"Before" pic of kitchen

So…things started hopping this week!  My son and I have been installing sheetrock in as we have time, but our hired installers got started, working with and around our plumber who had been AWOL for a few weeks.   Remember, we are in Southern Illinois, which bears many semblances to Mayberry RFD.  Our hired workers are very capable, but, being “good old boys”, they aren’t always easy to round up.   The trade off is that they don’t charge much.

How has it gone so far?

I thought you would never ask.  Actually pretty well, with a few snags.

Same shot after "gutting"

The good

The house is solid and square.

It already had a good layout, so our  focus is limited to the kitchen and bathroom.  Other than new walls, ceiling and floors, the three bedrooms and the living room will stay essentially the same.

The bad

We are over budget.

Even though we allowed a buffer amount for the remodeling, there are just too many “little things” that we overlooked.  Fortunately, we also allowed quite a bit of buffer in what we can ask, so we are hoping that the extra expenses will bring extra income.

Same shot on Friday morning. The sink will go in the corner and the gap between the sheetrock is for a ceramic tile backsplash.

I was concerned at the beginning that a project involving a husband, wife and son could stir some friction.  But this is really normal and should not be thought of as a bad thing.  Disagreements (always about whether an expenditure will bring a return)  bring on discussions which force us all to think through our decisions a second or third time.  Still, things can get a bit testy at times.

The ugly

Let’s see.  I needed to say “Ugly”  just to balance out the headings.  I don’t think anything is really ugly unless it would be the droopy wiring in the crawl space.  It WILL be properly attached to the floor joists before our home goes to market.

On to the Roundup

Recommended reading:

Meet Andrew Hallam: The Millionaire Teacher at Invest it Wisely

True Trick to Save Money on Appliances at Budgeting in the Fun Stuff

What is a Sin Tax? at My Journey to Millions

4 Things That Are Always Increasing in Price at Money Crashers

Snowballs in Arizona Paid Off  Three Credit Cards at Mrs. Accountability

Credit Card Consolidation and 0% Balance Transfers / Does it Really Help? at Money Help for Christians

Buy New Car vs Keep Old Car at Well Heeled Blog

Dave Ramsey’s Seven Baby Steps – Step 7: Build Wealth and Give at Smart on Money

Your Guide to Google Search – How to Make the Most of the #1 Search Engine at Doughroller

Breaking Free of the Cage: Escaping the Rat Race at Invest it Wisely

Ways to Fix Your Credit Score Fast at Good Financial Cents

Carnivals I have participated in this week:

Best of Money Carnival hosted by Money Energy

Christian Carnival hosted by Thinking in Christ

Christian Finance Blog Carnival hosted by Christian PF

Baby Boomers Blog Carnival hosted by Baby Boomers US

Carnival of Financial Planning hosted by The Militay Wallet

Our normal anxieties in dealing with insurance companies are based on the concern that we won’t be sufficiently compensated.

However, not everyone fits this mold.  This post is based on an email from one of my clients (I will call her Carol) who, because she had been injured in an auto accident, is in the process of hiring an attorney to represent her in dealing with the insurance company. Although she was hospitalized, missed work and could have ongoing medical issues, Carol is struggling with the morality of “going after” the insurance company. Because of the trauma of the accident, she doesn’t clearly remember it, which creates some guilt issues. Carol is also concerned about the possible “greed” mentality many lawyers seem to have.

Here is a clip of her email:

“You helped with this when we talked, but I think I’m blanking on it and churning. Will you give me perspective on the accident claim again according to biblical teaching? I’m still struggling with what God really wants of us in this financial circumstance.”

This is my reply to Carol:

I wish I had great biblical passages to share with you about insurance. The best I can come up with is Exodus 21: 12-36, a section of the bible which tells us that those who are harmed should be compensated. The gist of this passage is just that: God expects people to be compensated for harm done to them. This is why you have insurance and why the other person in the accident has insurance. If the other person was harmed, I am sure you would be glad that you had insurance so she could be compensated. Just because the shoe is on the other foot (being you are the one harmed) does not make it any less right that you should be compensated. You are concerned about how this will affect the other person. This is something you have no control over, but she SHOULD be glad that her insurance is going to take good care of you. If she isn’t, that is her problem, not yours.

