Power of pre-paying your Mortgage

Many individuals have not taken the time to understand the power of interest.  Banks earn their living off the interest and fees that we pay.  If we can somehow reverse that and save the interest and fees for ourselves, then we are far better off.

One way to save yourself from paying so much interest in by pre-paying on your mortgage a little each month or each year.  You'd be surprised, a little bit really gives a lot of savings.  Here are a couple of simple examples.

Mortgage Amount:  $100,000.00
Interest rate: 6%
Monthly Payment: $599.55
Total interest paid by end of loan:  $115,838.19
Extra monthly payment: $50
Total interest paid by end of loan:  $91,268.98

By putting an extra $50 a month towards your mortgage you end up saving nearly $25,000!

Maybe you can't do an extra payment every month, but you can do an extra payment each year at say tax return time.

Mortgage Amount:  $100,000.00

Interest rate: 6%

Monthly Payment: $599.55

Total interest paid by end of loan:  $115,838.19

Extra yearly payment: $600

Total interest paid by end of loan:  $90,515.25

This plan also allows you to save about $25,000!  The timing of your yearly payment will make a slight difference in the total amount of interest you will save. Check online for a mortgage calculator and you can plug in your specific situation.  If you can figure out putting even more extra towards your mortgage than you will save even more.

The main point is it is worth trying to find savings in some other areas of your budget so you can put it towards paying down your mortgage faster.  The peace that comes when your house is paid for cannot be found in any other way.

True Cost of Credit Cards

I came across a good article the other day that helps to explain how credit cards work when you only pay the minimum balance.  It is worth reading to remind yourself that there is great power that comes in disciplining ourselves to live within our means and save a little each month that can go towards bigger purchases later.

It is easy to find ourselves buried under credit card debt in a huge hurry.  Make a commitment to yourself to pay off any debt you are carrying as quickly as possible.  To those of you who don't have a balance, I have to say, "Way to go!  Keep refusing to charge items you can't pay for."

The True Cost of Credit Cards

Credit Cards Make Buying Things Easy, But At a Significant Cost

By Jeremy Vohwinkle, About.com Guide

Credit card offers are hard to resist. It would be tough for most people to pass up an offer for a 56 inch plasma television worth $2500 for only $50 a month on a credit card. Even though many individuals can afford a $50 monthly payment, they may not realize that they will end up paying more in interest than for the original cost of the television.

It is a common mistake to let yourself get used to paying only the minimum amount that is due on your credit card bill. A small monthly payment may seem insignificant. However, the payment may not look so insignificant when you understand the true cost of credit cards and interest.

Take for example, let's say that you really did go out and buy a new plasma television for $2,500. You used a credit card that had an annual percentage rate (APR) of 18 percent. In addition, your minimum monthly payment may be as low as $50 like in the example mentioned above. However, in order to calculate your total long-term costs you will need to know how your minimum payment was determined.

A minimal payment is typically determined by using a percentage of your entire balance. The percentage amount is usually about 2 percent but can vary depending on the card. Keep in mind that the minimum payment goes towards the interest charge and to the original amount that you owed. In this case, the original amount was $2,500.

For the $2,500 plasma television, 2 percent of your original debt would be $50. With an APR of 18 percent, your payment would cover $38 in interest and $13 towards your $2500 liability. After the first payment, you would still owe $2487. The basic formula is:

1.    Divide 18 percent by 360 days of the year which equals .05 percent.

2.    Multiply .05 percent times 30 calendar days which is 1.5.

3.    Finally, multiply 1.5 by the $2500 original balance which equals $37.50 ($38 rounded) in interest.

The True Cost of That Purchase

If you paid only 2 percent of your total balance due every month, it would take 334 months to pay off your debt. In other words, it would require 28 years to pay off a $2,500 liability. The television will probably have stopped working long before you have paid it off.

Even if you decided to pay for 28 years, you would also have paid $5897 in interest. Your true cost for the 56 inch plasma television would end up being $8397.

Letting Interest Work For You

However, image what you might have earned if you had put the $50 into a savings account for 28 years. Even at today's current low rates it would have been a substantial amount.

For instance, let's say you started a savings account or opened a CD with a 5 percent rate and deposited $50 every month for 28 years. Also, let's include what you would have paid in taxes with a tax rate of 25% on the income that generated.

Your total savings would have been $29,648. You would have earned $17,130 in interest income. Your total tax cost would have been $4,283. After taxes, you would have made an extra $12,847. You could have paid for the television in cash and had plenty of money left over.

Don’t Fall Into the Credit Card Trap

A lot of individuals get tempted by the credit advertisements and deals that are too good to be true. However, when you look at the long-term consequences, the low monthly payment offers will usually cost you a lot more money.

It is a good idea to learn about how much a credit card transaction would really cost before going through with the purchase. You can check for yourself at About.com's credit and debt management calculator section. This section has a special “minimal payment credit card calculator” that can tell you:

·         Your total cost with minimum payments.

·         How many payments it will take to pay off the entire balance with minimum payments.

·         How different rates will affect the total costs.

Credit companies usually make huge profits by offering teaser rates and low minimum payments. It is one way of maintaining their income by keeping consumers in debt for 10, 20 or even 30 years. Instead of adding to their income, you might consider building a savings account by depositing what you would have spent on your minimal monthly credit card payments.

