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When To Refinance

May 2, 2012 By Leave a Comment

Mortgage interest rates continue to be at record lows. How do you know if you should refinance? Banks will always tell you that it is a good idea, but they want to sell you a mortgage and will get fees and your interest rate in the deal. So how do you really know, when to refinance?

Housing should be no more than 25% of your take home pay.

First of all, if you are renting or buying your mortgage or rent should be no more than 25% of your take home pay. For example, if you bring home $3,500 per month you should be paying $875 for your mortgage and insurance. If you are paying more, you either have too much house or rent or your rate is too high.

How to decide

If you are planning to stay in your home for at least 5 years, you may want to consider refinancing. We suggest a 15 year fixed rate mortgage at the 25% of your pay or less. If you can’t afford a 15 year, then you can go to a 30 year fixed mortgage. The closing costs will be a percentage of the amount borrowed. Let’s say that you want to borrow $200,000 for the mortgage. If the closing cost is 1%, then you will pay $2,000 in closing fees. Here is the decision part. How long will it take you to save that $2,000 in fees on your new reduced mortgage payment? If your payment is reduced by $200 per month it would take you 10 months to recuperate your refinancing costs. This means that you would have to stay in your home at least 10 months in this scenario. For some this is the deciding factor.

Other factors

How much debt do you currently have other than your home? The bank may not let you refinance if your loan to debt ratio is too high. Paying off some of your consumer debt may help you get a better interest rate.

How much do you owe on your home versus the current value of your home? You may be required to have your home appraised prior to refinancing, which is an additional cost to you. If you home is currently valued for less than you currently owe, you are considered underwater. This means that in order to refinance you will have to pay your mortgage off up to the current value of the home. For example, Your current mortgage loan is for $200,000, but your home is only valued at $180,000. Now, hopefully home prices will rise in the next few years but right now you are underwater. You may be required to come up with the $20,000 that  is between the current mortgage and the new value before you refinance.

Since refinancing will ultimately save you money in interest payment over the life of the loan, to go from a 6.5% interest down to a 3.5% interest will save you money. But, the upfront costs all have to be weighed, as well as the consumer debt and the amount of time that you expect to stay in your current home. Who knows, after you run the numbers you may find that you are paying 30% or higher for your mortgage costs and you may decide to move into a smaller more affordable home instead of re-financing. Just remember the 25% rule of thumb and you will get pointed in the right direction to reduce the stress of your housing costs.

Tim and Kathryn Gerken are financial coaches in Newcastle, WA. They serve their community with seminars, speaking and of course, personal coaching. To find out more, please contact us!

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Cutting Transportation Costs

April 28, 2012 By Leave a Comment

Transportation is the second highest category where consumers spend their income. So the question is, how can we save more money on our transportation costs?

How much are you paying each month?

Most consumers feel that if they can afford the payments, they can afford the car. But when other debt payments come along, pretty soon they become stretched too thin to make all the payments. The average new car loses 21% of its value in the first year. If you do not put at least that much down you will owe more than the car is worth (also known as being “upside-down”) within 12 months. That makes it hard to sell, if you get into a financial bind.

The better option is to purchase a used car that you can afford and pay cash to do so. This might mean driving a cheap, $2,000 car, while you pay yourself a car payment. Doing that for 10-12 months will give you the cash to upgrade to nicer used car. Used cars do not depreciate at such a rapid rate as new cars.

Calculating other costs

Let’s assume that you have a car that is paid for. What are the other monthly costs associated with car ownership? First, there is insurance. Most states have mandatory car insurance laws. Next there is the cost of gas, oil and maintenance. If you plan on driving the car you will need to budget for all three of these items. If you live or work in a city there may be additional parking expenses to think about as well. Even college campuses have parking fees per quarter or per use.

Other options

Now that we have reviewed some costs, how can we cut them?

  • Drive less, or carpool to share expenses
  • Cluster your errands by area, so you are not traveling back and forth a lot
  • Consider public transportation
  • Find out if your job will let you tele-commute from home occasionally
  • Ride a bicycle or walk, where it makes sense. This gives the added benefit of daily exercise!
  • Changing your own oil can save you money over having a garage doing it. Just be sure you properly dispose of it.

