4 Ways to Sabotage Your Personal Savings

Has a personal savings account has lost its appeal in an age of credit cards and second mortgages? In a culture where instant gratification is king, setting aside a chunk of money for the future is not the “cool” thing to do. Yet, this one thing alone can determine your financial success or failure health in the future.

If fiscal fitness is not important to you, here are a few rules to follow that are certain to lead to the end of any financial security:

Rule #1: Do Not Have an Emergency Fund

Sadly, most Americans today do not see the importance of a set amount of money in the bank simply waiting for something that may never happen. A sudden illness. A job loss. A flood that leaves your home as nothing but your life preserver.

Sure, you never plan these things. They just happen. They are a little something called “life” and they are just lurking around the corner, threatening to steal your economic freedom.

Here are a few simple guidelines to help you set up an emergency fund:

- Save 3-6 months worth of living expenses. This amount will not only help you in a personal crisis, it also serves as insurance if you unexpectedly lose your job.

- Create up a separate account to isolate this money so that it is not easily used the next time you impulse buy with your debit card.

- Make automatic deposits into your emergency fund so the temptation to “forget” saving each month vanishes.

Rule #2 Nix the Budget

Few things guarantee a poor savings account. A lack of a budget, however, pretty much promises that your saving account will never reach its full potential. The act of using a budget forces you to live within your means and creates an automatic habit of saving monthly.

Tips to creating a budget include:

- Track your monthly expenditures for 6 months. This gives you a clear picture of how much you need to allot to each category in your budget. It also shows you how much surplus you really have that you can put towards your savings.

- Record all sources of income. It’s easy to just think about your weekly pay check your employer gives you, but what about that $20 Grandma gives you when you see her each month? Look over each amount of income you have during the course of a year and figure it into your budget.

- Make a list of monthly expenses. Break them down into fixed, non-negotiable expenses (mortgage, car payment, etc) and variable expenses (occasional doctor visits, car repair, etc) and set your monthly budget up to reflect these expenses.

Rule #3: Ignore the Habits of the Wealthy

Studying the habits of the well to do actually can teach you a thing or two about how to get where they are. One common denominator that many of the wealthy have is a stash of cash in a bank account. In reality, it does not matter how much you earn that makes you wealthy, it’s how much you have in your bank account.
If you spend untold amounts on disposable items such as fancy dinners and clothes that have no lasting value, you are not truly “rich.” If you spend time setting aside money for things like investing in real estate or stocks, wealth takes on a whole new dimension.

Here are a few common traits of the wealthy:

- They invest or build a business. This grows their money exponentially.

- Being innovative is the name of the game of for the elite. They are always looking for a way to increase what they already have.

- They give back. The rich recognize the concept of the more you give, the more you receive. Of course this is difficult if you do not have anything to give!

Rule #4: Don’t Let Your Money Work for You

The fact of the matter is having money sitting a savings account can actually make you more money. But, how is that possible? The most obvious answer is interest. If you find a good savings account with a stellar interest rate, your money will actually work for you. You do absolutely nothing while your money works away multiplying itself.

Some other ways to make your money work for you:

- Invest in things like stocks and bonds with considerable research beforehand and watch your money multiply.

- Take a leap into real estate by investing property. If done right, this investment can take a small amount of money and turn it into an insane amount more in a short time.

- Research money market accounts and CD and maximize your interest rate.

Maybe a secure financial future is not bad of an idea, right? There are a few simple pitfalls to avoid and be among the economically secure rather than the fiscally devastated. A little help from someone who knows how to help you stay as fiscally healthy as possible is not a bad idea either. Contact me at terry@terrywilliams.com if you have any questions.

Refinancing - No, Low and Full Closing Costs

Tough economic times deeply affect all market areas, one of which is real estate. Luckily, I, the “Mortgage Doctor,” am here to work with you while you regain control of your finances, especially when it comes to your home.

Most people may feel lost when it comes to finding functional and affordable solutions to their home ownership, but I am here to offer direction and guidance in an effort to get you the best deal when it comes to closing costs.

With interest rates at historic lows, many homeowners are considering refinancing. One question that seems to come up often is, should I pay closing costs or not? Here is a list of options to consider when looking at refinancing. Each option has its benefits, so there's no one size fits all answer.

1. No Closing Cost Refinance

Like the title says, it means you the borrower do not pay closing costs. The next question is who is paying them? Indirectly you are. By taking an interest rate slightly higher than the market rate, the broker can use the "Premium" in the interest rate to pay all your costs. For the purposes of this example, let's take a look at how this “no cost refinance” works.

For this example only, let’s use 4.875% as lowest rate 30 Year Fixed Rate Loan available today and 5.125% as lowest 30 Year Fixed Rate Loan offered with no closing costs and a loan amount of $400,000. The lower rate will include $2,400 in closing costs. The higher rate will allow me the broker, to pay all your closing costs of approximately $2,400 in addition to leaving enough gross revenue to cover office expenses and overhead.

2. Low Closing Cost

This is a combination of the “No Closing Cost” & “Full Closing Cost” options. By taking an interest rate slightly higher than the market rate, the lender or broker can use the "Premium" in the interest rate to pay a “portion” of your closing costs.

For this example only, lets use 4.875% as lowest 30 Year Fixed Rate Loan available today and 5.0% 30 Year Fixed Rate offered with low closing costs of $1,000 and a loan amount of $400,000. The lower rate will include $2,400 in closing costs. The higher rate will allow me the lender, to pay a “portion” of your closing costs of approximately $1,400 in addition to leaving enough gross revenue to cover office expenses and overhead.

3. Full Closing Costs

Like the title says, it means you the borrower pay closing costs of approximately $2,400. For this example only, let’s use 4.875% as lowest 30 Year Fixed Rate loan available today and you the borrower will pay the $2,400 in closing costs.

Now look at the monthly payments:

$400,000 Loan Amount * payments exclude taxes and insurance

30 year fixed rate loan program (same criteria works for 15 & 20 year fixed rate programs)

4.875% = $2,117 monthly P&I

5.0% = $2,147 monthly P&I

5.125% = $2,178 monthly P&I

Compare: 4.875% v 5.125% (No Closing Costs)

monthly savings: - $2,117 – 2,178 = $61 lower payment by selecting the 4.875% rate.

Now look at the total costs divided by the savings: $2,400/$61 = 39.3 months or 3.28 years to break even. That means after 3.28 years, the lower rate and paying the closing cost would have paid off.

Compare 4.875% v 5.0% (Low Closing Costs)

Monthly savings: $2,117 – $2,147 = $30 lower payment by selecting the 4.875% rate.

Now look at the total costs divided by the savings: $1,400/$30 = 46.7 months or or 3.88 years to break even. That means after 3.88 years, the lower rate and paying a “portion” of the closing cost would have paid off.

Another factor to take into consideration is the loan to value ratio of the new loan to your home's value. If for example, adding closing costs to your loan puts you into a higher loan to value bracket, you may opt to go with the lower closing cost or no cost option. Or if you have to pay private mortgage insurance by adding in closings cost, you may opt to go with the low or no closing cost option.

After all is said and done, you don’t want to walk away from a closing and regret your decision, or fear that it will negatively impact your pocketbook in the long run. Therefore, precautions and future planning must be executed to ensure you receive the best deal possible.

Not everyone grasps the “closing costs” concept very well, and there are lots of other elements of your home financing that can add up quickly, but I am here to help. If you have any questions about your home or are looking to purchase in the near future, contact me at 402.301.4500 or email me anytime at terry@terrywilliams.com.