Posts Tagged "financial situation"

Mentally Spending Your Next Raise Before You Actually Get It

Posted by Preet on Apr 4, 2010 | 2 comments

One thing I’ve noticed with some people is that they get progressively more stressed about money the older they are. That should come as no surprise. But it’s also no surprise that people tend to earn more and more money as they get older too. So shouldn’t things get less stressful?

One (of the many reasons) for this phenomenon is the tendency for people to mentally spend future increases in income ahead of time, which is similar to how people will tend to spend exactly what they earn now (if not more).

If you earn $50,000 (after tax) and you spend $50,000 after tax and you know that you are getting a $5,000 raise in the next three months how likely are you to use the increased income to better your financial situation? Do you commit the extra dollars to accelerating your debt repayments or funnel it towards savings and investing? Or do you plan on spending $55,000?

I’ll offer up a compromise: take half the increased take-home pay and put it towards savings or debt repayment and use the other half to scratch your itch to spend.

Something is better than nothing, but until you break the cycle of spending every penny you have coming in the door every future raise just means the knife-edge you are balancing on is higher and higher up from the ground.

Refinancing your home Part 2: An Example

Posted by Preet on Jul 27, 2007 | 2 comments

Okay let’s show how an actual couple ended up freeing $915.80/month by refinancing their home. I’ve rounded the numbers, but they are from a real life scenario. We’ll begin with a snapshot of what their financial situation was BEFORE:

Home Value: $250,000

Mortgage: $150,000 balance, 20 years left, 6% interest rate = $1,070 Monthly Payment

Credit Card Debt: $10,000 balance, 18.8% interest rate = $500 Monthly Payment

Vehicle Loan: $26,000 balance, 8% interest rate = $500 Monthly Payment

Department Store Charge Cards: $5,000 balance, 28.8% interest rate = $250 Monthly Payment

In this case, they have a total debt obligation of $191,000 and total monthly payments of $2,320.

By refinancing, they were able to take out $41,000 of equity from their house to pay out the vehicle loan, the credit cards and the department store charge cards. This increases the mortgage from $150,000 to $191,000. Plus, let’s add a $5,000 charge to break their existing mortgage for a total new mortgage balance of $196,000.

However, that entire amount is now being charged 6% interest and amortized over 20 years.  The new mortgage payment is $1,404.20. …but that’s the only payment.

So: Old Total Monthly Payment ($2,320.00) – New Total Monthly Payment ($1,404.20) =

$915.80 Saved Per Month

Take this with a grain of salt.  You have to factor in the trade-offs. Yes, you free up a lot of money monthly, but it has to be put to good and productive use. Also, before they would have freed up the $500 monthly vehicle loan payment in 4 years anyways, but now they blended it into a 20 year mortgage, effectively paying for that vehicle for 20 years. In many cases, these trade-offs are more than acceptable to people who are looking into refinancing as they are in dire need of a short term solution and even just a little breathing room is enough of a dangling carrot for them to proceed. In this particular case, a $915.80 monthly savings was very compelling and they are currently saving $700/month out of that into an investment account.