The issue of how much the claim should be…again, ask yourself, “What if the other person had to go through what I have been through?” Wouldn’t you want her to receive payment for her medical care AND for lost income AND for possible future medical care? Of course you would. It is only right. I agree with your attorney. This is not about greed. It is about an injured person being compensated for the harm done.

Another thought is this: we are commanded in Romans 13:1 to be subject to the governing authorities. I am not sure about Missouri, but I know Illinois requires auto insurance (liability as a minimum). In keeping with the laws of the land and Romans 13:1, you have auto insurance. The very legal system that requires you to have insurance will also have a judge who makes a determination as to the award of the case. As long as you aren’t doing anything un-Godly to tweak the system (which you aren’t), then I would say that God is using that judge to make a proper and fair determination. In reality, the attorneys for the insurance companies might settle out of court, but the point is that God requires insurance, so trust Him to see to the details.

One more thought. You have debt and you have been harmed financially by this accident, meaning you have not been able to work as much physically or emotionally. This is not your fault and you should not feel guilty about what you can’t control. But if you were to somehow sabotage this settlement, you might be turning away money that could go toward those you owe. I know this is a stretch, but allowing the process to play itself out could help some creditors get the money owed to them. I can’t see that is a bad thing. Without the accident, you might have been able to gain enough traction to start making some major payments through your income stream. But the accident DID occur, so you don’t really know what might have happened in your career if it hadn’t. All of this is part of compensating a harmed party (back to Exodus 21).

In the end, I think you should trust the process, trust your attorney (or find one you can trust) and trust God. That is the best way I know to put it in God’s hands. When you do so, you can feel good about the outcome whether it goes very well or very poorly.

I hope this helps.

Joe

Carol’s response:

“I won’t be able to tell you how much it means to have your counsel and how thankful I am….I’m breathing easier today because you took the time to think on this for me. I’m so thankful”

Readers: have you ever struggled with guilt or the feeling of greed when negotiating an insurance settlement? How did you handle it? What would you add or change in my response to Carol?

photo credit: Chasqui

Another research project indicates people do spend more with credit cards

A published study by researchers at Carnegie Mellon, Stanford and MIT, indicates that people  “spend money ’til it hurts”.   The study appears in the journal “Neuron” and is the most recent from the emerging field of neuroeconomics, which looks at the mental processes that drive economic decision-making.

However, before any of you credit card advocates start overdosing on your blood pressure medications, let me quickly assert that this study DID  NOT prove that people spend more with credit cards than with cash; it only gives credence to the theory.

“Credit cards effectively anesthetize the pain of paying,” said George Loewenstein, Carnegie Mellon professor of social and decision sciences (SDS) and co-author of the paper. “You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”

OK.  How exactly did the study work?

Remember that these people are, uh, brainy.

In the study, 26 adults were each given $20 to spend on a series of products that would be shipped to them. If they made no purchases, they would be able to keep the money.   The participants viewed the products while lying in a functional magnetic resonance imaging (fMRI) scanner while the researchers studied which regions of the brain activated during each participant’s decision-making process.

With the study participants all wired up, the researchers goal was to learn if their brains would register pain when they saw higher prices.  Guess what?  They did.

An electric moment

“We were so excited when we got the results from the first scans, and saw that the insula, a section of the brain associated with pain processing, activated when subjects saw prices that were too high,” said Loewenstein. “It was an electric moment.”

Scott Rick, the SDS graduate student who worked with Lowenstein on the project, was especially excited when they found that insula activation discouraged spending.

“It suggests that prices do not deter spending purely through thoughts of foregone pleasures, as assumed by standard economic theory, but also through immediate pain,” added Rick.

Restated in my words: “The findings indicate that people decide not to buy because they intrinsically know the purchase. while giving some pleasure, will also cause pain.  When the fear of pain overrides the anticipation of pleasure, people decide not to buy. ”

Loewenstein and Rick, along with Cynthia Cryder, also a graduate student in SDS, are continuing their research on the “pain of paying” — the pain one experiences when paying for purchases.

