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  • Medical Bills & Personal Finance

    I just re-read an old post from October 2008 about the impact of medical debt on some families. Back then, I didn’t have any experience with huge, and most importantly, continuing, medical bills. The biggest medical bill I’d ever paid was for giving birth.

    But then we had our family medical crisis earlier this year, which involved multiple emergency visits, a hospitalization, and then numerous follow-up visits and tests. As the bills rolled in and added up, it was overwhelming at first, even for me – and I had money in the bank to pay all of the bills! It was just difficult to accept that we suddenly owed so much money to a handful of medical providers. (Fortunately, the big bills have been paid and it’s just the bills from the follow-up visits that are trickling in – and those are for perfectly sane amounts.)

    The experience gave me some insight into how scary it must be for people who don’t have an emergency fund. The medical bills add up incredibly quickly – I now understand how people who were living within (but not necessarily below) their means can so quickly end up deep in debt. I can now see how, if you don’t have much savings or insurance coverage, you can blow through the savings you do have, find yourself having to choose between paying the bills you’ve always had or the newly arrived medical bills, and eventually end up without a home.

    The lesson here, of course, is that your best shot at weathering the storm is preparation. Get health insurance. Do the research to find the most affordable plan with the greatest amount of coverage. And live below your means and build up your savings. Have enough to cover your annual deductible and maximum copay. And most of all, do your best to take care of your health because man, those medical bills are expensive!


    Banner via MySavings.com

    Re-thinking the Mortgage Payoff Plan

    On a day-to-day basis, I tend to focus on the small picture: save a few dollars on milk and cereal, buy the boys’ clothes a year ahead on clearance, pay insurance bills in full to avoid the installment plan “convenience” fee, etc.

    But lately I’ve been thinking more about the big picture: our long term goals, what’s likely to happen in the next five to ten to twenty years, and especially, how do we balance liquidity with paying off the mortgage?

    While both Marc’s and my jobs seem secure for the moment, we are definitely not immune to the economic crisis that our country – and particularly, our home state of California – is weathering right now. We could be hit by pay cuts or layoffs, a steep decline in the quality of our local public school, or even a medical crisis or something unpredictable.

    Pay cuts or layoffs are unlikely but not impossible or even improbable. One of my best friends and her husband were both laid off earlier this year and just found jobs after months of searching. It was stressful, to say the least, but they survived as well as anyone could due in large part to their conservative spending habits and savings. We want to be in the same position, just in case.

    Additionally, you may recall that I’ve spent much of the last two years researching public and private schools in an effort to determine where to send Alex next year. I was pleased to discover that our local public school is at least as good as any private school that we could afford. But of course, whether the public school is able to maintain its high standards in the midst of this recession remains to be seen. Class sizes are increasing this coming year. The school board has approved a three-year plan to eliminate full-day kindergartens and all arts and music programs, cut salaries by five percent in 2011-2012, and require furlough days. Governor Schwarzenegger wants to “suspend” mandatory school funding. I’m cautiously optimistic that because our public school seems to have a committed administration and an active PTA, it will be able to adjust to these restrictions without a loss in quality. The PTA, if it is able to raise enough money, can provide funding for supplemental arts and music programs, for instance.

    But, who knows what the situation will be in a year or two? It would be nice to have the option of sending the boys to private school should that become preferable.

    It would also be nice to pay off the mortgage in six years, as we’d originally planned. But sometimes it’s necessary to strike a balance.

    For the time being, we are splitting our debt snowball and directing half to our mortgage and the other half into savings. I created yet another subaccount at ING to keep this money separate. My thinking is that we will re-evaluate every six months or so, and if things look good, we can make a large principal payment on the mortgage that will keep us on the path to full repayment in six years. On the other hand, if we feel like hoarding cash, we can do that too.

    This plan worked well for us when it came to paying off my student loans – and in fact, we did that a few months earlier than I’d anticipated. So hopefully things will work out that well when it comes to the mortgage too.

    Previously: How I’m paying off my student loans

    Does the mortgage interest deduction make carrying a mortgage worthwhile?

