June Monthly Newsletter
June 11, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The June newsletter is now available with an investment market update and some historical perspective on stock market returns over time to put recent volatility into perspective. It also include a how-to on deciding if you should pay off your mortgage and an invitation to the upcoming budgeting workshop at the Keller Public Library. I’m also pleased to share in the newsletter that no-load, low-cost, passively managed Dimensional (DFA) Funds are now available for investment management clients. Click here to read the June 2010 newsletter.
Should you pay off the mortgage?
May 18, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
One of the best financially freeing moments in life is the day you compare your savings and mortgage principal balances and realize that you could pay off your mortgage if you wanted to. If you’re at that point, congratulations! If you’re not there yet, keep saving; it can come sooner than you think.
Of course, immediately following the discovery of being able to pay off the mortgage comes a question: should I? Here’s how you decide:
First, consider what you would do with the money if you didn’t pay off the mortgage.
Would it sit in savings, be invested for long-term retirement goals, or something else? Based on your plans if you didn’t pay off the mortgage, you can estimate a rate of return you expect to receive. From this rate of return, you’ll need to subtract taxes paid on the earnings (15% if capital gains, your income tax rate if regular interest).
Second, figure out what your mortgage is costing you.
Look at your interest rate, calculate the annual interest expense, and subtract any income tax savings you’re receiving. Be sure to avoid over-estimating the benefits of tax savings. For example, if your mortgage interest is $5,000 and you have another $8,000 of itemized deductions, your total itemized deductions are $13,000. If you’re married filing jointly, the standard deduction is $11,400 this year. So the mortgage interest is only increasing your deductions by $1,600. If you’re in the 28% tax bracket, this equates to a $448 tax savings.
Third, compare your answer in step 1 with your answer in step 2.
If it’s costing you more to keep your mortgage than you would earn with the money invested or in the bank, then you should generally pay off the mortgage. If you can get a greater return on your investments than what your mortgage is costing you, then you should generally keep the money invested and wait to pay off the mortgage.
Of course there are exceptions and other considerations including:
If you would be taking the pay-off money out of a pre-tax IRA or deferred compensation in a lump sum, take a really close look at the tax consequences of that lump sum withdrawal! They can often totally cancel out any savings on the mortgage interest.
If you would be using “retirement” savings funds to pay off the mortgage, you really need to look at your retirement projections and ensure that they still work with the funds withdrawn. If your projections rely on you beginning to save what you’re currently paying on the mortgage, know yourself. Will you stick with this savings program? If not, probably best to just keep your retirement funds intact and continue paying the mortgage.
If paying off the mortgage would take your emergency funds dangerously low or short-change funds for other important goals, it’s likely not a good idea.
Making your decision
While it seems like a fairly straight-forward question, when you think about the whole picture, you realize there are lots of what-ifs and options to consider. The important thing is to take time to do your homework, complete the analysis, and seek professional assistance if needed.
Even if the process reveals you’re better off with the mortgage, you might still want to go ahead and pay it off because of the peace-of-mind benefit that comes from not having any debt. If that’s the case, by going through the process thoughtfully and thoroughly, you will know what you’re giving up financially for that peace of mind so you can make an informed decision about whether it’s worth it to you.
And if the process does show that you would be better off getting rid of that mortgage, you can move forward with confidence.
Of course, everyone’s situation is different. While the process described above addresses many considerations, you may have some issues not addressed here or that are unique to you. Make sure you fully consider your own situation before making any decision.
Quoted by Jean Chatzky
May 12, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
Jean Chatzky’s column in the New York Daily News on “How to get by when jobless pay runs dry” quoted me on several considerations and strategies to cope with this difficult situation. I’m a fan of Jean Chatzky, so having the opportunity to be interviewed by her staff and being quoted in her column was pretty exciting for me. In the article, she provides excellent suggestions on how you can prioritze your expenses and resources in this challenging time to do the least amount of damage to your financial situation long-term. You can read the full article here.
May 2010 Newsletter
May 10, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The May 2010 newsletter is now available. It includes investing information with perspective on last week’s market plunge and an update on the new reduced fees for trading Vanguard ETFs. For taxes, there’s information on the new 3.8% medicare tax for high income individuals. For cash flow, we cover using a Roth IRA as a back-up emergency fund. For insurance, it includes information on incorporating TX state guarantee association coverage limits and exclusions into your financial planning. Click here to read the newsletter.
Quoted on BankRate about Roth IRAs and emergency funds
April 30, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
When you’re juggling creating an emergency fund and saving for retirement, it’s important to be aware of your options. BankRate.com reporter Teri Cettina recently interviewed me about using a Roth IRA as a back-up to your primary emergency fund. A Roth IRA should not be your primary emergency fund, but it can provide a useful supplement that can help you work toward both retirement and emergency fund goals simultaneously. You need to understand the pros and cons of the strategy and make sure it really makes sense for you. Also be aware that Roth contributions are not treated the same as funds converted to a Roth. You can see Teri’s full article on BankRate.com.
