Monthly Archives: August 2017

Financial Freedom

Getting out of debt one step at a time

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“There’s no problems, only solutions.” – John Lennon

Kudos!

You have committed to get out of debt once and for all.

It takes guts to recognize that there is a problem.

In psychology, you identify a problem and then come up with a strategy to solve it because, as Lennon so eloquently put it, in life there are no problems, only solutions.

Now, let’s get down to brass tacks.

Every journey begins with a first step.

“An investment in knowledge pays the best interest.” – Benjamin Franklin

I have read hundreds of books on finance and debt. It has been over 10 years, but I still learn new tips and information to this day.

Here are my suggestions of how to start getting out of debt.

Organize. Gather every piece of mail you can find or any documents that pertain to your income. You need to know where every penny is going. Locate bank statements, pay stubs, tax returns, and promissory notes.

Know the terms. You should know the who, what, when, where, and how of your money. Do not think, know. One of the best ways to do this is to pull a copy of your credit report with one the three credit reporting agencies – Experian, Equifax, and TransUnion.

Write it down. List all the people and places you owe. You should include the name, date opened, amount owed, and interest rate.

Set a goal. I have read in numerous books and articles that said if you want to get out of debt, then you have to commit to a debt repayment plan of two to five years. Anything more than that could mean you may have to consider bankruptcy.

Avoid bankruptcy at all costs. Even though it is supposed to be removed from your credit report after 10 years, I have heard tales of lenders still bringing this up in conversation while someone was applying for a loan more than two decades later. This says to me that bankruptcy is a dark cloud that follows you around for the rest of your life.

Read about money. The more you know, then the better decisions you can make. Go to your local library and check out books on finance. You will not regret it. You can start here at my blog. I have yet to hear anybody say I wish I didn’t learn about the stock market.

Start today. Start a cash cushion of just $50. If you start, then you are taking a single step.

Cash on hand. Work your way up to $500. This will get you motivated to continue saving and provide a small cash reserve for minor life hiccups such as a flat tire or insurance deductible.

The point is just to start.

Financial Freedom, Real Estate

Home Buying: Survival of the fittest wallet

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They say home is where the heart is.

However, in current economic times, I have learned that home buying is not for the faint at heart.

The process of buying a home today is treacherous because banks have once again started lending more than you can possibly afford to repay. Proceed with caution.

Due to the cost of renting increasing into the stratosphere, it makes owning almost inevitable.

Buying a home now is like playing Russian roulette with your finances. Eventually, your wallet can’t dodge the bullet.

After speaking with numerous colleagues, friends, family, and acquaintances it is safe to say that the subprime mortgage crisis is roaring back into people’s lives like a lion.

Housing prices are getting out of control again in America.

This is some of what I have uncovered so far.

Rent too high, houses too small.

Rent is too high. There is no cap on rent. Sky is the limit. And that limit is going to the ceiling. It is no secret that renting can be expensive. This is acutely felt when living in high cost areas such as San Francisco and New York. Rent has doubled in the last 20 years. Read this article Rent is totally out of control. Making it harder for folks to save and buy a home of their own.

Low cost-housing is shrinking. As neighborhoods around the country gentrify, more people are being displaced. I actually saw blogs and articles about people discussing living in cars, vans, and in their cubicles!  That’s no joke. Read the article here I secretly lived in my office for 500 days.

The country is also losing 125,000 affordable rental units a year. Read all about it  The affordable housing crisis.

Amount of homes available to buy is too small. Not only are there not enough homes for sale on the market, but the ones that are more affordable tend to be on the smaller side.

Location, location, location. Many are priced out of major metropolitan cities where the jobs are plentiful. I work in the Washington, DC area and the location I commute to has homes on the market in the millions! That’s right folks, if you can write the next hit song for Beyoncé, then you can afford the housing prices in certain parts of the District.

Applicant pool shrinking. The amount of folks actually able to buy a home is getting smaller. Financing may be a little harder to come by when you owe tens of thousands in credit cards, auto loans, and student loan debt. Fewer people are able to not only apply but be approved for home loans. Thus, creating a vicious cycle of not being able to afford to rent but not having enough to buy.

Prices of homes on the market are increasing. This is where I get steamed. I have heard of people being approved for anywhere from $250,000 to $625,000. Even on one salary! Come, on. This is not legit. It makes no economic sense to put yourself into a mortgage that you can’t afford or that would possibly lessen your quality of life.

I read that it is best to purchase a home for about half of what you are approved for so that you will not become house rich, but cash poor.

In addition, you should put no more than 20 percent down as anything more could expose you to unnecessary risk. Should the market go down and your home goes under-water so too does your down payment as it now sleeps with the fishes. This means you got too much skin in the game.

A house is not a home. Fill it with love and laughter. Easier said than done. First, you have to find a partner. If not, you have to be able to afford to live alone until you find one and that my friends can be expensive. Don’t believe me, then read this It’s getting very expensive to live alone.

Foreclosure. You go and get a piece of the American Dream and buy a home. Congrats! You own a slice of American pie. Then it all comes crashing down as your home plunges under-water and your adjustable rate mortgage loan ballooned your payments from an affordable $1,200 a month to $3,000. This not only displaces your family, but hurts your credit.

