It is a truism that most big spenders are showoffs; they feed off attention.
Ironically, while your typical big spender works 24/7 trying to impress others, most of the time they rarely do so.
There is a small segment of the population, ...
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Paying Off the Mortgage Early? Not So Fast …
In January 2009 I wrote one of my most popular posts to-date entitled Paying Off Your Mortgage Early Is A No-Brainer. In that post I did a detailed analysis that justified why paying down my mortgage was the right thing to do.
That Was Then, This ...
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An Easy Way to Compare Credit Card Reward Programs
I always assumed the cash-back card to be a better value than the one passing out airline miles, but I never did a detailed analysis to confirm my suspicions. For me it just made better sense to get a dividend check a couple times per year that I could put to use for whatever I wanted.
Since we always pay the card off in full at the end of the month, this is pure profit. At a penny for every dollar I spend, the dividend isn't much -- but, hey, it's free money! And who doesn't like free money? ;-)
In 2008, we charged $21,089.93 on our dividend credit card. That is an average of $1757.49 per month. The charges resulted in dividend payments to us of $210.89 just for buying things on the card. :-)
But what if I had chose airline miles instead?
With my particular card, I would have been entitled to 1 mile for each dollar spent. At that rate it comes down to a trade between a $250 dividend check for a round-trip ticket to anywhere in the continental US, or a $400 dividend check for a round-trip ticket to Hawaii. Of course the airlines would restrict the days and times I could use those tickets, assuming I could get them at all, but that's life. Right? :-)
A recent check on a national travel website showed round-trip airfare from Los Angeles to Hawaii for as little as $374. Based on this unscientific survey I would clearly be better off collecting the dividend miles than saving for a flight to Hawaii.
When it comes to cashing in miles for a trip within the continental US, this is not necessarily the case, as it all depends on the desired destination. For example, at the time of this writing, the cheapest round-trip ticket from Los Angeles to Boston cost $414 -- clearly a better deal than the $250 rebate. Then again, trips could be had to many other parts of the country for less than $250.
Based on that observation, those of you who live near airline hub cities such as Dallas, Atlanta, Denver, and Salt Lake City may decide that the airline miles option would be less desirable because hub cities tend to have lower airfares. It might not be a slam dunk rule of thumb, but it is worth considering.
For those who are considering applying for a new credit card but are not so inclined to do all of this analysis themselves, there is good news. While surfing the net the other day I came across this handy credit card rewards comparison tool at CreditCardFlyers.com.
You simply enter a breakdown of your credit card spending habits and it returns a listing and complete description of the best rewards cards on the market. After entering data such as how much money I charge per month, and estimating how I distributed that spending (e.g., how much I spent on groceries, how much I charged on gasoline, etc), it gave me a rated list of 17 different cards to compare.
For those who don't want to break down their spending, it is sufficient to simply give your estimate of how much you charge per month. Keep in mind, though, that this can affect the analysis because many cards give additional bonuses for buying groceries or gas, for example.
The resulting credit card summary separated the winners by the type of rewards offered, be it rebate, points, or miles. It also provided an estimated first year payout for each of the cards. The payouts included bonuses and other incentives for signing up.
CreditCardFlyers.com also includes comprehensive reviews on various credit card programs, including information on interest rates and annual fees, and a summary of credit card perks and benefits. Although there are some low rated cards, the majority of the reviews seem to have a lot of 4.5- and 5-star ratings; still, all of the information is there for you to make an informed decision.
Hopefully, CreditCardFlyers.com will take a lot of the mystery out of deciding which credit card program is the right one for you.
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Using a HELOC as an Alternative to Refinancing
Recently I was talking with a buddy of mine, who happens to be a higher-echelon employee for a major bank, about my desire to refinance into a longer-term home loan in order to provide me with additional financial flexibility in the event I ever lost my job.
Eventually, our conversation migrated over to when people want to remortgage with bad credit and then on to the case of my mother-in-law. I wanted to also refinance her mortgage for maximum flexibility because she has a very limited monthly income that will become even more limited when she finally retires. Unfortunately, although she is 65, she has very little saved for retirement and therefore she will be almost entirely dependent on her social security payments in the coming years. Here is an approximation of her current situation:
Monthly Social Security Income: $1000
Monthly Mortgage Payment: $400
Remaining Mortgage Balance: $40,000
Value of House: $200,000
As you can see, once she retires her mortgage will eat up roughly 40% of her social security payments, making life quite difficult for her.