My thoughts

Far be it from me to second guess brainy researchers, but I think they overstated the results of the study.  While giving strong credence that the brain does register pain when prices are too high, Loewenstein took a leap in logic when he said that the study explains why people spend more with credit cards (less pain than cash).  The problem is that he never actually tested the pain using credit cards versus cash; he only proved there is more pain when prices go up.    I wish the researchers, while they had these 26 adults’ brains all wired up up, would have required them to pay cash and then swipe plastic for the same value purpose.  At least we might have been able to have learned if the credit card pain theory was valid.

In the meantime, I suppose we will have to wait for another study to actually prove whether people spend more with credit cards than with cash.

How about you?  Do you personally spend more using credit cards than using cash?  How do you know?

“Why would I need your help?” he barks indignantly. “For your information, I am a very wealthy, prosperous man. I have no needs!” He gets back up and lurches off, bouncing into a light post on his way.

You have just encountered a member of the Laodicean church: a wealthy man who didn’t realize that he was a beggar.

Allow me to explain:

The city of Laodicea was a center of wealth. Known for its black wool and carpets, it also had a medical school famous for its eye salve. The historian Tacitus notes that the city was so affluent that they refused government aid from Rome after the earthquake of A. D. 60. Can you imagine ANY U. S. city refusing FEMA aid after a natural disaster?

They were industrious and innovative, creating a stone aqueduct system to bring water from the hot springs of Hierapolis some six miles away. By the time this water reached Laodicea, however, it was tepid and distasteful.

Yes, they were wealthy, affluent people, surely the envy of all who visited their city. But was Jesus impressed? Not a bit. He called them “pitiful, blind beggars, threadbare and homeless” Rev. 3:17. And he follows up with this command, “Here’s what I want you to do: Buy your gold from me, gold that’s been through the refiner’s fire. Then you’ll be rich. Buy your clothes from me, clothes designed in Heaven. You’ve gone around half-naked long enough. And buy medicine for your eyes from me so you can see, really see.” Rev 3:18.

What are the lessons for us?

1. You can have lots of stuff and be very poor.

If you base your life on the size of your portfolio, you are still very poor. Why? Because life is more than your net worth. Jesus said to buy gold which has been through a refiner’s fire; gold that has all of the impurities burned out of it. Real wealth for us means having the impurities burnt out of our lives. Faith in Jesus Christ may throw us directly into the fire (1 Peter 1:7) or it could mean simply allowing God to refine us bit by bit. Either way, He will make sure that we are refined.

2. Independence can stifle dependence.

Independence is normally a good thing, but not when it creates a prideful attitude that says, “I don’t need anyone’s help. I can do it all by myself.” Reality is that we all need each other and we all need God. The Laodiceans had a prideful independence. They didn’t need Rome’s help after an earthquake and they didn’t need help from God. Do you see the irony here? They prided themselves in their wealth, but they were poor spiritually. They prided themselves on the fine clothing they sold, but they were half naked spiritually. They prided themselves on their famous eye salve, but they were spiritually blind. Their prideful independence prevented humility and dependence on God. It can do the same to us.

3.  Their wealth was not evil.

Nowhere in this passage is the slightest indication that the wealth was evil. Having the wealth is not the problem, but allowing the wealth to become predominant is. God wants his children to have the riches of this world, not so we can be caught up in our stuff or become prideful, but so we can help those who are less fortunate.

4.  There is always hope.

In spite of their misplaced priorities, their prideful independence and their spiritual blindness, Jesus never gave up on them. He makes these same people this promise,  (Rev 3:20)  “If you hear me call and open the door, I’ll come right in and sit down to supper with you.”

If you ever think that God has abandoned you, look again. He hasn’t moved. You have.

One more thought

The site of this wealthy metropolis now lies in ruins. Yes, there are remnants of a great theater and part of the aqueduct still exists, but time and nature has reduced the greatness of the city to rubble. These ruins are an object lesson for us…whatever we gain in this world will not last. Only treasures in heaven will. Aren’t those the types of treasures you would like to have?

photo credit: Yoni Lerner

The book “Aftershock” by Weidemer, Weidemer and Spitzer documents economic predictions by people who should have known better but didn’t. Here is a sampling:

• Prediction: “A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!” Richard Band, editor Profitable Investing Newsletter, March 27, 2008.

What actually happened: At the time of Band’s comment, the Dow Jones industrial average was 12,300. By December, 2008 it was at 8,500.