    Since announcing our intention to pay off our mortgage in six years, I’ve been asked if that’s wise, given that the interest on a mortgage is tax deductible. The short answer is, it doesn’t really matter to me. Paying off the mortgage will free up a lot of cash flow, which in turn will open up lots of options for us – options that I most definitely want to have in six years, because they may include things like the very expensive private school that we can’t afford right now.

    The long answer is – no surprise here – it depends – on whether you can earn more money with the extra principal payment than you would save by paying off that amount of principal. The math gets kind of complicated (at least for me), and I’m not a CPA or tax lawyer, so let me know if I haven’t got this right.

    Let’s say that you’ll pay $10,000 in mortgage interest this year and are in the 25% tax bracket, meaning that you’ll pay $2500 less in taxes thanks to your mortgage. Let’s also assume that if you pay an extra $250 per month in principal, you’ll reduce your mortgage interest to $9,000, and therefore reduce your tax deduction to $2250. In other words, you’ll end up paying $250 more in taxes this year because you paid off $3000 extra in principal ($250 x 12) . But you also paid $1,000 less in mortgage interest, for a net gain of $750.

    Now, suppose you could take that $250 per month and invest it somewhere and earn more than $750 over the course of the year (plus more, to cover the taxes you’ll owe on the extra income). Then theoretically, you’re better off not paying extra on the mortgage but going with the investment instead. However, it also occurs to me that the math ought to be even more complicated because the mortgage interest savings are probably compounded over the life of the loan – that sort of calculation is way beyond my abilities, so I’m not even going to attempt to go there.

    In my case, I haven’t run the actual numbers to see if we could earn more via investment than we’ll save by paying off the mortgage early. I don’t even want to attempt those calculations, and in any event, it doesn’t matter because I would predict the gain wouldn’t outweigh the options that I’m looking forward to having in six years. And for us, that’s what really matters.

    We are debt-free! (Except for the mortgage – here’s how we did it)

    I sort of slipped the big announcement into a previous post, but we are now debt-free!

    Except for the mortgage.

    The funny thing is, I’ve been looking forward to writing about being debt-free for a long time. When I made the final payment on our last non-mortgage debt (a student loan), I had big plans to write about how we accomplished it, and how good it feels to not have any debt. (I was just waiting for the official “congratulations, you’ve paid off your loan!” letter.)

    But after paying off that last loan, I turned my attention to our mortgage. And that’s sort of taken away from the accomplishment of paying off all of our other debt – because the simple fact is, we’re still in debt.

    A big part of why my sense of elation at paying off the last of our non-mortgage debt has been diminished is that I can see how much more freedom we will have when we no longer have the mortgage. So while I’m still excited that we’ve paid off our other debts, paying off the last non-mortgage debt doesn’t feel that different from paying off the debts that we finished off before that.

    I’ll be really excited when we have paid off the mortgage. Because if all goes according to plan, we’ll never need to borrow money again. (Unless we decide to move, in which case we may need another mortgage, or make a big investment, like buying rental property – neither of which is likely to happen, however.)

    Here are the steps we’ve taken to ensure we can pay off our mortgage quickly and hopefully never need another loan again:

    We don’t just live within our means – we live well beneath them. We are lucky that we can do this, of course, while still maintaining a comfortable lifestyle. But we worked hard in school and after graduation, and made wise choices, to get to this point in our lives.

    We pay off our credit cards each month. This goes along with the first point, of course, in that we don’t spend more than we can pay off. Some of my favorite bloggers, like No Credit Needed, don’t believe in using credit cards at all. Personally, I’m okay with credit cards as long as I’m not spending frivolously and can pay off the balance each month. The convenience and rewards are worth it. (And remember that failed all-cash experiment last year?)

    We save money each month. One of the first things we did as a married couple was build a nice emergency fund. It’s grown over the years, as our family and obligations have expanded. We continue to add to the fund each month, and this helps to ensure that we won’t need to borrow money in the event of a major financial need.

