The Nuts And Bolts

If you haven’t gone through the home loan application process, here is a quick tutorial.

The most popular mortgage out there is a 30-year fixed loan; according to the LendersMark Financial Network, more than 70 percent of homeowners opt for this loan. Why? Because if offers a stable interest rate for three decades, giving you a chance to pay down even a hefty principle gradually over time. The downside, however, is the interest. Even at today’s interest rates in the mid-fours, you’ll still pay more than double your original loan amount thanks to interest.

Adjustable-rate mortgages – called ARMs – got a bad rap in the first decade of the 20th century as the housing market crumbled. However, these mortgages offer homeowners a much lower interest rate – and, thus, a far lower monthly payment – at the cost of a shorter term. A 10/1 ARM gives you a ten-year introductory period with that low rate, but once it expires, you could be paying market values, increasing your monthly payment by hundreds of dollars. Shorter ARMs – like a 3/1 loan – give you an even lower rate, as well as an even shorter introductory period.

So what’s a well-meaning homeowner to do? There is middle ground – the 15-year mortgage. This fixed-rate loan comes with lower interest rates – not quite as low as ARMs, but lower than 30-year loans – and a shorter time frame as well. Because of this shorter term, you’ll pay a higher monthly payment, but you’ll also pay less in interest over the life of the loan than you would with a 30-year fixed.

The Pros of a 15-Year Mortgage

Let’s break down the numbers to see exactly how much a 15-year mortgage could save you. Actually, not you – me. Because I’m going to use the actual numbers from my loan application, as well as the mortgage calculator from our preferred lender.

Right now, we could get a 15-year mortgage on a principle balance of $200,000 at a rate of 3.5 percent; by comparison, the rate for a 30-year mortgage would be 4.25 percent. Factor in the $2500/year tax and $1000/year homeowner insurance fees, and we’d be looking at:

• $1275.55/month for the 30-year mortgage (paying a total of $459,196.72 over the 360 payments)
• $1799.24/month for the 15-year mortgage (paying a total of $302,271.51 over 168 payments – that’s actually 14 years!)

(Because our lender offers PMI-free mortgages with a minimum 10 percent down payment – an industry rarity – we would save more than a hundred dollars a month as opposed to going with a loan that required private mortgage insurance.)

With the 15-year mortgage, we’d be paying about $524 a month more than with the longer term loan. However, over the life of the loan we’d pay a whopping $156,925.21 less.

Not So Fast…

Of course, these calculations aren’t as simple as they seem. The numbers from the a basic mortgage calculator only show part of the story. They assume that once you reach the end of your loan’s term that you won’t be paying escrow any more – but, as we all know, there are two certainties in life: death and taxes (and, in this case, homeowner’s insurance). I’ll be paying those two things for as long as I own the house, regardless of whether I’ve paid off the loan or not. That bumps the overall savings from $156,925.21 down to $104,425.21 – a difference of more than $52,000.

There’s another factor at play here, too: the impact on your taxes. Right now, the mortgage tax reduction allows homeowners to deduct the interest paid on their home loan. By losing that tax deduction for a period of 15 years – with our marginal tax rate of 25 percent – I’d lose out on another $7,586.21.

Also, what could I do with that extra $524 a month I’d be putting toward a 15-year mortgage? Say I invested it every month for 15 years in a Roth IRA with a modest return of 6 percent. By the time I was eligible to withdraw from the Roth at age 59 1/2 (29 years from now), I’d have amassed $354,012.05. Of that total amount, $259,692.05 would have come from interest. That far outweighs the $156,925.21 I’d be able to “save” with a 15-year mortgage – although it also assumes I’d do my due diligence by habitually investing the difference in monthly mortgage payments, without fail, every month… and we all know that’s easier said than done.

Reader, do you have a 15-year mortgage or a 30-year loan? What was the deciding factor for you in your home loan decision?

I landed in a pile of mud.

My Investment Portfolio

In addition to rolling over my 401(k) from my old job, I also let my new financial planner talk me into opening a series of new retirement accounts. She had me fill out a short questionnaire to gauge my tolerance for risk, then set me up with a spousal Roth IRA and a pair of 529 accounts for my children. In all, I decided to put $100 a month into my new Roth and $25 a month into each of the 529 plans. I wouldn’t be contributing to my traditional IRA, since I would be unable to tax advantage of its tax benefits, since I didn’t have a paycheck from which to pull out pre-tax contributions.