• Prediction: “AIG could have huge gains in the second quarter.” Bijan Moazami, distinguished analyst, Friedman, Billings, Ramsey, May 9,2008.

What actually happened: AIG lost $5 billion in the second quarter of 2008 and $25 billion in the third quarter. It was taken over in September by the U.S. Government.

• Prediction: “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under…I think they are in good shape going forward.” Barney Frank (D-Mass.), House Financial Services Committee Chairman, July 14, 2008.

What actually happened: Within two months of Rep. Frank’s comments, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion to each.

• Prediction: “I think Bob Steel’s the one guy I trust to turn this bank around, which is why I’ve told you on weakness to buy Wachovia.” Jim Cramer, CNBC commentator, March 11, 2008.

What actually happened: Within two weeks of Cramer’s comments, Wachovia came within hours of failure as depositors fled. Steel eventually agreed to a takeover by Wells Fargo. Wachovia lost half their value from September 15 to December 29.

• Prediction: “I think you’ll see (oil prices) at $150 a barrel by the end of the year”. T. Boone Pickens, one of the wealthiest and most respected oilmen today, June 20, 2008.

What actually happened: Oil at the time of Pickens’ prediction was around $135 a barrel. By late December it was below $40.

• Prediction: “I expect there will be some failures…I don’t anticipate any serious problems of that sort among the large international active banks that make up a very substantial part of our banking system.” Ben Bernanke, Federal Reserve chairman, February 28, 2008.

What actually happened: In September, 2008, Washington Mutual because the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.

Why don’t they tell us the truth?

How do you feel when your read these failed predictions? Angry? Confused? Miffed? Cynical? I probably feel some of all. And while I don’t claim to know another person’s motives for their actions, I have some theories about why these “experts” didn’t tell us the truth.

They do not know the truth.

They may be “experts”, but (being charitable) I concede that many really had no clue to the imminent housing, banking and stock market collapses. But then should they be called experts?

Finally: someone who tells the truth

They have agendas which are contrary to the truth.

Again, I don’t claim to know another person’s motives, but T. Boone Pickens, an oil man, is not likely to make negative predictions about oil. Richard Band, editor of Profitable Investing Newsletter, knows that dire market predictions will normally curtail investing.

Predicting failures could make a leader seem inept.

Barney Frank, as House Financial Services Committee Chairman, may have realized that failures of Fanny Mae and Freddy Mac could be reflections on his leadership ability. Same with Federal Reserve Chairman Ben Bernanke in regard to impending bank failures.

They honestly believe that knowing the truth is not a good thing.

Have you ever had someone hide the truth from you because they didn’t think you could “handle it”? Have you ever heard, “what you don’t know can’t hurt you?” If you are like me, once you learn that a friend or relative withheld the truth because it was “for my own good”, I feel patronized…and angry. It may be that certain experts simply don’t think that us normal down to earth citizens have the fortitude and integrity to deal with reality, so they keep it from us.  Is “arrogant” a fitting word here?

The doctor/disease analogy

If your doctor knew you had a life threatening disease, which of these would you prefer:

• Not telling you because your disease would reflect poorly on his ability as a doctor?
• Not telling you because he didn’t think you could deal with the truth?
• Telling you the truth?

You want the truth of course. I realize that economic forecasting is not as an exacting science as practicing medicine, but, be it a doctor, a politician, or an economic pundit, I want to know the truth.

Whom do you trust?

I don’t want to become a cynic, but recent history has given me little reason to trust the so called economic experts. I have therefore vowed to do something far too few of us do: think for myself. I might not get it right either, but at least I know my own motives. And I am the expert in one financial arena: my own finances.

How about you? How do you filter economic predictions? Whom do you trust? Why?

photo credit: LowImagination

photo credit: Shot By Darko

Spousal benefit

The lower earning spouse has a choice: to claim a “spousal” benefit of up to 50% of the higher earning spouse’s benefit or to claim his own earned benefit. The higher earning spouse must be already collecting benefits before the lower earning one can qualify for a spousal benefit. And this spousal benefit will be reduced for every month under full benefit age. For example, if the spouse is already drawing a $1600, the lower earning spouse could qualify for $800 a month at full retirement age; or 75% of $800 ($600) if starting at age 62.