After hearing these details, my banker buddy offered up what I think is an ingenious and brilliant alternative to refinancing that was just too good to believe. I'll paraphrase his words to me: Why don't you have your mother-in-law take out a home equity line of credit (HELOC) for the amount of the mortgage and then pay off the mortgage? If minimizing her payment is the ultimate goal, she can pay only the monthly interest payment on the HELOC.
What! Why would anybody ever do that? Isn't it true that the interest rate on the conventional fixed rate home loan is lower than a HELOC?
It is true that the HELOC carries a higher interest rate than if she refinanced into a conventional fixed-rate home loan. But the beauty of this plan is that unlike the mortgage on a conventional fixed-rate loan, the HELOC would permit my mother-in-law to pay only the interest due each month. At current rates, this strategy would lower her monthly payment to somewhere in the vicinity of just over $100 per month. (As an aside: many folks may be interested to know that it is possible to get a HELOC, or even remortgage with bad credit.)
But if you only pay down the interest every month you'll never pay off the house! I know what many of you are thinking: Okay, Len, what is going on here? Just the other day you were spouting off that for those who want to reduce risk by agreeing to trade the desire of making more money over the short run in exchange for the security and promise of a steady risk-free return, paying-off the mortgage was a no-brainer!
And in most cases, that is still true. But there are ALWAYS exceptions to the rule. In my mother-in-law's case, being a senior citizen with no nest egg to speak of and very limited income, minimizing her monthly payments easily trumps paying off the mortgage. For many senior citizens with limited incomes who are still responsible for paying a mortgage for a home, it becomes logical to ask: what do they have to gain by paying it off, other than providing their heirs with a bigger inheritance?
With all that in mind, for my mother-in-law it basically becomes a trade between these two options:
1) continue to work as long as she can continuing to pay down (for her) an expensive mortgage in exchange for owning the house free-and-clear by her 77th birthday, or...
2) pay off the existing mortgage with a HELOC and then make payments of just over $100 over the next ten years, using the resulting savings to build a small nest egg and give her more a little extra money in her pocket to boot.
Of course, the key to implementing this strategy requires sufficient available equity exists to tap a HELOC in the first place. Fortunately, even after the collapse of the housing bubble, my mother-in-law still has plenty of equity to qualify.
So why not go with a reverse mortgage? Well, everybody's situation is different. But in my mother-in-law's case, the HELOC allows her to avoid the steep fees and other loan costs (usually over $10,000) normally associated with reverse mortgages. In fact, many lenders offer zero or near-zero closing cost HELOCs. The high closing costs associated with reverse mortgages are attributed in part to FHA insurance required to cover the risk of the loan balance growing in larger than the home’s equity over time. For my mother-in-law, the savings that the HELOC provides are just too big to ignore.
True, unlike a HELOC, a reverse mortgage wouldn't have to be paid off until my mother-in-law moves out or dies. But HELOC loan terms can run for as long as 10 years. When that term is eventually reached, she can decide to either sell the house, repay the relatively small balance or refinance.
In the mean time my mother-in-law, by using a HELOC to pay off her existing mortgage, can enjoy a little more financial freedom and hopefully some added peace of mind in her autumn years.
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Living Within Your Means Has Its Rewards
First off, I know I sound like a broken record, but I will repeat myself yet again because it is a key tenet of this blog -- financial freedom can be attained by anyone, regardless of income level! "Financial freedom", folks, is not a two-word ...
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Why You’re Broke: You Don’t Audit Your Spending Habits
Now that I've outlined a top-level job description for the household CEO it is time to begin breaking down each of those six top-level tasks in a little more detail.
The biggest reason most people always find themselves broke and continually in debt ...
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The Sad Consequences of Fiscal Irresponsibility
The first step to becoming a successful household CEO is to understand the tragic consequences of fiscal irresponsibility. A household CEO that fails to understand this is equivalent to an automobile driver trying to navigate rush hour traffic with a ...
Continue reading The Sad Consequences of Fiscal Irresponsibility
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