At the time – November of 2010 – my traditional IRA was worth $13,800. Since then, here’s how my accounts have grown over the past 18 months… or not:

• Traditional IRA (initial value – $13,800): $14,400
• Daughter’s 529 (initial value – $0*): $713
• Son’s 529 (initial value -$0**): $527
• Roth (initial value – $0***): $918

Legend:

* – In addition to contributing $25/month to this 529, I also added in my daughter’s Christmas money from relatives, resulting in an additional $300 in contributions

** – I couldn’t contribute to my son’s 529 until after his birth in May 2011. On top of the $25/month I put in from that point on, I also put in $250 in baptism and Christmas money he received last year

*** – After my husband’s work offered him a matching Roth IRA in July 2011, I scaled back my original $75/month investment in my spousal Roth to just $25, putting the difference into my husband’s Roth instead

My Contact With My Financial Planner

My planner – we’ll call her Ms. N – calls once a quarter to check in on us to see if we have any questions. I usually say no. What I should say is:

Why has my IRA only seen a 4% return over the last 18 months, while the Dow has seen returns more than quadruple that?

How have my children’s 529s actually LOST money?

Why has my Roth only earned $18 beyond what I’ve put into it?

Instead, I remain quiet. I try to be a good investor who patiently waits to for long-term results on her investments, instead of demanding immediate returns. I fear I am failing myself.

Why I Need To Move On

The problem is, I really like my financial planner. She’s a sweet lady. She always asks about my children. She invites us to her family’s annual holiday open house. She sends us birthday calls.

But our financial relationship isn’t working out. I’m up to my eyeballs in financial headlines every day because of my job as a freelance writer. Factor in my two children, my household, and my other freelance gig as a media research analyst, and I don’t have time to manage my own finances. I don’t have time to do the research to decide what’s best for my portfolio. That’s why I hired a financial planner; that’s why I pay her to manage my finances for me. If I had the time to do it myself, I would.

My father – who is a CFP, short for certified financial planner – also hires someone else to manage his investments. It may sound redundant, especially for a man who is so aptly qualified to do it himself, but he likes to get someone else’s perspective on his money management techniques. I’ve seen my father’s relationship with his CFP firsthand. Rather than sending my father financial literature on a mutual fund – which he doesn’t have time to read in the first place – his CFP makes a five-minute phone call to discuss it in person. If he can’t get ahold of my dad, he simply makes the move that he knows from years of experience is in my father’s best interest.

This is what I need – someone who is going to take control of my finances, who is going to not only answer the questions for me, but is going to ask them for me as well. Maybe it’s the lazy woman’s approach – although if you call me lazy, I’ll Ann Romney you to the moon (that’s to say, don’t insinuate that a mother is lazy – EVER) – but I need someone to be more proactive about my finances, not just about my family.

]]> http://www.goberich.com/why-im-firing-my-financial-planner/feed/ 1 http://www.goberich.com/10-signs-someone-might-be-rich/?utm_source=rss&utm_medium=rss&utm_campaign=10-signs-someone-might-be-rich http://www.goberich.com/10-signs-someone-might-be-rich/#comments Mon, 30 Apr 2012 22:26:49 +0000 Libby Balke http://www.goberich.com/?p=1333 »]]> Let me start off by admitting that I am not rich. I was not born rich. I probably won’t die rich. In the intervening years, I will probably never be considered rich.

But for most of my life, I’ve had the privilege (and, some would say, the curse) to be surrounded by people who are rich. I grew up in an affluent suburb, where the average housing prices were in the $400,000 range (my family lived on the “wrong side of the tracks” – literally – in a house currently valued in the $231k range). I then went on to an elite East Coast university, where my freshman year roommate arrived on campus with a Coach luggage set crammed into the back of the BMW convertible she’d received as a high school graduation present. Since college, I’ve seen my friends go into lucrative fields like I-banking, law, and medicine, amassing obscene fortunes for 20- and 30-somethings in the midst of the economic recession.

The point is that, although I am not rich, I do know a lot about rich people.