Credit cards can play an important role in our lives. They can provide emergency funds for a major car accident or another critical situation and allow you to recover quickly in a time of need. If you have to use credit, pay your bill in full each month. If you have to rely on making smaller payments try to pay at least $10 over the minimum payment and only charge items that you can truly afford. This can save you thousands of dollars in interest charges.

Money Saving Snack Ideas

Money Saving Snack Ideas

When you do your grocery shopping, you can very easily spend $20–30 a week or more on pre-packaged snacks.  (That adds up to over $1,000 a year!)  As a family, this is one area of the food budget that can be tightened quite easily.  The money you save can be used to pay down debt, increase emergency savings, or purchase additional food storage items.  Talk through some of these suggestions as a family and decide which ideas you’d like to try.  I've collected many recipes over the years for making snacks.  I will share them a little at a time here on the blog.  In the meantime, I'm sure you have a few recipes in your collection that would work.  

It takes some thinking ahead to have snacks prepared for when kids need them.  I love my freezer to help with this.  I grew up in a family of nine children so we tripled a batch of cookies on a regular basis just to have a couple around it seemed like.  Growing up this way, makes it seem easy to bake in large batches.  I double or triple recipes all the time and then I've experimented to figure out what freezes well.  Most every cookie freezes well.  Muffins also do great in the freezer.  So when I am baking these items, I bag up some of them in ziplock bags and pull them out another day to thaw before the kids are home from school.

Popcorn is a very inexpensive snack to keep on hand.  If you buy just the popcorn seed instead of the microwave version, you will save even more money.  We have an air popper and one of the fun Whirly pop pans that you can use to pop the popcorn seed.  We also love to make granola bars and try out different flavors.  These homemade bars can store in a snack size ziplock for two months or more if you can keep them hidden from the kids.  It costs me well under $2.00 to make a batch and I get about 24 bars.

These are just a few suggestions - commit to doing more homemade items and you will see your savings grow.

Muffins

Dried fruit

Homemade Graham Crackers

Homemade trail or snack mix

Chex mix – using store brand cereal

Popcorn/caramel corn

Homemade granola bars

Cookies or brownies

Homemade Lunchables

Rice Krispie treats/no-bake treats

Cinnamon toast or toast and jam

Boiled eggs/deviled eggs

Yogurt smoothies

Cheese ball with crackers

Garden vegetables and ranch dip

Budget - a plan for spending

Many people look at the word "budget" and cringe.  One thing my husband and I learned early on in our marriage is that a budget is not a restriction.  It is actually a plan for our spending so we know we have covered all our required areas and left some for our future goals.  We get pretty creative sometimes in how we choose to limit our spending in some areas so we can free up money to be used other places.

Both of us grew up in homes where money was tight, but our parents were good to not spend what they didn't have.  It meant we went without a lot of things we saw our friends getting.  This taught us a valuable lesson - you don't need all those things.  You can grow up a well rounded individual without having the latest and greatest new craze.  Dave Ramsey uses the phrase, "Live like no one else, so you can one day live like no one else."  This means make the hard choices early on to stay out of debt and go without many things your neighbors may be choosing so that one day, you can enjoy financial freedom like many in America will never feel.

So the big question is how to do it -

First -
Make a record of all you are spending.  James and I found that we really needed to do this for an entire year to record it all.  Some things only come due once a quarter or every six months.  Birthdays and Christmas added expenses some months that weren't there other months.  Also, utility bills fluctuate with the seasons so after recording expenses for the entire year we were able to include all of this information.

During the time that you are recording, begin to recognize places where you may be able to cut back.  Set up some categories and challenge yourself to stay below a certain level.  It has become a bit of a game for us.  Can we do groceries for less than $100 week or can we come up with fun things to do that only add up to $20 for the month?

As you determine hidden savings within your budget, you can decide where these savings will go.  First, fill an emergency fund of at least $1,000.  You will eventually want to build this higher but not until you are completely out of credit card debt.

Many families carry a balance on their credit cards.  This needs to be the area that you focus your extra savings on first and commit to never adding to, or carrying a balance again.

This gives you a beginning and something to think about - I'll post more soon about how to find savings and what to do with this "new found" money.

Emergency Fund

We learn from the Bible story of Joseph in Egypt that seven years of plenty are followed by seven years of famine.  My husband likes to remind me of this which is his way of saying, "During our times of prosperity we need to be thinking ahead and preparing for what may come."  The best way to prepare financially is to save a little each month in an "Emergency Fund."  Financial experts suggest having at least 3 months' of expenses set aside, but if you only have one income in your household or are working in a more risky area for job loss, you really need to try and set aside 6 months-1 year.

I know this seems like an impossible task.  But I know it is possible because we have done it and I am aware of other families who have done it as well.  The amount for each family is different.  You really need to determine what your bare minimum expenses would be for one month.  Notice that I didn't say to pay attention to what your income is each month.  If you can figure out a way to reduce your expenses, the amount you need in an emergency fund can be less.

For example, if you are living on $3,000 a month right now, you would need to save $18,000 to cover 6 months'  worth of expenses.  If you are able to find ways to cut back to only $2,500 a month, you would only need to save $15,000.  You would also have an additional $500 a month you could put toward your emergency fund instead of other purchases.

Great peace of mind comes as you watch that emergency fund grow.  Get creative in finding ways to save money.  Many of us make resolutions to do better with our finances in a new year.  Over the next few weeks, I will be posting some ideas that we have come up with that help us save money every month.  Hopefully, these ideas can help inspire you to keep at it and get that emergency fund filled up.