Monthly Archives: June 2011

Mortgage Payoff Progress For June With Chart

In February of 2010 my wife and I purchased our very first home.  We have a conventional 15-year mortgage and our plan is to pay it off in less than 10 years.  Our stretch goal is to pay it off in less than 7.

As of June 27, 2011, we have made 16 regular mortgage payments – and several, additional, principal-only payments.

When I posted February’s update, we had paid off 5.72% of our mortgage debt.

When I posted March’s update, we had paid off 6.26% of our mortgage debt.

When I posted April’s update, we had paid off 6.90% of our mortgage debt.

When I posted May’s update, we had paid off 7.35% of our mortgage debt.

As of the end of June, we have paid off 7.79% of our mortgage debt.

Here is our most recent chart -

 

The chart shows two percentages.  The blue percentage is how much I still owe – the balance.  The red percentage is how much I have reduced – the paid.

This chart does not represent how much of my house I actually own – it simply reflects how much of our mortgage balance we have paid.  We actually “own” much more than 7.79% of the house, based on appraised value and initial down payment.

We have made 15 regular payments and have lived in the house for just over a year.  Our contractual remaining term is 13 years and 8 months, but our actual remaining term is 13 years and 5 months.

We altered our June budget to reflect our new goal of saving for a newer car. Due to this, we had less money for debt reduction.  Even so, we managed to send a couple of small principal-only micro-payments.

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Break The Credit Card Cycle

It has been several years since my wife and I regularly used credit cards for monthly purchases.  Instead, we use cash, debit cards, and online bill pay.  Here’s how we broke our credit card cycle -

1.  We put our credit cards in our wallets – and just left them there.  We didn’t cut them up.  We didn’t cancel them.  We didn’t put them in the freezer.  We simply made a decision not to use them on a regular basis.  Over the past six years, this has served us well.

2.  Before we started living on a budget and getting out of debt, our credit card served as our emergency fund.  If we were a few hundred dollars short at the end of the month (due to real needs and / or just wants), we would use our credit card.  The first thing we did, when getting out of debt, was establish a real emergency fund.  Obviously, no fund is big enough to cover every-single-emergency-imaginable, but we had to start somewhere.  Our goal, in those early years, was to keep between $1000 and $2000 in our emergency fund, at all times.

3.  We live on a budget and created a structure for managing our daily and monthly spending.  Click link to see yesterday’s article on this subject.

4.  We use the envelope system – which really helps to keep cash spending down, keep things organized, and promote smart shopping.  There was a time when, if I had cash in my pocket, I would spend it.  If I had $5, I would spend $5.  If I had $100, I would spend $100.  However, once I made the promise to myself that I was “done” with credit cards – I had to get serious about proper cash management.  Without the safety net of the credit card (and with no desire to constantly dip into our emergency fund) we quickly learned to be smarter with our cash.

5.  We routinely use our debit card “like” a credit card.  I use it online and I’ve even used my debit card to reserve a rental car.  A bit concerned about using our debit card for online purchases, I opened an Electric Orange℠ checking account from ING DIRECT.  (Right now, ING is offering a $50 bonus if you sign up for their Electric Orange checking.)  We keep a limited amount of money in the account, separate from our primary checking account, and use the Electric Orange account for all online purchases.  This works well for us – but we do have to be careful.  It’s easy to overspend when simply swiping a card or punching in those 16 digits, credit or debit.

6.  We ignore bonuses, rewards, and discounts associated with credit card use.  I’ll admit it:  It can be difficult ignoring all of the “extras” associated with credit card use.  However, for us, we would rather focus on zerothat’s the amount we owe credit card companies – than on the 5% discount or 2% cash back we might receive.  Sure, the “extras” would be nice, but we’re doing just fine.

That’s how we broke our credit card habit.  If we chose to do so, we could start using our credit cards again.  We do a much better job of managing our finances than we used to do.  I’m sure we could use them without a hitch, but we’re going to keep doing what’s been working.  Our system works just fine for us.  However, if we were to use credit cards again, we would simply use them and pay them off at the end of the month.  The focus of this article is not on abandoning credit card use, forever, but on how we broke the cycle of over-using them, and having to pay interest and fees.

 

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Structure And Freedom

Over the years I have learned the true value of creating structure and following a routine.  My wife and I use the following structured systems to control spending, plan for saving, and manage our finances.

Monthly Calendar – Each month we sit down and plan out that month’s events and scheduled activities.  We brainstorm and try to be thorough.  We list doctors visits, school functions, church events, etc.  Out goal is to know where we’ll be and when we’ll be there.  This helps us know two things, vital to all other systems – how we’ll spend our time and where we’ll spend our money.

My wife is old school – and uses a simple spiral-bound day-planner.  I prefer the calendar on my phone, which easily syncs with my computer and email.

photo by – Joe Lanman

Noted next to each event on our calendar, we approximate how much money that event might cost.  If we are taking the kids to one of their ballgames, that needs to be in our budget.  Or, if we’re taking the dog to the vet, that too needs to be in the budget.

Using a calendar to map out our month really helps us see where our money will be going.  If you struggle to create your monthly budget, try building a monthly calendar – filled with spending approximations – first.

Family Budget -  Once we have created our monthly calendar, we fine-tune our monthly budget.  Since we have been doing this for many, many years, our budget remains (relatively) unchanged, from month-to-month.  The calendar helps us make any changes that we might need to make, with increases or decreases in specific categories.

We use a simple zero-based budget for our regular monthly income.  For my business income (writing here at No Credit Needed) I use a budget based on irregular income.  We use the awesome You Need a Budget software to keep things nice and neat.