And that’s where this list comes from. Part tongue-in-cheek, part stark reality, these are ten signs that you – or someone you know – might be rich:

1. They go to a restaurant where prices aren’t listed on the menu (meaning they cost more than my monthly mortgage payment)… on a Tuesday night… and they’re not celebrating a birthday/anniversary/new job.
2. They name their children horrendous names like Randolph Edward Channingsworth IV in honor of the family’s forebearers who earned, subsequently squandered, then redeemed the family’s inscrutable wealth. They endearingly call the over-monikkered child “Trad.”
3. They don’t go on vacations; instead, they “summer.” Maybe they “summer” at the coast, or maybe they “summer” at the mountains. They never, ever go on road trips.
4. They talk with a slightly British accent, a la Madonna, although they don’t have a single ancestor with ties to the United Kingdom.
5. They fly first class. Seriously, nobody except a millionaire can afford to fly anything other than coach these days.
6. When they say they have “season tickets at the Met,” they mean the Metropolitan Opera, not the New York baseball team.
7. They are impeccably accessorized. If you comment on their Louis Moinet watch, they’ll brush it off – “This old thing? My parents gave it to me when I graduated from Haaaaaahvard” – but you’ll know it cost upwards of $2 million.
8. They have a driving range in their attic (no, this is a true story – I recently met a man who has a full-fledged driving range in his attic; I didn’t believe it until he whipped out his iPhone to show me pictures).
9. They have the job title “Consultant” printed in bold font on their business cards. When you ask them what exactly it is that they do, they reply, “Ohhh, you know, a little bit of this, and a little bit of that.” No, you don’t know.
10. They call their gym a “health club.” They never use any of the cardio equipment, nor do they lift weights. At best, they may indulge in a game of racquetball or a round of golf, although they’re usually found hobnobbing in the steam room.

Reader, what quirky habits tip you off to someone’s wealth?

“I see that you don’t have – ” he paused, shifting to his most serious tone of voice, ” – er, traditional employment.” He said those words – traditional employment - as though they’d be a shock to me and my husband. Obviously, they weren’t. We both were well aware of the fact that, as a freelance writer, my career path was outside the norm. I received 1099s every January instead of W-2s; I never filled out W-4s when starting a new project. I set my own hours, claimed my own projects, answered to no one but myself. My “non-traditional” employment was everything I’d always dreamed it would be: fun, flexible, freeing.

The bank didn’t see it that way.

My “Unstable” Income

As the mortgage broker went over the paperwork I’d brought in to launch the mortgage preapproval process, he hemmed and hawed over my numerous 1099 forms. He bristled when he saw the 1040 deduction schedule attached to my tax returns. He scoffed at many of the invoices I’d maintained to record who was paying me what and when.

“We won’t be able to acknowledge a lot of this,” he said, waving a few 1099s and invoices in his hand. I asked him why. “Well,” he started, then again paused, a habit I was quick to notice, “you haven’t been doing this [and by "this" he meant freelancing] for long enough. The underwriters want to see two full years of freelance employment before they consider your income to be stable.

Had he just called my income unstable?

Oh snap. He had.

The Instability Affect

At first, I thought my lack of so-called “stable” income would have a nominal affect on our mortgage application. By this point, I’d been freelancing in some capacity for more than a year and a half. When the mortgage broker announced that the underwriters wanted to see proof of at least two solid years of freelance experience, I figured the bank would probably average out the income I’d earned during 18 months of freelancing over the requisite 24 month period.

I thought wrong.

Banks and other lenders use two main financial factors when deciding on a loan application. Both of these factors revolve around something called your DTI, or debt-to-income ratio. The “front end” DTI ratio compares your monthly gross income and your estimated monthly mortgage payment. Underwriters want that front end number to be at or below 33 percent. For example:

$1300 (monthly mortgage payment estimate) / $4000 (gross monthly income) = 0.325, or 32.5 percent

That scenario would work out in your favor. Increase your estimated monthly mortgage payment by $100, however, and you’re looking at a front end DTI of 35 percent, well above the underwriters’ guidelines.

Meanwhile, the “bank end” DTI ratio compares your overall monthly debts – things like car payments and student loans, along with your mortgage – to your gross income. To be approved for a mortgage, you’ll need a back end DTI at or below 41 percent, although many banks prefer borrowers to have a back end DTI of 38 percent or less.

The underwriters opted to only count half of the income I’d earned freelancing over the previous year and a half, then spread that income out over 24 months. The result? While I had earned an average of $1200 or more a month, the bank only gave me credit for $450 a month. That left my husband and I well short of the DTI we needed to qualify for the mortgage we wanted.

Misery Loves Company

Turns out, I’m not the only one being called out for having a lack of stable income. Crystal, who writes “Budgeting In The Fun Stuff,” recently posted about her and her husband’s house hunt. The bank had done the same thing to Crystal and Mr. BFS that they’d done to me and my husband. Crystal and I talked about it, and came up with a singular conclusion:

Our income is more stable than the traditional employee’s.

