• How about any one else out there, do you think gold should be in your portfolio? If so, how do you recommend gaining exposure to this asset?

***Photo courtesy of http://search.creativecommons.org/?q=idea

Top 5 Ways to Reduce Car Insurance Costs

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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How about you all? What methods/techniques do you use to save money on car insurance? Do you use any of the ones listed above? How much do you pay on car insurance per year?


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Parking off of the street in a driveway or garage to lower your car insurance –
• While it definitely makes sense that parking your car off of the street when it is not in use would reduce your risk of getting hit (and possibly having to tap in to your insurance if the other driver isn’t insured), I’m not certain that this will get you a discount in the United States.
• This is due to the fact that if your car is parked and it gets hit by another car/driver, it would be quite rare for the driver of a parked car to be found “at fault.” Furthermore, it is required by law in the US for every driver to have (at a minimum) liability insurance covering the other driver in the event that the wreck is your fault.
• Does anyone have experience with this aspect (I’m not much of an expert when it comes to car insurance)?
• @ Having a steering lock to prevent theft – 
• Steering locks used to be VERY popular in the US for a brief period of time. It was almost like they were a “fad” which came and has now faded.
• In fact, it’s quite rare that I see people with a steering lock on their car.

***Photo courtesy of http://www.flickr.com/photos/stignygaard/194225065/sizes/l/in/photostream/

Need to Save Some Money? Take a Look at Your Auto Insurance!

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post. Enjoy! 

Many people today are struggling financially; therefore, you might desperately need to find ways to save money. One way that you can save is through your car insurance.

Car insurance is considered by most people to be expensive, putting a financial strain on them. However, individuals sometimes are actually paying too much for their car insurance, as there are ways that you can find cheaper insurance.

Car Insurance Discounts

You should always ask your insurance company if they offer any discounts. There are many companies which provide the following discounts to their customers:

• Safe Driver Discounts: If you follow the law, you could receive a discount of up to 15 percent. Your driving record should be spotless for three to five years to qualify for this sort of discount.
• Senior Citizen Discounts: If you are over 50, you could be eligible for a discount.
• Taking Defensive Driving: If you take a driving safety course, and you can show proof that you took the course, you might qualify for a discount.
• Good Grades Discounts: If you have a child who is old enough to drive, you might be offered a discount for their good grades. If the student has completed a course in driver’s education, you possibly could receive an even lower discount.
• Car Features: If your car has anti-lock brakes, an anti-theft device, or airbags, an insurance company might give you a discount on your car insurance.
• Low-Mileage Discount: If your place of employment is close to your home and you rarely take long trips, you could qualify for a discount based on your mileage.
• Multi-Car Insurance: If you have more than one car insured, you can receive a discount.

Save Money By Raising Your Deductible

If you raise your deductible, you can also save money on insurance. The higher the deductible, the lower your premium will be. However, you want to make sure that you can pay your deductible before you agree to increase it.

Timing of Your Premium Payments Affects Your Rates

If you are able to, you can save money on car insurance by paying the premium in full. Many people pay insurance every month, but most companies give you the option to pay it in one lump sum. The overall amount of money that you pay will be lower if you choose to pay it all at once (or twice a year is a common payment frequency in the United States as well).

Be Sure to Shop Around and Compare Rates

Another great way to save on car insurance is to shop around for the best rates. You might be paying too much because you are trying to be loyal to your agent. However, cheap insurance companies now are very competitive, and you need to search around for reputable agents to get a great deal. Most online companies will provide you with free quotes; therefore, try to get several rates before deciding on car insurance.

Conclusions

There are ways to lower your insurance rates if you can just find the right company to offer you the best deals. You need to try to save money any way that you can, and car insurance is one area in which the savings can really add up.

How about you all? What ways do you use to save money on your car insurance? What discounts have you been successful in finding and/or negotiating? Do you prefer to get your insurance company-direct or through a local agent?


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• As I’ve mentioned before, because the issue of car insurance affects such a large number of people, it makes for very good discussion in the blog and/or online forum setting. In fact, recently, I wrote an article about how car insurance rates specifically vary based on gender, age, and geographic location. Pretty interesting results!
  • Needless to say, I’m glad to continue the debate with this article as well!
• @ Ways to Save Money on Car Insurance 
  • Be sure to shop around before buying – One of the most important things for me when I start the process of looking for any type of insurance is to make sure to shop around and get a good feel for market prices of insurance premiums from a variety of providers. There’s a great deal of competition out there in the insurance market today, and we as insurance buyers can take advantage of this!
  • Purchase multiple insurance policies from the same provider – In addition to the list of discounts detailed above, another one I’ve heard of quite commonly is getting a price break if you purchase multiple types of insurance (e.g. business, home, car, life, etc) from the same carrier.
    • As far as the extent of the discount you can receive with this tact remains unknown to me as of right now. However, it is something that might be worth trying! But, just be careful that the insurance premiums of the “add-on” policy from the same provider is in fact a competitive, low price compared to other insurance providers.
• @ Good grades car insurance discounts – 
  • My parents actually were able to use this technique to get a break on pricing for my car insurance when I was in high school. They’d simply request a copy of my report card to provide proof of my grades to the insurance agent.
• @ Raising your deductible to lower car insurance premiums – 
  • It’s definitely true that raising your insurance deductible will significantly lower your monthly premiums.
  • However, one needs to exercise a good bit of prudent deliberation before raising your deductible. First and foremost, you need to make sure that for whatever deductible you decide upon, you will always carry at least this amount in a cash emergency fund. By having an emergency fund, you ensure that you are able to immediately pay your car insurance deductible and get your insurance policy to kick in.
  • Personally, I think a good amount of a deductible for car insurance would be $500-$750 (about the same as for health insurance deductibles). This is significantly lower than my homeowner’s insurance policy deductible of $2500 due to the fact that there is much more risk of me being hit by another car and having to tap in to my car insurance than for my condo burning to the ground.
• @ Question of whether it’s better to “buy local” or direct from a nationwide company – There seems to be an ongoing debate/battle between different groups about whether it is better to “buy local” versus to buy direct from a national or multinational corporation. And, car insurance is no exception to this “war!”
  • Personally, while I would probably prefer to buy local (mainly to have someone in my same town to talk to about my policy), when it comes to car insurance, I would not hesitate to buy direct from a big provider like Shelter, State Farm, etc, if it meant saving me a large sum of money.
  • When I purchased the insurance for my condo, I compared prices at many insurance providers (both local and national). Ultimately, I took out a policy with a local insurance agency who brokers policies from the national corporation, Erie Insurance. As it turned out, the price for the policy using the agent was no more expensive than buying direct from the company. Go figure!

***Photo courtesy of http://www.flickr.com/photos/insurewish/4112407433/sizes/z/in/photostream/