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  • Midday Coffee: All that loan interest adds up

    All Financial Matters crunches the numbers on a car loan and shows how you can end up paying $7,000 in interest on a $17,000 loan (yikes!). Stories like this make me very happy that we’ve paid off both of our cars and are setting aside money each month so we can pay cash for our next car. Of course, the loan that AFM works with has a 12% interest rate, while the interest rate on our two most recent car loans were under 3%. So even if you can’t save enough to pay cash, just having an excellent credit rating can save a few thousand dollars.

    Become a Facebook fan of Libby’s and get a free can of Libby’s Vegetables. Offer expires 5/15.

    If you live in Ada County, Idaho, A Thrifty Mom explains how you can get free insert coupons.

    Get a printable coupon (pdf) for $1/1 Nexcare bandages. MoneySaving Mom explains that this coupon is legitimate despite being a pdf because it’s hosted on the manufacturer’s website.

    Get $10 off a $10 purchase at Crabtree & Evelyn with code MOM210. Go through a cash back portal to get some of your money back. Big Crumbs is giving 8% back, Shop At Home (affiliate link) is giving 7% back, Upromise is giving 4%, and Mr. Rebates (affilate link) is giving 3%.

    Going Concern offers some suggestions for polishing your resume. Their tips are specifically geared toward accountants, but are generally applicable to almost everyone.

    I Heart Wags has coupon match ups for this month’s “suggestive sell” items at Walgreens – cashiers/stores that sell a lot of these get some kind of recognition, so if you like your cashier and/or store, buying these can help them out.

    Moms Need to Know reports that the General Mills manufacturer’s coupons on the Target web site print without the dreaded “Do Not Double” instructions at the top.

    Banner via Escalate Media Affiliate Network

    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!

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    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