How’s that, you say?

Think about most conventional jobs. You work for a single employer, earn a single paycheck. What happens if you get sick and can’t go in to work? You lose that one job, that one paycheck. What about if you get laid off or fired? Again, you lose that one job and the paycheck that went along with it. But in my case, if I’m sick, it doesn’t affect my work; I don’t have an office to go into or co-workers to infect, so even when I’m feeling ill, I am still able to work. And if, God forbid, one of my contractors were to fire me, I’d still be receiving paychecks from five others.

To recap:

• You lose your traditional job, you lose 100 percent of your income
• I lose one of my freelance contracts, I lose roughly 16% of my income

Whose income sounds more stable now?

Room To Negotiate

You have to know one thing about me: I like to argue. Negotiating should be my middle name, because I am good at it. Years ago, I received what I considered to be substandard service from a telecom provider. When I called the company’s customer service line, I asked the call representative to transfer me to his manager – I continued doing so until I was speaking to the company’s regional vice president. In the end, I haggled my way to six months of free service.

So naturally, it was my first instinct to argue with the mortgage broker about what the underwriters had decided regarding my monthly income. After all, I’d worked my butt off over the previous 18 months to get to a solid place financially and professionally. It was an insult to be credited for a mere third of that work. But when I started negotiating with the broker about my income, he said his hands were tied – he wasn’t at liberty to refute the underwriters’ decisions or to amend them in any way.

I left the bank knowing I had one of two options to move ahead:

1. Wait until my freelance career reached the two year mark, at which point my husband and I would reapply for the second mortgage
2. Shop around with other lenders, including banks and credit unions that make in-house application decisions, for an institution that will look at me and my work instead of just estimated numbers on a page

Ultimately, my husband and I decided to shop around, a process we’ve yet to complete.

Reader, do you agree with the bank – that I have an unstable income? Or do you agree with me, that I do have stable income? Why or why not?

“You know we have a coupon for these in our circular,” the cashier was informing a customer, a well-dressed woman of about 40 years old. He was gesturing to a pair of 12-packs of Diet Pepsi the woman had in her cart.

She shrugged him off. “Oh, that’s all right,” the woman replied nonchalantly. She leaned over the register in a semi-secretive fashion. “I really shouldn’t be drinking them anyway,” she confided.

I was blown away. The cashier was telling the woman she could save an extra $1 a case – $2 in all – on a purchase she already intended to make. And what did she have to do to receive the discount? Simply walk over to the store’s entrance and pick up the in-store circular containing the aforementioned coupons. Instead, she said no thank you, paid for her order, and walked out the door without a second glance.

I Don’t Pay Full Price

I have a rule when I go out shopping: I don’t pay retail prices. It doesn’t matter where I am or what I’m buying. At the grocery store, I always scour the weekly ads – online at the store’s website, where I can see all the weekly promotions, not just the ones included in the printed circular – as I formulate my shopping list; then, I match that list up with coupons I already have. It takes me, what, an extra 15 minutes a week? But, over the course of the last year, that simple organization tactic has shaved an average of $25 a week off my grocery bill.

I do the same thing when I need to fill up my gas tank. As soon as my low gas light flickers on, I immediately head to the web to check out which local stations have the lowest gas prices (my favorite site to do this is GasBuddy, although there are now plenty of apps for iPhone and Droid platforms that let you do the same). I can see which station in my neighborhood is beating out the others when it comes to price without burning fuel cruising the streets. (Extra bonus if my Discover Card is offering 5% cashback on gas station purchases that month.)

Any time a family member or a friend has a birthday, I use my ability to avoid paying full price to both of our benefits. I head to sites like Plastic Jungle or Cardpool to snag discount gift cards to department stores, restaurants, and hotel chains I know my friends frequent. For example, my mom has a serious thing for Gap jeans. When her birthday rolls around, I hit up Plastic Jungle, where I can get a Gap gift card at a 9% discount. The result? I can score a $50 gift card for just $45.50 – meaning I can use the $5 I saved to get her a discounted Starbucks gift card as well!

Coupon Sites & Daily Deals

The web – and smartphone apps – are chalk full of sites designed specifically to help you pay the lowest amount of money for the greatest amount of goods. There are daily deal sites like Groupon, LivingSocial, Plum Deals, and Deal Chicken, all of which can offer you 40, 50, even 60 percent off a products and services in your area. Some of the daily deals they offer are simply gratuitous – I get that. I mean, who really needs 50% off 12 microdermabrasion treatments? But when my husband and I needed to get our carpets deep cleaned before an open house, we were able to pay $50 to have our first floor steam cleaned, instead of the full price of more than double that.