Analyze your family’s driving habits. It may be that you can cut costs by owning only one car. The best way for most people to save is to buy a used car with cash and skip the payments. You save on depreciation, you save on interest and most of all you get pointed in the right direction to getting your debt paid off, so that your stress levels are reduced and you can have financial wellness and peace.

Tim and Kathryn Gerken are Financial Coaches in Newcastle, WA. They serve their community by teaching classes, speaking and coaching families in the Seattle area. To learn more contact them.

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Are You Eating Your Income?

April 24, 2012 By Leave a Comment
There is no sincerer love than the love of food. ~ George Bernard Shaw

Food ranks in the top three spending categories of Americans.

Almost 13% of monthly household spending was for food according to the 2009 Consumer Spending Survey. That 13% averaged to $6,372 per year, $2,619 of which was spent in restaurants, while $3,753 was for eating at home. All of this was for an average family of 2.5 people with an average before tax  income of $62,857. The other two top categories according to the survey were housing and transportation.

This breaks down to $531 per month spent on food for 2.5 people. In our family of (currently) 6, we spend about $900 per month on food.  So where does your family fall? Are you above the national average or are below it?  Remember that your income is probably different than the average as well as the number of people in your household. Regardless, if you have two or three people in your household your monthly food bill should not be $1,200. You would be eating your retirement income!

Reining in food costs

The first step is to make a budget and decide how much of your income you can afford to pay out in food. Keeping in mind that food should be the first thing on your list of priorities, not the credit card bill. Once  you have an amount established, go to the bank and take out cash for your food. You can get out the amount for the whole month or just for the week. This is the only money you can use to purchase food. If you run out, you must adjust your budget someplace so that it stays balanced. Using cash to pay for your food helps you to see how much you are spending and how much you have left. It helps you to say “no” to the kids as well as to yourself when it comes impulse purchases.

Make a menu

Whether it is for the week, the pay period or for the month, a menu is essential to keeping your food costs down. The main reason for this is that you know exactly what is for dinner when you get home. There is no impulse eating out if you have a meal already planned. Anyone can start to cook it when they get home if they know what is planned and have the ingredients. A menu also helps when you are at the grocery store. You know exactly what you need to prepare the meal and can stick to your list and not impulse purchase.

Couponing

Many people today use coupons to help save on their food budgets. Couponing can save you money but only if you use it correctly. Only clip coupons on items that you would normally purchase anyway. Do not let it become an impulse shopping list item just because you are saving 10 cents with a coupon. Make sure that your coupons are organized so that you actually use them. Otherwise, it is a waste of your time and energy to clip them out. There are online coupon sites that can be helpful, but we do not suggest paying for a coupon.

Get organized. Spending time each week to plan a menu and shop on a budget with a list will take you a long way to getting pointed in the right direction to save on your food expenditures each month.

Tim and Kathryn Gerken are Financial Coaches in Newcastle, WA. They serve their community by speaking, facilitating workshops and seminars and by coaching people on their personal finances. To learn more contact us today!

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Life Insurance: The best investment for your family

April 20, 2012 By Leave a Comment

Most of us know people who have died. Hopefully, those people in your lives who have passed on were able to live full lives and see their children and grandchildren. For those of us who have known family and friends who were called home early in their lives, we are reminded that life is fragile and you never know when your time is up.

No one can confidently say that he will still be living tomorrow. Euripides

This was brought home to me once again this week, when the daughter of a friend became ill and within two weeks had died from her illness. She left a husband and young daughter. In this sad situation I am reminded that everyone needs life insurance to help to take care of the family that is left behind. Whether that person is the bread-winner of the household or the stay at home mom, the position that they filled in the family will need to be financially replaced. The surviving spouse will need to work and the children will need care.

Term Life Insurance

Purchasing term life insurance can help to release the financial stress of the loss of a loved one. It is hard enough to continue after the loss of a loved one even without the financial burden it may create. Term insurance is inexpensive for otherwise healthy adults to get. It is one of the necessities of a good financial plan and if you have children, it is a must.

