Archive for the ‘Debt’ Category
Thursday, March 20th, 2008 |
Don’t Talk About Moving When Your Wife Is Pregnant
I’ve recently had a discussion with my 9-month pregnant wife about the idea of moving. Now, I should have known better than to approach that subject when my wife is in her “nesting” mode - needless to say she was not happy.
The reason that I brought up the subject is that we can literally choose to live wherever we like. There is nothing holding us back from moving anywhere that the respective laws allow. I began thinking about this subject as I have watched home values in my city double over the last two years.
My Thoughts
We have made a couple of really savvy real estate deals that have made us more money over the past two years than our respective salaries. This, along with minimizing our expenses has put us in a comfortable position with no consumer debt and an increasing net worth.
Because our only debt is our mortgage, I have been toying with the idea of selling our house and moving to a less expensive location whereby we can purchase a similar home and be completely debt free.
In my mind this makes a lot of sense, here’s why:
- We would not be enslaved at jobs that we may not enjoy because we need to make a mortgage payment.
- We could plow a lot of money into other investments at the age of 29, with a long time horizon to watch it compound.
- We could spend money on travel and experiences that produce life-long memories, which is more valuable to me than “stuff”.
- We could choose to take extended “vacations” from our jobs to spend with our new child and extended family.
Rationale
- We both have Master’s degrees and are highly employable in any location. Even in a remote location, we could easily make ends meet by telecommuting or freelancing.
- Our city is freakin’ cold in the winter - what is the advantage to that?
- We would be further from extended family, but with the added freedom of not having a mortgage, visiting would be less taxing on the pocketbook.
(To be honest, we see our extended family only slightly more than when we previously lived much further away)
- Real Estate values are bound to cool at least slightly as evidenced by the “trendy” markets in the United States and Canada. I’m not calling a top to the housing market in my city, but I’m not greedy either - freedom is very tempting.
Making a move to a slightly smaller city less than three hours rive from our current location, with good job prospects for the both of us could set us completely debt free under 30 years of age. Most importantly, it would do so while living the same lifestyle that we are accustomed to. This is something that I find very tempting. (The winter would be just as cold though)
Of course it was seriously bad timing on my part to bring this up due to the pending birth of our first child. However, it has been eating at me ever since we did our annual budget in January and I realized the possibility.
Complete freedom from debt is a huge goal of mine; but is this the right way to achieve it?
I’d love to hear your stories or thoughts on this matter. Feel free to share in the comments!
Posted in Debt | 2 Comments »
Tuesday, March 4th, 2008 |
It appears that I shocked a few people when I wrote about my thoughts on maxing out your student loans to get every penny that you can. Of course, there are the same arguments about other kinds of debt as well. I have received my fair share of email regarding my advice on the use of debt.
Debt is a Tool.
It is that simple.
Loans, mortgages, credit cards etc. These are all tools that, if used correctly, can not only help you manage your cash flow but increase your wealth as well. Yes, debt can be terrible if you can’t control it, but it can also be your best friend if managed correctly.
I already talked to you about the power of using a mortgage as leverage to build wealth and why lenders are more eager to hand out money when it is backed by an asset such as real estate versus consumer debt - like a car loan!
Why is This Article Titled “Student Loan Strategies”?
Well, as mentioned in the previous article on student loans, the student loan is some of the easiest money (debt) that we can obtain as average individuals. It is even easier to obtain than a mortgage because you are not required to prove that you have an established income. The debt is backed by your future earnings - how’s that for pressure!
Anyway, as we get back to the moral of the story and we understand how we can leverage our student loan money so we might graduate without a negative net worth, there is a way to combine the above strategies in order to profit while getting your degree.
Kiss The Dorms Good Bye!
This strategy is directed toward the parents of children who are on their way to college. So, if you are a college student, or about to be one get your parents on the phone!
To the parents…
Your child will have to live somewhere and either you or they will have to foot the bill regardless of where they hang their hat, so why not profit from it?
The strategy is to purchase a house with as many bedrooms and bathrooms as possible in a location that is as close as possible to the university. Yes, you will be renting this house out - but your child will be managing the rental.
College rentals can be unique and very profitable in that it is possible in this situation to rent “by the room”. While most residential real estate rents by the unit or the house, the college market will allow increased returns by renting by the room.
An Example
A 4 bedroom home that would normally rent for say $1000/month as a unit can often be rented by the room in the college market for between $350 and $450/month per room. As you can see the potential for profit is much higher and the potential for your child graduating without a mountain of debt it also greater.
This strategy requires more management as you must collect rent from each person separately instead of collecting one check from the entire house. If you trust your child and they are responsible, this should not be a huge issue as they will be living there to manage the property.