There are plenty of sites – and, again, apps – that help you find coupons as well. SmartSource and RedPlum, the two main coupon booklets you’ll find in your Sunday newspaper, also let you print out coupons on their websites. Other sites, like Retail Me Not, keep a catalog of coupons and special promotions – some uploaded by companies, some uploaded by fellow shoppers – to help you score discounts. All of these sites are absolutely free.

Why Pay Retail?

Even though it’s been several weeks since my encounter with the Diet Pepsi lady at the grocery store, I still can’t stop thinking about the episode. A 2011 survey found one-quarter of American adults are living paycheck to paycheck, meaning millions of us are looking for ways to cut costs and keep spending in line. It’s baffling to me that someone wouldn’t take advantage of an easy opportunity to save money.

Reader, how often to you pay full price, even when you know there’s a discount readily available? What are your reasons for eschewing coupons, daily deals, or other discount methods? Time? Convenience?

But as the years passed, no such deluge came. Instead of being flooded by rain, we found ourselves flooded by money. All the scrimping and saving we had done over the intervening years had allowed us to do all the things financial experts say you’re supposed to do: building up a six-month emergency fund (check), maxing out our 401(k) contributions (check), saving or investing at least 10 percent of our pre-tax income (check).

We were rife with money… but we weren’t having any fun with it. So six months ago, I loosened the purse strings. I made it rain money in my house. Booyah.

Going Overboard

The first few weeks after I stopped acting like Ebeneezer Scrooge, my husband and I went a hog wild. We spent $75 at a nice restaurant, not to celebrate a birthday or anniversary, but just because. I bought myself a new pair of jeans for the first time since getting pregnant with our oldest child… nearly four years prior. My husband purchased new tools, without a plan as to how he’d use them.

At the end of the first month of our new-found financial freedom, we reevaluated things. Although we’d still paid all our bills, maxed out our IRA contributions, and hadn’t dipped into our emergency fund, we’d failed to make extra payments on our existing debts (specifically, our car loan and my student loans). When we’d loosed the purse strings, the plan was to have fun with money. But by overspending, we’d gone back to where we were years prior, when money was tight: we were so worried about how much we had – or rather, didn’t have – that we weren’t having any fun anyway.

We had to rein it in.

Finding Balance

In month number two, we employed the allowance method. I gave my husband and I $50 each to do whatever we wanted. I expected him to spend it all on tools he wouldn’t (and didn’t know how to) use; he expected me to spend it all on shoes.

But we surprised each other.

Instead of blowing his $50 on a new power sander, my husband split his allowance into five allotments of $10 each:

• He used $10 to go out to breakfast with his coworkers before work one morning
• He used another $10 to enter a fantasy football bracket with some friends
• He spent $10 for new insoles for his tennis shoes
• He paid $10 to take our daughter to the children’s museum one rainy afternoon
• He used the last $10 to go out for drinks to celebrate his friend’s 40th birthday

Likewise, I also broke my $50 down into smaller amounts:

• I spent a total of $16 on four separate occasions to buy myself Starbucks before heading to the grocery store to shop
• I bought a cool new color of toe nail polish for $5 instead of paying $25 for a pedicure
• I used $10 to go out to lunch with my girlfriends
• I paid $7 to buy a six-pack of my favorite adult beverage to share with my husband while watching football one weekend
• I used $5 to participate in a Zumba-a-thon for charity at the YMCA

Faced with the decision to spend or save, I pocketed the remaining $7 to use the next month. I could also contribute to a CD. Check CD Rates here.

What We Learned

Without consulting the other, my husband and I both learned that $50 could go a long way. We employed many of the same budgeting strategies that had helped us build up our nest egg in the first place when it came to spending our monthly allowance money. It’s easy to learn how to save money – you simply reduce or eliminate your expenses and save as much as you can. I’d argue it’s harder to learn how to spend money, or, perhaps better said, to spend money wisely.

Several months have passed since we started the allowance system. Over that time, we’ve figured out what our “fun” financial priorities really are. To me, a $4 latte from Starbucks is priceless; it helps me relax during what can otherwise be a rather frenzied trip to the grocery store. To my husband, the $10 he spends every month to have breakfast with his coworkers before one of his dreaded weekend shifts puts him in a better frame of mind heading into work. I’ve never regretted the money I’ve spent on charity-related expenses, and I know my husband has never doubted the value of the money he spends on our children.

