What Would You Tell a Teenager About Money? (Carole)

A few weeks ago, I was asked to speak about money to the teenaged girls in our church congregation.  Thanks to all of you and your many good comments on this blog since January, I felt like I knew what kind of information would be most interesting and helpful to these girls who are just on the cusp of adulthood.

Here's what we discussed:

1.  Getting a job and saving 50% of what you earn while in your teens.  I also shared with them examples of impressive teenagers I've known through the years and the amounts of money they've been able to save in their bank accounts by the time they graduated from high school.

2.  The cost of tuition at local and out-of-state colleges and universities.  We even took a look at the cost of elite schools like Harvard and Stanford, just so they would know.

3.  Typical salaries of standard jobs:  surgeon, fire fighter, grocery store clerk, pilot, flight attendant, lawyer, school teacher. . .  and what the monthly take-home pay (after federal taxes) would be for each of these jobs.  So. . .is a college education really worth the time and money invested for your particular profession?

4.  How much adult life costs:  housing, groceries, transportation, utilities and insurance.  True to one of my previous examples of teaching children about money, I brought in $3,000 (which is a typical take home salary if you make $50,000/year -- the average salary in Las Vegas) in cash -- in $10 bills.  Together we paid the bills of a typical family in southern Nevada.  Much to their surprise, we ran out of money, long before we ran out of bills.  This was very eye-opening to this lovely group of girls.

5.  How compound interest works.  We walked through how compound interest works in your favor if you're saving money or investing, but how it works against you if you're paying off a loan or a credit card bill.  We also discussed how the length of the loan (or investment) and the interest rate influence your payment (or return) and the total you will pay (or earn) over the lifetime of the loan (or investment).

It was a fun night, and I felt like the girls were right with me.  But I'd love to know what YOU would have said to them?  What do you wish someone had told you at their age?

What Would You Do With a Windfall? (Carole)

Many years ago I had a good friend.  She and I lived in the same small town and had children who were just the same ages.  We became exercise partners and often spent entire days at each other's apartments while our children played.  After a year or so, we were both on the verge of buying our first homes.  I was aware that before she was married she had been involved in two accidents and had received two different insurance settlements adding up to a whopping $50,000!  In my mind, they had it made, since we were scrimping and saving to get our own down payment together.

But one day she mentioned that they were going to have to borrow most of their down payment from her parents.  She was unbelievably embarrassed to do so, because now her parents would know that she and her husband had blown the entire amount!   I don't know how they spent all that money.  I do recall they had a ski boat and an old truck to pull it with and their kids had a lot of cool toys, but beyond that I couldn't see where it had all gone.

I've often thought of my friend during these past 25 years.  What COULD they have done with that much money that would have been smart?  In reality, the possibilities were endless, but here are three super frugal choices.

1.  Bury it in their backyard or put it in a safety deposit box.  In 5 years they would still have had their $50,000.

2.  Put it in the bank.  In the mid 1980's an average money market account earned 7.71% (these were the high interest Jimmy Carter years -- great if you had money to invest, horrible if you needed to borrow it) and at the end of five years they would have had over $73,000.

3.  Buy a house.  In the 1980's, $50,000 would have been a hefty down payment on a starter home.

What would you do if you suddenly found yourself with a large amount of money right now?

Setting Financial Goals (Carole)

Anyone who knows anything about my husband knows that he is a goal setter.  I'm not sure how old he was when he set his first goal, but by the time I met him when he was 23, it was deeply entrenched in his soul.  In fact, when we were on our honeymoon back in the summer of 1983, he insisted that we take the time to write down our life goals.  These goals dealt with education, career, lifestyle, finances, travel, life experiences and habits to name a few.  We still have the original papers we wrote these down on in our Goals Binder that is kept at his desk at home.  We bring these sheets back out at least once a year and review how we're doing.  I'm frankly flabbergasted at how many of these goals we have achieved over the past 27 years!  We continue to set goals every year (both as a couple and individually), but we especially enjoy looking back at those original goals.  A few of them didn't turn out to be realistic or even relevant, but many of them were right on track.

You'll not be surprised that paying off our student loans in five years, paying off our house early and a set $ amount saved for our retirement years were a major portion of what we talked about that day.  In 1983, David was just about to begin his 2nd year of dental school and we were right in the middle of the whole student loan thing.  The idea of even buying a house was still years in the future and retirement seemed light years away.  But even so, we tried to make our best guess for
1.  How many years until we would be able to buy a house?
2.  What would a dental practice cost?
3.  How many years would it take to pay off our student loans?
4.  How much money will we need to retire in 2030?
This was an exciting discussion!  Our entire lives were ahead of us.

Now 27 years later (our anniversary is 2 weeks away) we've accomplished MANY of these goals -- and amazingly close to the dates we chose way back then.

I would highly recommend that you take time to think your life-time finances through, map out a plan and write it down.  I would encourage you mix in a hefty dose of Blue Sky with your Reality.  You really need both.  I think goals should move you forward at a speed (and maybe in a direction) that normal life would not.  If this were not true, why bother?   It's nice to be able to look back every year at a written goal sheet and be reminded of what you had hoped for when you were young and idealistic.  Maybe you'll discover you're ahead of the game in a few areas and possibly you'll be grateful for a nudge to get moving forward again.