This will also help your child to learn to better manage finances and learn business skills such as management, marketing and basic accounting.
The Benefits
Ideally, the monthly profits (cash flow) from the roommates can cover expenses, repairs, vacancies etc. or may be used to have your child live, essentially, for free!
However, the best part about this strategy is that over the course of the 4-5 years that your child is in college, you will be gaining equity in the home courtesy of your child’s college roommates. This equity can be crystallized by selling the home when the child graduates and using the equity to pay off the student loans for example.
If you have a steady income and a good credit score, buying a house for your child to live in while going to college is typically a sound strategy.
If you don’t know if you have good credit or not, you can check out your credit score for free at Experian.
The Kicker
If you have more than one child that attends the same university, this strategy can have a compounding effect as the younger ones enter school and the rooms continue to be rented out, your equity grows and grows.
If you are fortunate enough to realize a substantial capital gain along with your home equity, you executed this strategy exactly as my good friend and his parents did when I attended college. I only wish my parents and I could have undertaken this strategy instead of paying off someone else’s house!
I hope you enjoyed this example and are able to benefit from it. I share this with you, not because I profited from it, but because I was a victim of it! If it helps your child start their professional life without the same $40,000 in student loan debt that I had, then it has been worth the time to write this article.
Stay tuned later this week when I will tell you a story about what I learned from falling victim to this strategy and how it catapulted my net worth right out of college!
Posted in Debt | 8 Comments »
Friday, February 22nd, 2008 |
I have received a handful of e-mails lately asking to hear my story about overcoming more than $40,000 in student loan debt to having no consumer debt and a net worth of more than $250,000 in just three years.
The title of this post is rather misleading because I do appreciate the wealth building power of leverage as I mentioned in my article detailing mortgages. Of course, mortgages are financial debt instruments that the vast majority of people require in order to purchase a home.
Why I Use Credit Cards
I also utilize one credit card on a monthly basis. I use a credit card for a few reasons:
1.) It helps me to track my expenses. I simply download my card statements to a financial program such as MS Money and divide my expenses in to categories. If I use my credit card for all of my purchases, it makes analyzing my budget a snap.
2.) It saves me money. Yes, using my credit card saves me money. When I use my debit card, my credit union charges me a fee per use (or more accurately a monthly fee that includes a number of debit transactions). When I use my credit card, the credit card company charges the business where I used my card instead of charging me personally.
Yes, you could argue that it still costs me money indirectly as the business would factor that charge into the price of the product - but please bear with my example.
3.) I receive rewards from the credit card company for using my card. My particular card offers me 2 points for every dollar I spend which, if used for travel, equates to approximately 1.75% cash back - not too bad!
I do advocate the use of credit cards for these purposes if, and ONLY if, you use them for managing monthly cash flow and not for accumulating debt. This means that you must pay off the entire balance each month - no exceptions.
To help you sort through the thousands of Credit Card offers to find one that suits your needs, I suggest using a service designed to match you up with a card that will benefit you and not take advantage of you.
My Stance On Auto Loans
Several folks have inquired about vehicle loans, asking if I own a vehicle and if so what types.
Vehicle loans are the biggest mistakes that I could ever think to make. Not only do vehicles depreciate, but they also require fuel, repairs, insurance and maintenance. There are no two ways about it - owning a vehicle is expensive.
That being said, my wife and I own two 2003 Hondas which we paid for with cash. We purchased a 2003 Honda Civic in the fall of 2005 and a 2003 Honda CRV in the fall of 2007. Yes, I do adamantly believe in purchasing high quality used vehicles that are fuel efficient and known for reliability.
Why Honda? It is simple really. I owned a 1991 Honda Civic hatchback in college and it had over 300,000 KMS on it and ran like a top. I simply filled the gas tank and changed the oil - I was hooked.
This has been a quick outline of my current stance on debt.
I also have no problem advising anyone to take out student loans to invest in themselves and their future. However, you must be careful not to “live too high on the hog” on borrowed money while in college.
Stay Tuned For The Rest of My Story
In a future post, I will tell you how I graduated from college with fewer student loans than most of my classmates and how I managed to pay off the balance within a year after attending my final class!
Posted in Debt | 8 Comments »
Thursday, January 3rd, 2008 |
When you start climbing on to the property ladder, sorting out a mortgage can be a daunting task. There are numerous types of mortgage to choose from, and you need to make sure you get the right one. Within each type of policy, there are myriad options to go through before committing to such a huge loan.