Reader, what are your financial priorities? What lessons have you learned when it comes to spending money?

He has so many three-letter acronyms after his name on his business cards that you’d think he was teaching preschoolers about the alphabet. CPA, CFP, CFO… the list goes on. He’s a financial expert – maybe even a financial genius – and he loves dispensing money advice whenever possible.

Case in point? Two weeks ago, my dad had a quadruple bypass. Technically, he was only supposed to have a triple, but his cardiac surgeon found a fourth blockage just as they were about to close him up and figured, why not? Dr. M told my parents and I in post-op that accountants are more likely than any other type of professional to suffer from heart disease, especially during tax season. (I tried to find medical studies corroborating this, but could only find clinical data suggesting their blood pressure and cholesterol – and not their risk for a catastrophic event like a heart attack – was higher during this time. Not saying I doubt Dr. M’s medical prowess, but I’m a journalist and like to back things up with evidence… failing that, however, we’ll just have to take his word for it.)

Anyway, as my father was recovering from his open heart surgery, he was having a tough time coping with the physical pain and emotional exhaustion – that is, until one of the cardiologists realized my dad was a tax professional.

“I know you’re trying to recover,” he began one morning shortly after rounds, “but I heard you’re a CPA…”

That was all it took. My dad was happy to talk about money instead of listening to the beeping of the heart monitor; he was thrilled to answer the doctor’s – and then the nurse’s, and then the respiratory therapist’s – questions rather than wonder how long he’d be out of work.

The thing is, my dad’s always teaching people money lessons – whether he’s officially on the job or officially on bed rest. From my earliest days, he’s been giving me real world lessons on personal finance and managing my money.

Lesson #1: Saving Starts Early

I was eight years old and had just celebrated my First Holy Communion at our local Catholic church. After the Sunday service, my entire family came over to our house for a big party. I, dressed in my white gown that made me look like a tiny bride, was less than thrilled when just about every card I opened contained not a toy but a check. What good would this do me, I asked myself, glaring at what I considered to be my decidedly ungenerous relatives.

The next day, my dad took me down to the bank, where we used that money – $300, to be exact – to open my very first savings account.

More than 20 years later, I still have that account. Over the years, we opened a checking account, allowing the two to work in tandem to help manage all my teenage financial needs. When my husband and I got married, I refused to add his name to the account: it had been mine since I was a little girl, and it would remain mine – and mine alone – until I was old and grey.

Lesson #2: Managing Your Credit

“Whatever you do,” my father warned me in his sternest voice, “do NOT open a credit card account – even if they offer you a free hat!” And, with those sobering words fresh in my head, my mom and dad climbed into the car and headed home. They’d just dropped me off for my freshman year of college, and – while my mom warned me about binge drinking and being roofied – my dad’s only advice was not to be duped by credit card companies selling their wares on campus.

It’s advice I followed not only through college, but into my adult life as well. To this day, I’m very cautious of my credit. Ultimately – and with my father’s advice – I did select a few credit cards to put in my wallet, but he taught me to use them sparingly. He showed me – not just with his words, but by his own example – that credit cards are part of your overall budget, not an excuse to spend money you don’t have. Because of his personal finance expertise, I graduated college without a penny of credit card debt (although I did have student loans…)

Lesson #3: Finance Your Education

Both of my parents are college educated. In fact, they met at a large state school in their home state. But when it came time for me to make my college choice, my parents – led by my father – urged me to think bigger.

When I selected Duke University (no basketball jokes, please), my father didn’t bat an eye. Instead, he helped me fill out the requisite FAFSA forms and, later, negotiate with Duke’s financial aid office to increase the number (and value) of grants I was receiving. When the grants – and my parents own contributions – weren’t enough to pay the whole bill, my dad secured low-interest student loans; he later helped me consolidate those loans under an even lower interest rate shortly after graduation.

In all, I graduated from Duke with $17,000 in student loan debt. Considering the school cost $46,000 a year – for a grand total of $184,000 over my four years – $17k wasn’t all that bad. Then, with his help, we managed to pay it off in under five years. (I later went on to earn my master’s degree as well; I am still working to pay off that loan.)