Surviving spouse benefit

A surviving spouse of a retiree drawing Social Security will receive 100% of that pension, with the following provisions:

• The survivor must be full retirement age. If not, the benefit will be reduced based on age.

• If the survivor is insured on her own record and the benefit of the deceased spouse is higher, the survivor will continue to receive her own benefit and also the difference between her benefit and the deceased spouse’s benefit.

Simply put, the surviving spouse will receive the greater of her benefit or the deceased spouse’s benefit, providing she is full retirement age.

Got those definitions? Good! Now for some Social Security strategies.

For clarity’s sake (and because it is this way in most families), I will refer to the higher earner as the man and the lower earner as the woman throughout the rest of this article.

Strategy of waiting

All Social Security benefits are greater when delayed. Because the spousal benefit is dependent on the higher earner’s benefit, the advantages are compounded. Say the higher earning spouse’s benefit is $2,000 at full retirement age. If his spouse also waits until full retirement age to start her spousal benefit, she will draw 50%, or $1,000, for a combined $3,000 monthly benefit. On the other hand, if the higher earning spouse starts his benefit at age 62, it will be reduced by 25% to $1,500. Because 50% of $1,500 is less than 50% of $2,000, this reduction also affects the spousal benefit. But if the spouse starts drawing at age 62, she won’t even receive the full 50% of the $1,500; her benefit will likewise be reduced by 25% from $750 to $562.50 for a combined benefit of $2062.50. Obviously, waiting can make a huge difference.

In the same way, waiting will also affect the surviving spouse benefit. In the above scenario, the surviving spouse benefit drops by $500 (from $2,000 a month to $1,500 a month) when the benefits start early. If you consider this benefit as a form of life insurance, a $500 per month decrease is substantial.

Should Spousal Benefit always be delayed until full retirement age?

Not necessarily. The age differential of the spouses should be considered. For example, if the husband is 70 and the wife is 62, she should consider beginning her spousal benefit at the reduced rate. Why? Because the husband is likely to die earlier and, at that time, her survivor’s benefit (based on HIS pension) would kick in. This is the same benefit she will receive whether she starts at age 62 or not, so she should consider bringing the extra money into the household now.

How to draw Spousal Benefit while waiting

Suppose the husband is full retirement age and wants to wait until age 70 before starting his benefits. Will the wife, who cannot draw the spousal benefit unless her husband has started his pension, need to wait until he is 70? Not if the couple takes advantage of voluntary suspension.

Here is how it works: The husband files for his benefit and the wife files for the spousal benefit. The husband then immediately requests a voluntary suspension of his pension. The wife will be able to collect her spousal benefit while the husband’s future benefit will grow by 8% annually. I like this strategy because the couple is bringing in “bonus” household income while the husband is patiently maxing out both his future pension and his wife’s future survivor benefit.

Another way to claim a Spousal Benefit while waiting

Suppose the husband wants to wait until age 70 to start his pension but his wife also qualifies for benefits based on her own work record. Think through this one with me: she could start her benefit and he could sign up for the spousal benefit while waiting until age 70 to start his own. At that point he switches to his own higher benefit. As in previous examples, this will increase the survivor’s benefit, but will do so while bringing extra income into the household. And the wife could also switch to a spousal benefit based on what the husband’s benefit would have been at age 66. This is very similar to having your cake and eating it too.

One caveat: the higher earning spouse cannot use this tactic if he is younger than full retirement age.

Summary

Social Security can be complicated, but you can make intelligent decisions if you understand these basics. This is your pension that you have paid into all of your working life. Make sure you maximize your benefits.

One more thing: Social Security rules change, so I strongly recommend that you check with the Social Security Administration with all of your questions.

Have you started receiving your Social Security benefits?  What strategies did you use?  Would you recommend to those who haven’t started yet?

photo credit: joguldi

Savings are low risk funds that must be liquid (available) when you need them. The purpose of saving money is so you can have it for a specific purpose within a short time frame.

Investments, on the other hand, are for wealth building, and will not be needed for many years. Yes, investments do involve greater risk, but, investments also yield much greater returns when left alone long enough to ride out the turbulence of the stock market.