    We set aside some money each month for the next car payment. After we paid off our last car loan, I started making monthly deposits for the sole purpose of buying a new car with cash in four to five years. We may need to draw some money out of our savings account to complete the purchase, but we definitely won’t need to take out a loan to buy the car.

    We use the debt snowball method. I love the debt snowball. Ours has grown a lot over the years, and will now be used to pay off the mortgage. A portion of every regular increase in income (i.e., salary raises) and decrease in expenses (e.g., lower insurance premiums) has gone toward the debt snowball. Our nearly decade-old snowball is now big enough that we will be able to pay off our mortgage in about six years. I can’t wait for that day!

    Previously: How I’m paying off my student loans

    My week in review

    I don’t know if I’ll make this a regular feature, but there are some random things that I thought were worth sharing but not really worthy of their own post.

    The highlight of the week was definitely initiating the payoff for my student loan. Once that goes through, we’ll be debt-free except for our mortgage!

    I don’t know what my problem is, but I’ve screwed up what’s supposed to be an incredibly easy bread recipe twice now. It’s the focaccia recipe I mentioned a couple of weeks ago. Camille from Growing Up Gabel made it and said it was great so I was really looking forward to it, but I obviously lack her breadmaking skills. The problem is probably that I’m not using all white flour – it’s just so hard for me to not substitute half white whole wheat flour, but of course it’s much denser. I’m guessing that if I want to do this, I need to add some gluten, even though the dough seems to rise beautifully in the bowl and pan. I’m going to try it soon with just white flour and that will at least help me determine if it’s me or just the ingredients.

    Just because I’ve done something well in the past doesn’t mean I can do it well again – at least, not on the first try. I made calamari for dinner this week for the first time in at least six months. It had been so long that I kind of forgot how to deep fry the things. It took a few batches before I was able to keep the oil at a consistent temperature, and I even overcrowded the pot once. But the pieces that came out well were amazingly delicious, as always. I don’t really have a recipe, but here’s my technique: Marinate the squid in buttermilk for a few hours. When ready to cook, heat the oil and dredge the squid in cornmeal. Fry until golden brown. Drain on paper towels and sprinkle lightly with salt.

    Our federal tax refund seemed to come especially fast this year. I think it was within two weeks of our accountant e-filing our returns. We had to pay the state, so I don’t know how quickly state refunds are being issued, though apparently they are being issued now (for a while during the budget crisis, refunds had been withheld). This year was the closest we have ever come to getting our federal and state taxes exactly right (i.e., not owing any money nor getting a refund). Of course, I try to get as close as I can every year so I think it was just luck.

    Thanks to all of your suggestions, I think I put together a pretty good non-food Easter basket. Of course, I’ll know for sure after their reaction tomorrow. But thank you again for your help!

    The keys to paying off debt: persistence, consistency & growing your debt snowball

    Kelly at The ¢entsible Life explained how she’s paying off her debt, and asked her readers how they’ve paid or are paying their debts off. It occurred to me that the single most important thing we’ve done to get so close to being debt-free is being persistent and consistent. We’ve made every payment on time. We’ve always paid extra, even if it wasn’t much, especially at the beginning.

    And the other thing we’ve done that’s been key is grow our debt snowball. The “debt snowball” is simply the payment you make each month toward your debt – it’s a “snowball” because when you pay off one debt, you apply the payment you’d been making toward the next debt, and you keep doing it until all of your debts are paid off. (No Credit Needed has a more detailed explanation about debt snowballs.)

    We’ve consistently added to our debt snowball over the years. Salary increases in particular have helped grow our debt snowball. Also, any long term decreases in our expenses – such as a reduction in our insurance premiums – have been applied to our debt snowball.

    I’m a believer in “snowflaking” too – a term coined by PaidTwice for random savings that can be applied to pay off debt. It’s been my experience, though, that snowflaking is most effective when you can’t grow your debt snowball. Growing the debt snowball is more effective than snowflaking because it’s a regular thing – there’s that much more money going toward the debt each month. But of course, adding snowflaking to your growing debt snowball will pay off your loans fastest of all.