Could I have followed my parents to state school and graduated with less debt? Probably, although I do have friends who went to a public school and have just as much – if not more – debt. But my father didn’t want to place barriers on my enthusiasm for learning because of the price tag. He knew that it was possible to finance a high-priced education without breaking the bank; he not only avoided crushing my collegiate dreams, but also crushing my financial future.

Father Knows Best

Today, my dad is still the first person I turn to when I want personal finance advice. He’s helped me navigate rolling over my 401(k) to a Roth. He helped me figure out a tricky tax return the year I switched from a full-time employee to a freelancer. He was even at my side while my husband and I negotiated our first mortgage. I know that my father knows best – then, now, and always (well, at least when it comes to money lessons).

Readers, what are the most valuable personal finance lessons your parents taught you?

Were you able to find money to add to your debt? Which method did you choose?  Or did you use a combination of methods like I did? When I start a project, I like to tackle it from every direction possible. That’s what I did with my debt. After reading Dave Ramsey, I knew that we were going to be primarily using the snowball method to pay down our debt. But for me, that wasn’t enough. I needed to feel like I was tackling all of our debts at the same time. There was something satisfying about paying even $5 extra on a bill; it made me feel like I was paying down all my debt instead of just one.

The most effective method we used, after the snowball method, was snowflaking. Every time we had some extra money, we sat down and figured out the best way to use that money. Most of the time, it went towards our debt (sometimes we treated ourselves because debt repayment is exhausting if you never take a break. We’ll cover this in an upcoming week). It was delightful to login to an account and make a payment mid-cycle. I liked this for two reasons: 1) It all went to principle and 2) I felt proud that we were working enough to make that extra payment. It really helped bring out debt down quicker, which was also nice.

But something else that was helpful was understanding our paychecks and exactly what all of the charges on our bills meant. For instance, as a public employee, we have to pay into a pension. It’s not a choice; it’s mandatory. However, until we earn a certain amount each year, our pension is not deducted from our checks. This is confusing unless you sit down with your checks and understand that your 503(b) plan is your pension; if you don’t know that, you just know that more money is being taken away from you.

It’s the same way with your bills. If you don’t understand what a $3.28 tax actually means or why you paid $9.99 for a premium service that you never signed up for, your money management will be all over the place. Why pay money, or have money deducted, if you don’t know what it’s for?

Task for this week

Following that logic, this week I want you to go through your paychecks and your billing statements. Write down any charges or deductions you don’t understand and contact someone who can explain it to you. If it’s a charge for service you don’t use, have it removed. If it’s a deduction for something you never signed up for, have it removed. Make sure you are being charged exactly what you are obligated to pay for and/or actually use. A word of caution: don’t let companies talk you into anything. Let’s say you call your cable company to have the second outlet fee removed because you got rid of that TV and don’t need to pay that extra $5 or so per month. Since they want you to pay as much as possible, they may try to convince you to upgrade an existing package, promising you a great deal. However, you know that you have only a certain amount each month to spend on cable and that package will put you above that amount. You need to stick to your guns and say “no, thank you. Please just remove this fee”. It’s tough but I know you can do it!

When my husband and I were in the throes of paying off our consumer debt, we would battle back and forth about which debt to pay last—the home loan or the car. Each one had its own pros and cons and eventually, we decided to go with paying off the car last. We did this for two reasons: 1) we’re planning on selling our house and having the home loan would not be beneficial and 2) we were going to take the car with us when we moved; we wanted to pay off everything that was staying.

As far as deciding what to pay first, we opted for the smallest balance. We needed those psychological victories to keep us going (plus, that’s what Dave Ramsey said to do).  What also helped was having a spreadsheet that I updated each month with the new balance totals, plus a calculation of the total amount of debt paid off. When we would have a slow month, it would help to look at the overall picture for a little boost.  This worked, too, because about $60K later, we’re consumer debt free!

Finding money

This week we’re going to talk about ways that we paid off our debt. I’m not talking about cutting back on luxuries or getting part-time jobs or having a budget (which we did); I’m talking about methods we used to apply that extra money to our debt. The methods are pretty simple. Seriously, if we were able to use them then anyone can. It’s that easy.