Examples of savings

Emergency Fund

When an emergency happens, the money is needed immediately. The emergency fund, therefore, should be in a very boring account, such as a Savings Account or Money Market Account. One could also consider an online high interest account, as long as the funds are easily accessible. Its purpose is not to make a bunch of money; it is there for emergencies.

Car Fund

You DO save up and pay cash for your cars, don’t you? This money should be saved, not invested. Why? Because you don’t want to take the risk of a market plunge just when you are ready to buy.

Anything else you will need to pay cash for

What are you saving for (notice the word “saving”)? A home improvement (or repair), a riding lawn mower or a new computer are all examples of saving: you will need a set amount on a set date.

College Funding (sort of)

Should college funding be an investment or saving? It depends on how soon Junior is going to be entering college. If college is 18 years away, the money should be invested (make sure you use an ESA or 529 plan to get all of the tax breaks). But what if college starts four years from now? You don’t want the risk of your investments tanking just when that first tuition payment comes due. The choice is yours, but I think you should be moving those funds to a less risky vehicle (maybe even a savings account) as the time of need approaches.

Examples of investments

Retirement

Yes, retirement is the big one and retirement funds should definitely be considered investments. However, like college funding, the retirement nest egg should be made safer as the time of need draws closer.

Starting a business

If you have a long range plan to start up a business (say 10 to 20 years from now), you should be investing to achieve the nest egg needed.

Breaking it down

The difference between investing and savings is really quite simple. If you are going to need the money in the near future, save it. If you aren’t going to touch the money for a longer time frame, invest it. The trick is defining this time frame. Financial guru Dave Ramsey uses five years as his criteria. His rationale is that the stock market has historically made money in 93% of the five year rolling time frames and in 100% of the rolling ten year periods. Most of us are aware that the recent recession changed those percentages, and I heard Dave Ramsey recently say that the stock market has made money in 100% of all rolling fifteen (no longer ten) year periods. However, as far as I know, Dave still uses the five year criteria to distinguish saving from investing.

What do I think about the five year guideline?

I am OK with it. If I know I will need to tap the money in five years or less, I consider it savings. Our emergency fund and car fund are both in Money Market Savings Accounts. On the other hand, if I am not planning to touch the money for longer than five years, I invest it. Our traditional and Roth IRA’s are examples of our investments.

I also have a sort of hybrid investment fund. I am currently involved in flipping a house. This is clearly an investment, with money tied up in the house. However, when we sell the house, I plan to keep this money quite liquid and available (like a savings account) so I can be poised to buy another flip house. I say hybrid, because I would at that time have an investment that I am treating like savings.

How about you? Do you have a clear guideline to distinguish saving from investing? What is that guideline?

photo credit: Ken Wilcox.

By having a plan, you can pay off your house (and everything else) early.

“It seems like we will be making house payments forever. We owe $140,000 at 6% interest and are paying $1000 a month. How much sooner could we pay it off if we started paying an extra $100 a month?”

The above is a hypothetical question, but it could be you. There are two answers: the quick one and the “dig deeper” one. By clicking a few buttons on a financial calculator we discover the quick answer is 21 months; paying an extra $100 will reduce the payoff from 20 years to 18 years and 3 months.

COULD you pay off your house early? Sure. But SHOULD you?

Let’s dig deeper. Do you have other debt? Do you have any savings? Do you have an emergency fund? Are you on target with your retirement investments? Do you have children who will need some help with college funding?

Being as this is a hypothetical case, let’s say you are paying $300 a month at 12% APR on $5,000 on credit card debt and $500 a month at 8% on an $8,000 car loan. You have $2,000 in a savings account, nothing set aside for emergencies, you are on target with retirement investments and you have two children, ages 4 and 8. Your challenges are to not only get your house paid off, but also get out of debt, build an emergency fund and make plans for your children’s education. Don’t get overwhelmed. You can accomplish all of these and still pay your house off early by setting priorities and taking things one step at a time. Let’s develop a plan.

Clearly Communicated Budget

Yes, the dreaded “B” word…you knew it was coming. But until you are in control of your money, you simply cannot develop any type of a plan. It is essential that you and your spouse communicate openly while developing this budget. Discuss hubby’s dream bass boat and your dream kitchen. Leave nothing out now because it will surface later. Let’s assume you two worked together and decided that by eating out less, simplifying your vacations, getting a smaller tax refund and cutting back on Christmas spending, you find $500 a month positive cash flow.