January 2010 Newsletter
January 12, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The January 2010 newsletter is now available. Beginning in 2010, it will be published the second week of each month. This month’s newsletter includes a brief 2009 market update, an update on the estate tax for 2010, how to conduct a home inventory, and more. Click here to read it.
Recovering from Unemployment
January 11, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
If you’ve been out of work for a period of time, it’s a huge relief when the paychecks start rolling in again. Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
But here’s the good news. While you were unemployed, you and your family probably got used to spending less. Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
To make this work, you need to resist the status quo expectation that your spending “should” return to former levels. This doesn’t mean you can’t celebrate the new job or enjoy a few small additional luxuries. But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild. With the cash you’re saving, here’s a 6-item priority list to tackle:
1) If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month’s expenses). See my blog post on 10 ways to rebuild an emergency fund for ideas on this.
2) If debt has been accumulated, create the typical debt “snowball” program by paying off highest interest rate debt first. See my December 2008 newsletter for details on this strategy.
3) If you borrowed from retirement plans, be mindful of the plan’s rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts. These rules could trump the ideal strategy of paying back the highest interest debt first.
4) If you let critical insurance lapse, get your insurance back to the needed levels. This is also a good time to re-assess your insurance needs. It’s possible to be over-insured, and there may be some policies you let lapse that you’re better off without.
5) As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months’ expenses while paying off the last of the debt.
6) Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.
Once you’ve accomplished these 6 priorities, you will be well on your way to creating your desired financial future. You’ll probably be used to living on less by this point. And you’ll have created the freedom to choose when you’ll indulge in a splurge that you’ll really enjoy, as opposed to feeling trapped with a high level of fixed expenses.
If you have other ideas on financially recovering from unemployment, I’d love to hear them. Please feel free to contact me directly or post them as a comment to this article.
Quoted in Kiplinger Personal Finance Magazine
December 7, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
I was recently quoted in “4 Ways to Trim Your Spending” by Laura Cohn in the January 2010 issue of Kiplinger Personal Finance Magazine. Laura and I discussed that having one or two areas of luxury in your life is not a bad thing — it’s actually a good thing because it helps avoid a sense of deprivation that can lead to seriously blowing your budget. But choosing an area or areas of indulgence that makes sense given your income, other expenses, and goals is important. Where we can really get into trouble is allowing the indulgence to spread to too many aspects of our lives. The luxury vehicle, a nice home, designer clothes, fine dining, spa services, wine and grocery purchases, and lots of travel are some of the areas that can be just fine if we have one area of indulgence and it’s supported by our budget. But these same areas can lead to spending trouble for all but the wealthiest if we enjoy too many on a regular basis.
December 2009 Newsletter
December 3, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The December 2009 newsletter is now available. It includes a market update, tips on tracking your expenses, year-end investing moves designed to save on taxes, and more. Click here to read the newsletter.
Buying a home to cash in on home buyers tax credit?
November 12, 2009 by Jean Keener, CRPC, CFDP · 2 Comments
You may have heard that the first-time home buying tax credit was extended through April 30 next year, and that it now includes a credit for some non-first-time home buyers also. For details on the extension and who is eligible, visit the IRS website.
This is great news if you fall into the eligible groups and were already planning to purchase a home. A tax credit is an actual dollar-for-dollar credit against your tax liability, as compared to a tax deduction which just reduces your taxable income. A deduction, depending on which tax bracket you’re in, saves you between 10% and 35% of the deduction. The credit saves you 100% of the credit amount. The home buying credit is also fully refundable, which means you can receive it even if it exceeds your tax liability.
Should you adjust the timing of your home purchase to take advantage of the credit?
Yes, this is a good idea. If it’s just a question of changing your timing by a few months to take advantage of the tax credit and there aren’t other substantial costs with the change, that makes all the sense in the world.
If you weren’t planning to purchase a home already, should this credit motivate you to take action?
Definitely not. If you weren’t planning to buy a home and aren’t financially ready for the purchase, this tax credit doesn’t significantly change that math.
For existing home owners, the costs of a move are too high to even come close to being offset by this credit. Consider real estate commissions, preparing your home to sell, closing costs on the new home, moving expenses, and ongoing increases in your utilities, maintenance and property taxes if you move to a larger home.
For potential first-time home buyers, the credit doesn’t significantly change whether home ownership is right for you. Yes, the $8,000 is a nice bonus. But it’s a small dent in the costs of owning a home over even the 3-year minimum required to not pay back any of the credit. The mortgage is just the beginning of the cost of home ownership – consider maintenance, repairs, yard work, and utilities that are typically higher in a home than an apartment. There’s also the property tax and insurance which for most first-time home buyers will be escrowed into their total mortgage payment, however it’s up to the home owner to catch up any shortfall in the amounts escrowed.
Bottom line, you should definitely take advantage of the home buyers credit if it fits in with your overall financial plan. The credit could even provide a good opportunity for you to jump-start your 2009 or 2010 IRA contributions, beef up your emergency fund, or start a 529 plan for your children’s college. But the credit shouldn’t tempt you to make a decision that will end up hurting you financially long-term. Make sure your math includes the long-term total cost of your move!