Here’s what we did:

• Snowballed payments. Made famous by Dave Ramsey, this is where you pay off one debt and roll the amount you were paying on that debt into the next debt, creating a larger payment for that next debt. This goes on and on. This was extremely effective for us in the beginning, before we had part-time jobs. It was an easy way to come up with more money to pay on a larger debt.
• Rounded up. This was also an effective method for coming up with more money in the beginning. Basically, if we had a bill that was $257.58, we would pay $260. It wasn’t much toward the overall balance but at least it was something. And, it made us feel like we were tackling all of our debt at once. Even as the balance would go down, we would stick to the same rounded up payment (especially for our car. We kept the payment at $330 every month even if the minimum payment due was $288.42 or whatever).
• Made lump sum payments. Sometimes it was fun to make a minimum payment while stockpiling cash to make one giant payment. We found there was something satisfying about making a $12000 payment on a debt all at once. It was also fun to watch our savings grow because, although we knew it was going towards debt repayment, it taught us that we could save large amounts of money.
• Snowflaked our debt. Every time we came into a little extra money, whether through odd jobs or unexpected money in our paychecks, we added that money to our debt. Sometimes it was just a few dollars but it felt good to make an extra payment, knowing that even that little bit of money was making a difference.

Task for this week

For this week, I want you to determine what method you want to use to apply money towards your debt. It doesn’t have to be something listed here. It can be something you come up with on your own.  It can be a combination of methods.

It’s important that you know how you’re going to pay down your debt. Having that plan ahead of time makes it easier to implement.

This week provided some challenges for me. I was a bit worried about my bill paying schedule since my husband started a new job. We’ve been working for the same company (our state) for years so our paydays have always been the same. It’s why I’ve been able to develop the schedule that I have. But with his new job, we were unsure if he was going to be on the same pay schedule or a different one. Fortunately, our paydays are still the same so I didn’t have to make any major revisions. That was a huge relief!

I did work on a schedule for my writing. In addition to this site, I own and operate my own site and write for several others. It’s been hard balancing all of the writing jobs with my full-time job so one day, I sat down with my calendar, looked at my agreed upon deadlines for the other site owners and crafted a schedule so I never again miss a deadline (I hate missing deadlines. To me, it’s like not fulfilling a promise). I even had to renegotiate with some site owners regarding deadlines. And you know what? It worked! Now I can meet my deadlines and the site owners get their content. Everyone wins!

So, how’d you do on creating a schedule? What worked for you? What didn’t?

The next steps

Now that we’re organized, have a system and a schedule, what do we do next? Well, now we’re actually going to dive into looking at our money in-depth. Over the next five weeks, we’re going to pour over the nasty details of our finances and figure out what do with all of it. This week, we’re going to talk about prioritizing our debt payoff.  Next week, we’ll discuss ways to pay off our debts (think snowflaking, lump sum payments, etc). The following week, we’ll talk about scouring our bills and paychecks for charges, fees, and assorted other variables that cost us money every month. The week after that, we’ll look at ways to most effectively use our paychecks and find extra income. And during the fifth week, we’ll talk about creating a budget and why it’s important.

Prioritizing our debts

When we got organized, we tallied all of our debts and listed them out according balance, creditor, interest rate or whatever detail you chose. Now that we have that information in front of us, we can now devise a plan to deal with them. Clearly, the ultimate goal is to not have any. But we have to start small.  Pick one debt that bothers you the most and focus on that.

Dave Ramsey, and many others, advocates picking the debt with the smallest balance, tackling it and, when it’s paid, rolling that payment into paying down the next smallest. It’s most commonly known as the snowball method. It’s the method I used to pay off my debt and it works! Psychologically, it was nice to see some progress right away and it was an easy way to find extra money for all the other debts. But what if you have a debt that’s pretty large and nagging at you? What if you have a debt that’s preventing you from being able to sell your house or one that’s just been an albatross around your neck for years?

I say—go for that one. This is your debt repayment plan. You get to determine how you pay off your debts, at what pace you want to pay them off, and, most importantly, in what order. Dave Ramsey provides excellent guidance and a terrific framework but you don’t have to listen to him. This is your path to prosperity and it’s fine to play by your own rules. I only suggest that whatever order you develop, stick to it. Try not to let yourself get derailed in the middle. Set concrete goals, target payoff dates, and stay with the order you set.

If you’re in a relationship, make sure that your partner is on board with your priority plan (married or dating, if you’re part of a couple, the other half is going to be affected by your debt repayment. Make sure you share and that you’re on the same page). Discuss the plan with your partner and if there’s a disagreement about the priority order, stay calm. Don’t yell, listen to each other and come to an agreement (or compromise).

Task for this week

For this week, I want you to think about your debts and prioritize them. Which one do you want to pay first? Which one are you OK with paying last? While you’re doing it, think about why you’re putting them in that order.  The why is often just as important as the when and how.