Small Emergency Fund

Life happens, so you need a small emergency “buffer” fund. Simply label that savings account as an emergency fund and agree not to touch it for anything except emergencies. Voila! Your small emergency fund is complete.

Get Rid of Credit Card and Car Debt

We will come to paying your house off early in a minute, but let’s first free up more cash flow by attacking your credit card debt and car debt in that order. Keep making your regular car payment while bumping up your credit card payments to $800 a month (the $300 you were already paying plus the $500 you found in your budget). In seven months, when your credit card debt is gone, add the $800 you were paying on the credit card to the $500 you are paying on your car. With new payments of $1,300 a month on a car debt (now down to $4,800), it will be gone in about four more months. Are you still with me? You have just paid off your credit card debt and car loan in only eleven months. By doing so, you have bumped your cash flow from $500 a month to $1,300 a month. Congratulations!

Time for a Big Emergency Fund

Grandma called it her “rainy day fund” for good reason: rainy days come. A big emergency is a higher priority than paying off your house early because when emergencies come, you need readily accessible funds. More equity in your house would not help if you lose your job tomorrow. Depending on your number of income streams and volatility of your job, you need at least three months of expenses; many financial planners recommend six months and some nine months. Let’s assume your expenses are $3500 a month and go for a six month emergency fund. Your goal therefore is $21,000, so you need to save $19,000 to add to the $2,000 you already have. At $1,300 a month, you will need at least 15 months to achieve this goal. After only 26 months, you have paid off $13,000 in debt and saved another $19,000. You are on fire!

Retirement

You said that your retirement was on track, so I am taking you at your word. If it wasn’t, you should be investing enough of this $1,300 cash flow each month to bring your retirement investment level up to 15% of your take home pay.

Kid’s College

Your two children are now 6 and 10. You could start making huge house payments now, but, because that added home equity cannot be easily converted to cash, college funding becomes a higher priority. For sake of discussion, you could achieve a $40,000 nest egg for each of them at age 18 if, assuming an 8% return, you start investing $300 a month for the oldest and $220 a month for the youngest. Check into a 529 plan to get some great tax breaks.

Finally! Pay the House Off Early!

You have been making $1,000 a month house payments all along, lowering your mortgage balance to about $132,000. Your monthly cash flow is now $780 a month ($1,300 a month less your college investments of $520 a month). If you decided to use all of the $780 to pay extra on your house, it would be paid off in only 7 years and 9 months – a total of 9 years and 11 months from the time you started your plan. At that time your payoff schedule was 20 years. You are awesome!

Summary

Our hypothetical family was able to pay off $13,000 in debt, save for a $21,000 emergency fund, plan for their kids’ college and pay their house off 10 years early. How did they do it? By creating a budget, sacrificing and developing a plan. I have a hunch that if you follow their lead, you would also see amazing results.

Note: I wrote this post originally for Christian PF.

photo credit: The-Lane-Team

Readers:  Have you paid off your house early?  What tips do you have for others considering it?

• Jim had never been able to say no to anyone, especially his supervisors at work. He had moved up to the position of operations manager in a large firm. His dependability had earned him the reputation of “Mr. Can Do”.  But his kids had another name for him: “the Phantom”. Jim was never home. Being “Mr. Can Do” meant late nights at the office, business dinners several nights a week and weekends on the road even after he had promised the kids fishing trips and trips to the zoo.

Saying "no" can establish healthy boundaries. The inability to say "no" removes those boundaries.

In their classic book “Boundaries”, Doctors Henry Cloud and John Townsend explain various boundary problems people experience. One such problem is that of “Compliants”, who say yes to bad things because they haven’t learned how to say no or even that it’s OK to say no. Marti and Jim are examples of compliants. Because they don’t know how to say no, they do not establish healthy relational boundaries.

Why can’t they say no?

I suggest you read the book to get the more profound answers to this question, but basically, Marti and Jim and other compliants act from fear:

• Fear of rejection

• Fear of hurting another person’s feelings

• Fear of someone else’s anger

• Fear of being seen as unspiritual

• Fear of being seen as bad or selfish

You get the idea. Many people who are overly helpful have motives other than simply wanting to help; they may be afraid not to help. Where am I going with this? Most of us know compliants. Some are married to compliants. Many are compliants. Not being able to say no will cause problems with marriages, parenting, work and personal finances. Let’s touch briefly on each of these areas of life.