For a man or woman in their mid-thirties, you can obtain 20 year term life insurance for approximately $25 per month for $500,000 in coverage. For a personalized quote click here. The average American income is $50,000 per year. This will give that family 10 times its annual income. If they invest it, it is possible to use the proceeds to help with the living expenses of the family until the kids are adults.

Obtain some outside of work

If you and your spouse do not have term life insurance in place, please do not put it off any longer. It is the best gift that you can give each other and your families. If you have life insurance through your employer, consider having some outside of work as well. It is inexpensive. If you develop an illness while serving your current employer and are subsequently laid off, fired or quit that illness may mean you are no longer qualified to obtain insurance due to the pre-existing condition. Life insurance through an employer terminates when your employment does. The safest road is to have term insurance outside of work.

What happens when my 20 year term is up?

If you are serious about getting out of debt, paying off your home early and building a retirement fund, within 20 years you should not need life insurance. You will be self insured! Your kids will mostly be grown and on their own. You will not have debt and you will have a large emergency fund. Your investments will be able to make some money and the spouse that is left behind will be able to make ends meet with the financial portfolio that you have built over the past 20 years.

Life is fragile. We will all die eventually and none of us know when or how. Get pointed in the right direction today and leave your family the security that they will need for move on without you or your spouse. Get term life insurance in place so that you can enjoy your life and live it to the fullest without worry for your family.

Tim and Kathryn Gerken are Financial Coaches in Newcastle, WA. They serve their community through seminars, speaking engagements and personalized coaching in the Seattle area. To learn more contact us.

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Vacation Cost Cutting

April 17, 2012 By Leave a Comment

Spring vacation is behind us and Summer vacation is looming on the horizon, it is time to talk about some helpful cost cutting to get the most bang for your buck any time you travel.

When preparing to travel, lay out all your clothes and all your money.  Then take half the clothes and twice the money.  ~Susan Heller

This is most certainly true for many travel options.

Save for the trip first

When planning a vacation, the first step after you plan a destination is to save for the trip. Saving for a trip before you go is the best way to have a great vacation. The debt of the trip will not follow you home and when you get back you can start saving for the next trip. If you can pre-purchase airfare, lodging and transportation like a rental car or train tickets, you will be able to budget better and have less expenses on the road.

Condo or hotel or camping anyone?

If some destinations offer the choice between  condominium and a hotel do some research. Often you can save more money by eating at a condo and buying groceries than you can with a hotel and eating all of your meals out. If you have kids or teenage boys this is especially true. On a recent trip to Hawaii, our party of 6, four of which were teenage boys could not seem to eat out for less than $150, but I could buy almost a week’s worth of dinners at the local grocery for about $300. Another fine lodging option is camping. Even on Hawaii, campgrounds can be an inexpensive option. There are outfits where you can rent your gear or, if you are a light packer, bring it with you.

Be choosy about how you eat

Since we opted for a condo with a kitchen, we ate breakfast in and made a picnic lunch to take with us on our day excursions. The resort had a BBQ, so we often grilled something easy when we returned for the day. We saved our eating out dollars for treats in the afternoon that were local favorites. If you must eat out, do some research and find a local place that has good food at reasonable prices. This is typically where the locals would eat. Try and stay away from tourist areas, where the prices will be higher.

Tour or on your own?

Depending on your destination, you may consider a tour. This is especially true in a country where you may not speak the language. Time while on vacation is your most valuable asset. Sometimes a tour guide can get you in to the front of a museum line and show you the highlights. They can direct you to the best places to eat and shop. You basically have local knowledge at your fingertips, so that you can see more, do more and get more out of your experience. If you travel on your own, you may spend less, but you must weigh that against the opportunity cost of your time for having to learn where everything is and getting oriented in your new surroundings. Some companies offer the best of both worlds and give you plenty of free time, while still providing transportation and lodging at a group rate.

If you can travel like a local, you will be able to spend less money and have just as much fun on a vacation. Pay for your trip prior to leaving and have enough cash reserves saved up for the fun part of the trip as well as food and any other unforseen expenses. Get pointed in the right direction before you go and you will come back with a million dollar memory of your trip.

Tim and Kathryn Gerken are Financial Coaches in Newcastle, WA. They serve their community through, workshops, speaking engagements and coaching in the greater Seattle area. To find out more contact us.

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