Once you have settled on the right mortgage for you, there is the issue of interest. Which option you choose will depend on your circumstances, but going to see a lender armed with the basic differences will give you confidence that you are getting the best deal for you. Here’s a quick guide to paying interest on your mortgage. So if you’ve ever wondered what on earth it all means, read on…
Fixed Rates
With a fixed rate mortgage, you agree with the lender on a set period of time – usually between two and five years – during which the interest will not change. The benefit here is that you will not suffer an increase if rates go up. Similarly, you won’t benefit if rates go down, and discontinuing with the policy will mean you face penalties. Tempting though a low, fixed rate interest plan may seem, you must check how long you are expected to stay with the lender before you can leave without penalty.
Variable Rates
The amount you pay for your mortgage alters in line with national interest rates. Normally, the interest reflects the changes in the base lending rate of the central bank; this is decided at monthly meetings of the Bank of England’s monetary policy committee (MPC). Every time the MPC raises its rate, the lenders do too. And when the MPC lowers its rate, the lenders follow suit.
Capped Rates
The idea behind capped rates is to offer the best of both fixed and variable rates. A “cap” is set on the interest so that it will never rise above that level, but if national rates fall, your interest will go down accordingly. The benefit of these is that you know the maximum amount you’ll be paying. However, the capped rate is not generally very competitive.
Discounted Rates
Discounted rates will fluctuate in line with the lender’s variable rate, but are obviously cheaper to tempt customers in. After the discount term has ended, the rate will go to the normal variable rate.
Banks and companies offering mortgages are now required to supply customers with a key facts document that provides all relevant information relating to the loan, and clearly sets out the total cost of the loan, not just the interest.
Whichever mortgage you choose, make sure you thoroughly research every option and compare lenders. You are, after all, bound in to the agreement for a long-time, and it’s sensible to make sure you get it right first time as switching lenders can incur hefty penalties.
Among those offering the best mortgage rates is Alliance & Leicester. Meanwhile, take a look at Fish 4 if you’re on a property hunt.
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Thursday, January 3rd, 2008 |
Flexible and current account/offset mortgages
A mortgage is an important, sometimes daunting and normally long-term financial commitment for most people, but is also necessary if you want to get onto the property ladder and eventually own your own home. Once you’ve found a home, either through an estate agent or online through property finding sites like fish4, the most important thing to do is to get an agreement in principle from a mortgage lender.
There are a wide variety of mortgages and add-ons that offer a range of services way and beyond the traditional Fixed and Variable rate mortgages that have proven the basis of mortgage lending over the last few years. Among the many options you may end up discussing with a professional mortgages advisor – NatWest for example offer flexible, current account, offset and buy to let.
Flexible mortgages
Flexible mortgages allow you to adjust repayments to suit your situation. If some months you feel you’d like to pay a little extra, you can. Borrowers can also decide to make smaller monthly payments or even take a break completely for a period; however, you will normally have to build up a reserve through overpayments before being allowed to underpay or skip payments.
Most flexible mortgages charge interest on a daily or monthly rate. Any over-payment reduces the mortgage balance immediately, and the borrower will be charged less interest from the next day. Over-paying the mortgage on a monthly or regular basis, even by a relatively small amount, will reduce your mortgage term by years and save money.
Early Repayment Charges are excluded from many flexible mortgages so the borrower is not ‘locked-in’ to any particular lender. In addition the interest rate charged is often lower than the usual Standard Variable Rates charged by the other more ‘traditional’ mortgage schemes.
Imported from Australia you may occasionally hear flexible mortgages referred to as ‘Aussie style mortgages’.
Current account/offset mortgages
Current account mortgages combine your current account with your mortgage - so in effect you have a very large overdraft. The advantage is that when your interest is calculated on the sum you borrowed, the funds you have in your current account are taken off the loan.
With offset mortgages you have separate accounts but again the funds you have in savings or current accounts are taken into consideration when you interest is calculated. Some providers can also factor in credit cards and loans under the same interest rate too and while the standard variable rate may be slightly higher than other mortgage providers’ rates, the rate will be much lower than that of most loans.
For example - if you borrow £100,000 and you have £3,000 in your current account you’ll only be charged interest on £97,000.
Your savings remain accessible, however when cash is withdrawn, so the amount on which interest is payable will increase. This can result in savings earning significantly higher rates of interest than if left in a traditional savings account
They tend to be very flexible, allowing lump sum overpayments to be made or additional borrowing against overpayments. This can make this type of product ideal for the self-employed or those with unpredictable levels of income and if you generally have a healthy amount of credit in your other accounts.
Take a look at Alliance and Leicester’s mortgage calculator to work out exactly how much you can afford. They also provide some of the most competitive mortgage rates in the market.
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