Marriage

A compliant spouse will not stand up for herself. She is vulnerable to abuse and will never have a true voice in her marriage. Financially, she will agree to “whatever you want honey”. Her spouse will never really know his wife and the two, therefore, will never truly become one.

Parenting

The parent who doesn’t know how to say no is teaching children that life has no limits, that there is no right and wrong and that wrong actions have no consequences. What kind of adult will this child become? My hunch is one that has little respect for the law, for his employer or for God.

Work

The compliant person is the one who always accepts everything the boss piles on. A controlling boss will take advantage of the compliant employee without batting an eye. She may be heralded as a super worker, but sacrifices other relationships in the process. This is “Jim” in the opening illustration.

Financial

The person who does not know how to say no will say yes way too many times. This is the person who will succumb to the telemarketer, pay list price at the car lot and send grocery money to the threatening credit card collector. Remember: the compliant hasn’t learned to say no or even that it’s OK to say no. As already mentioned, a family budget is an impossibility because the compliant spouse won’t speak up, sending a message to the partner that anything is OK when both know everything really isn’t OK. Obviously, for the compliant, the lack of boundaries can be an expensive problem.

Concluding thoughts

In life and in our finances, the actions we take are often determined by deeper issues. Financial gurus commonly give great tips for getting one’s finances under control, but real life often requires more than learning a new technique;  it may require peering deeply into the mirror to learn what makes us tick.

Is a compliant person hopelessly stuck in that role? Of course not. Lack of boundaries is a learned behavior, so establishing boundaries is also something that can be learned.

photo credit: eridesign

Readers: Do you know compliant people? Are you married to a compliant? Are you one? How does not knowing how to say no affect your life and your finances?

Share the fun.

Rent a condo or a house and divide the cost with two, three or four families. Make sure that you have plenty of room (a separate bed and bath for each family) and count the savings. For the past few years, my wife and I have shared a huge log mansion (this link is the exact home we stayed in) with three other couples for fall getaways. Cost per night? $300 total…$75 per couple.

Save on meals.

Eating out is, for many, the biggest vacation money drain. A family of four could easily spend $120 or more a day in restaurants. But if you could cook your own meals (another reason to rent the condo or house), you are basically getting free food. Why? Because you buy those same groceries whether you are at home or on vacation. Our four couples take turns cooking supper, have lots of fun sharing the meal together and always have plenty of leftovers for lunch the next day. Do we eat out at all? Sure, but we afford it by using our entire monthly eating out budget during our one week of vacation…again sort of like free food.

Choose off season

An ocean vacation is off-season starting in the fall; a mountain vacation is normally off-season in the summer. Check and compare. Some off-season prices are discounted by as much as 50%.

Save on gasoline.

I realize that sharing a vehicle is not convenient when each family has children, but it is worth considering. We normally share with another couple, cutting our gasoline expenses in half.

Plan your shopping

You ARE going to shop. Right? Then take advantage of your shopping time by purchasing Christmas and Birthday gifts. This is money you would spend anyway, so plan your list and have fun! In the same way, you can buy clothing from money you already had budgeted for clothing. Last year Jan handed me $40 from our Clothing envelope and ordered me to buy some slacks. Using price and comfort as my criteria (style is not on my radar), I was able to find both jeans and cargo pants for under $40. My point? I used our clothing money to make my purchase; no vacation money was required.

Our $500 vacation

We (with three other couples) already have our lodge reserved for a Smoky Mountain getaway this fall. Here is the tabulation:

• Room: 4 nights at $75 a night = $300

• Food: We will use our normal grocery and eating out money. Vacation expense = $0

• Gasoline: 800 miles round trip at 20 MPG @ $3/gallon divided by two families = $60

• Shopping: Using budgeted Christmas, Gift and Clothing money, vacation expense = $0.

• Total cost = $360

OK, I know I said we were going to have a $500 vacation. We might just go crazy, live it up and spend another $140. After all, we ARE on vacation!

Readers: In what ways have you made your vacations more affordable?  Which one tip would you share with us?