Meal Planner – This is a new one for us.  We take our monthly calendar, and based on where we’ll be and where our kids will be throughout the month, we create a meal planner for our family.  Basically, we figure out how many of us will be at home, how many of us will be elsewhere, and we plan a month’s worth of meals.  This does two things – First, it allows us to fine tune our grocery budget.  Second, it takes the pressure off of “what’s for dinner”.  We know what we’re going to eat, weeks in advance.  So far, the kids love it and we do, too.

Grocery Price Book -  As odd as it sounds, I actually enjoy shopping for groceries.  A few years ago, I created a printable grocery store price book (click to check it out and download, for free) to keep track of grocery prices at my favorite stores.  The grocery price book helps me stock up on items, when they’re on sale, and also helps when creating our meal planner.  (Do you see how all of these systems help with and connect to each other?)

Cash Management – Once we know what our month is going to look like, and once we’ve created our budget, it’s time to plan for cash spending.  We use cash for daily or weekly purchases, like gas and quick trips to the grocery store.  We use the envelope system (click to view a video that I made, explaining how the system works) to manage our cash.  The calendar helps us plan for each week’s envelopes and each week’s spending.

Bill Payment -  I have managed to schedule all but one of our monthly bills so that they arrive during the first week of each month.  On our monthly calendar, I make a notation of when the bills are expected to arrive.  Using our budget software (again, the awesome You Need a Budget, long-time site sponsor) and online bill pay, I plan for and schedule payments for each of our bills.  We do have one bill which arrives during the third week of each month and it is auto-drafted from our checking account.  In less than fifteen minutes, all of our regular, monthly bills are paid – and I can spend the rest of the month working, relaxing, finding ways to increase income, hanging out with family, but not worrying about paying bills.

Adding structure to our lives has lead to, in an odd twist, more freedom.  We do not spend our time worrying about money or fretting over our finances.  Instead, we have the systems in place, systems which work from a unified structure, to help us stay organized and prepared.

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Saving For A Car

I drive a 2001 Honda Accord.  It’s a great little car.  Right now, it has a little over 175,000 miles on it.  Sooner or later (let’s hope, later) I’m going to need to buy a newer automobile.  Here’s my process for saving for a car – or any other major purchase.

1.  Using the super-handy You Need a Budget software, I create a budget category labeled: Automobile Replacement.

2.  I estimate the number of months between now and my plan-to-purchase date.

3.  I then estimate the cost of the replacement vehicle.

4.  I divide the estimated cost by the estimated number of of months.  This tells me how much I need to save, each month, to reach my savings goal.

In effect, I’ve created a monthly “payment”.  Instead of paying the bank or the finance company – I’m paying myself.

I like to automate the process.  I use our Ing Direct Savings Account to set up an automatic monthly withdrawal – for the “payment” amount.  I deposit my paycheck in our local bank, the automatic withdrawal occurs a few days later, and I’m one month closer to reaching my goal.

Now, obviously, there are some things to consider:

First, it’s rather difficult to estimate the exact cost of a future purchase, especially a purchase that may be several months (or even years) down the road.  My system (rather imperfect, but something to work with) is to find the average price of the automobile I want, today, and then add 5% to that price, for each year that I’ll be saving.  If the car costs $10,000 today and I plan to purchase the “same” care in 3 years, my goal will be $11,500.  Again, this is a very rough estimate and doesn’t take in to account compounding, but it’s a number to work with.

Second, it’s also difficult to tell just how much my current car will be worth, when it’s time to sell it or trade it.  So, for me personally, I just leave it out of the equation.  Why?  I would rather over-save (is that a word?) than under-save.  Plus, even if I buy something newer, I might just keep my little car.  If I knew that the future price of my current car was going to be rather significant, I might consider that when creating my savings goal.  As it stands, I’ll just save for the newer car – and decide at the time of the future purchase, whether to sell the old car or not.

Third, I might need a newer car before I’ve reached my savings goal.  Again, it’s difficult to be in the prediction-game.  My Accord is running quite well and gets me, comfortably, from place to place.  Ten months from now, this might no longer be true.  The goal is to be prepared, as much as I can, given the facts that I currently have before me.  I cannot be (overly-) concerned about things that I cannot control.  I prepare for a certain reality and adjust as needed.

Fourth, I really don’t worry too much about the interest rate that I’m getting on my savings.  Right now (as you well know) – most rates are very low.  In the past, like when I started this blog, it was fun to get 4 to 6 percent rates – and I would use them when calculating how much I’d have in x number of months.  Now, I just focus on principal and consider any interest earned as a bonus.

By creating a monthly “payment” – to myself – I do two things.  One, I am assured that I will reach my savings goal.  Two, I keep myself from spending “extra” money on frivolous things.  One of the distinct dangers, oddly associated with being consumer-debt free, is the fact that, without monthly obligations to creditors, it is easy to be wasteful.  By creating a series of budget categories, under the heading of savings, an saving for specific things, every dollar has a name, every dollar has a purpose.

There is a side-benefit to saving for specific goals and specific purchases.  We have savings categories labeled – Appliance Replacement, Furniture Replacement, Automobile Replacement, etc.  Each category is funded, monthly.  Once a category has been “fully-funded” – the money that was going into that category, is directed into another category.  In effect, we are “snowballing” our savings goals – just like we did with our debt reduction.  That 36-months goal might become a 30-months goal, or even a 24-months goal, depending on how quickly we fully-fund other categories.

One last note – We didn’t have savings categories until we paid off our last consumer debt.  Instead, we used every penny (above our emergency fund) to pay off debt.  The interest rates charged by our creditors were higher than the rate we could achieve in savings, so it made sense, mathematically and emotionally, to get out of debt.

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