Short sale. Due to circumstances that may be beyond your control; you lose your home. You owe more than the home is worth prompting you to decide to sell at a loss. The added pressure of a lender sending an eviction notice and threatening foreclosure aggravate this process.

Save for a home. For all the reasons stated above is why you must save for a home and not let your eyes be bigger than your wallet. Forget the Joneses. I mean what did they ever do for you anyway. Are they going to take you in when the sherriff shows up to evict you? No way!

My advice is to put aside the 20 percent down payment over a two to four-year time period. Find a home you like. Get the price and figure the amount you need to save over four years to have the down payment. That would mean saving five percent of the purchase price annually.

For example, $180,000 x .20 = $36,000/4 = $9,000 per year or $750 per month. This decreases the amount you have to finance and lessens the amount of interest you pay over the life of the loan.

You can use these posts to help be your guide and inspiration toward saving a down payment.

Getting back to cash only

How to build an emergency fund

Morale of the story: Let the American Dream be whatever and wherever you want it to be as long as it’s in a neighborhood you can afford.

Financial Freedom

How to Build an Emergency Fund

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Whether or not you call it an emergency or rainy day fund it is all the same.

Basically, it is a pot of money set aside just in case something happens that is unforeseen i.e., a job loss or illness.

During the economic crisis this was some people’s only and best line of defense against the loss of their income or investments.

Emergencies are part of life. Being prepared could make all the difference.

What is an emergency fund?

An account that is used to set funds aside that are for the worst case scenarios, such as medical illness, job layoff, or other major expenses.

What is considered an emergency? It depends. An emergency to some may not be considered one to others, but a short list includes the following:

  • Job loss
  • Medical emergency
  • Unexpected home repairs
  • Automobile issues
  • Unplanned family emergencies

For example, if you get a flat tire or have a leaky faucet, you should have the funds readily available in a savings account to use instead of putting these or other expenses on plastic.

Here’s some food for thought. Studies have shown that people have recently or will at some point in the near future have one of the following occurrences:

  • More than one in five Americans have unpaid medical bills: 21%
  • Nearly half of all adults that are high school graduates could not come up with $2,000 in 30 days from an emergency: 45%
  • The percentage of adults with a college degree could not scrounge up $2,000 for same time period: 18%
  • Late mortgage payments for the age group of 18-34: 29%
  • Respondents that have used high-cost forms of borrowing like payday loans and pawnshops: 21-39%
  • Financial Literacy rate of respondents: 37%
Source: FINRA Investor Education Foundation National Financial Capability Study, 2016.

Consider the Alternatives. Having no savings at all.

This means if Aunt Sally calls and asks you to visit or help her pay for a leaky roof repair, you can’t do either. Let alone, pay for your own emergencies or travel plans.

You are also more likely to borrow, most especially at high and egregious interest rates, when an emergency arrives.

Due to the lack of time or preparation to shop around for better rates or leverage to get a better deal, you are unable have any bargaining chips to bring to the table.

Worst case is that you will be unable to borrow at all and could fall prey to unscrupulous loan sharks or be unable to receive help when needed.

Benefits of having emergency savings

You are less likely to make bad financial decisions. I am sure no one wants to let the lack of money cause them to make bad decisions. No knee-jerk reactions required if funds are set in reserve. Read about finances, save, then invest. When you know better you do better.

Less stress is a huge benefit. High stress can trigger all types of health problems from headaches to heart disease. An emergency fund can help alleviate stressors such as these.

Being able to help others. You can now volunteer, donate, or help family and friends when people are in need. Helping others makes you feel good too. This is also a stress reliever.

How much should you have in an emergency savings?

I recommend 3-12 months’ worth of expenses. I have a preference for 8 months because when I lost my job during the recession, it took me that long to land a new job.

You should start with a specific goal in mind such as $500 and continue saving from there. NerdWallet columnist, Liz Weston says $500 is a good place to start, will get you out of most predicaments, and usually keep you out of the hole.

If you use direct deposit and automatically transfer $10 per week into a savings account, you can save $500 in a year.

How to save for an emergency?

  • Slash expenses. Probably self-explanatory, but it bears repeating and repetition. Cut any expenses down to the bone if you have to. This includes cutting cable, dry-cleaning, eating out, clothes shopping, and out-of-town vacations that you cannot drive to get to your destination.
  • Keep the change. Start a change fund. You can use a piggy bank or jar, but instead of spending change bank it. Once you fill the jar, you can take it to the bank and deposit it into your savings. FYI: a gallon jug can hold around $400, give or take.
  • Save your tax refund. Enough said.
  • Additional income. If you have the time, get a second job or start a side hustle. You can also sell used items online.

Where should you keep your emergency savings?

Somewhere that you can get immediate access to your money. However, not so accessible that you can easily access the funds to use for non-emergencies such as a vacation, shopping, or a new car. A savings or money market account would be preferable. If you have to jump through too many hoops to get your money, then this is probably not the best place to keep your funds for emergency purposes.

Do not let the bank or anyone hold your money hostage. You need to be able break the glass in case of an emergency.

You can hedge your bets by keeping emergency funds in both a savings and money market accounts. Having more than one fund like two or more beats having none any day of the week.

So remember this: Murphy’s law states whatever can go wrong, will go wrong. An emergency fund is your insurance policy against this law.