The Magic of Compound Interest (Carole)

When you are investing money, there are two basic types of interest your money can earn:  Simple Interest and Compound Interest.

Quickly, let's look at the difference between these.

Simple Interest 

(Interest is only calculated on the money you have invested):  

If you invest $10,000 (your principal) at 5% interest for 20 years:

$10,000 x 5% x 20 years = $10,000 (interest earned) 

Add this interest earned to your original $10,000

$10,000  + $10,000  = $20,000

Compound Interest 

(Interest is calculated on your invested money PLUS your previously earned interest):

If you invest $10,000 (your principal) at 5% interest for 20 years with compound interest  you'll end up with $26,532.98 .   


The formula is a bit complex and hard for me to type out, but you can look it up here if you just really need to see it for yourself.

In addition:

The more often  your compound is calculated (daily, monthly, yearly) the more interest you will earn.  Daily Interest = $27,180.96
Monthly Interest = $27,126.40
Yearly Interest = $26,532.98

The longer your money is invested the more interest you'll earn.  Your same $10,000 at 5% for 30 years turns into $43,219.42   Same money, same interest for 40 years is $70,399.89

The higher your interest rate, the more interest you'll earn.  Your same $10,000 at 10% for 20 years will become $67,275.00

Combine longer time and higher interest and it starts to get really fun:
$10,000 at 10% for 30 years =  $174,494.02
$10,000 at 10% for 40 years =  $452,592.56

$10,000 at 12% for 20 years =   $96,462.93
$10,000 at 12% for 30 years = $299,599.22
$10,000 at 12% for 40 years = $930,509.70  (yep, nearly a million $)

Imagine if you could scrape together only $10,000 by age 20 and find a good mutual fund that paid 12% interest (not that difficult really) and just LEFT YOUR MONEY THERE until you were 65 years old, you would have $1,639,876.04   That's without you ever adding one more cent of principal to this investment.  The sooner you can get investing in something earning a decent interest rate, the better off you will be at retirement.


That is magic.  If you want to work some magic yourself, here is a compound interest calculator.  I'll warn you -- it's addictive!

P.S.  Your mortgage (or car payment, student loan, credit card bill. . .) works on a compound interest formula in your lender's favor.  That is why you often end up paying 3 times the cost of your house by the time your loan is completed.

Financial Goals (Janssen)

Two months ago, my husband and I paid off the last of our student loans, making us completely debt-free. It was glorious.

Once those were gone, though, we had to figure out what our new financial goals were. This was a little tricky because now instead of having one single-minded purpose for any extra money, we had so many categories we could consider - investing, emergency funds, vacations, a new baby (that makes it sound like we are saving to buy a baby. . . ), cars, etc.

We sat down together, looked over our finances and our budget and decided that our priorities were the following three:

1. A fully-funded emergency fund. Following Dave Ramsey's steps, we had previously had an emergency fund of $1000 before we began pounding away at our student loans. Once you're done with your debt, however, he recommends an emergency fund that could support your family for 3-6 months. We reviewed our budget and decided what that amount was for us and started working away at it as quickly as we could. The good thing about this goal is that it has a finish line - once we got that dollar amount in the account (actually, we have it spread out over several accounts at different banks), we could just leave it and move on to our next goal.  
2. Long-term investing. We significantly increased the amount of money we contribute into my husband's 401(k). Because time is on our side at this point, we wanted to take advantage of that, as well as the match that his company provides. 
3. A down payment fund. We currently are renters and probably will continue to be for the next several years, as we don't want to buy another house until we are certain we will stay in it for at least five or more years (we owned a house in Texas for three years and even after selling it for more than we paid for it, we still would have come out ahead if we'd continued to rent for those years - a house is a money pit). Our goal is to have a down payment of 20% since this would allow us to avoid paying mortgage insurance. We have a fairly good idea of how much the kind of house in the locations we're considering would cost us, so while we don't have as solid a number as we do for our emergency fund, it's a pretty accurate ballpark figure, I think. 

It's not as easy to figure out how to approach these goals as it was with our student loans since we knew it was a short time period where we could be incredibly focused. We're less interested in sacrificing all fun for several years than we were in making do on very little for six months. On the other hand, knowing what our long-term goals are and what the payoff will be, it's easier to be a little more careful and a little more frugal.

Why You Want a 15 Year Mortgage (Carole)

There are 4 excellent reasons to have a 15 year mortgage:

1.  You will build equity in your house much faster, since each monthly payment has a larger percentage of your money going toward the principle.

2.  You will own your house (FREE AND CLEAR) in 15 years.  You'll be amazed at how quickly 15 years passes in your adult years.

3.  You will save tens of thousands of dollars in interest on a 15 year mortgage compared to a 30 year mortgage.  More about this in a minute.

4.  Interest rates are typically .5% lower on a 15 year mortgage.

Take a moment to visit a mortgage calculator .  Type in your own mortgage information (full amount of your loan and interest rate) using a 15 year time line and then do it again with a 30 year time line.  Have the calculator figure out your amortization schedule and scroll down to the bottom to see how much interest you will have paid to your lender over the life of your loan.  You'll see that even though your monthly house payment will go up a bit with the 15 year mortgage, you will save more than HALF of the interest $ you would have paid with a 30 year loan!

Here is an example:

30 year mortgage on $150,000 at 7% interest.  Your monthly payment would be $1097.75.    During the 30 years that you pay on your loan, you will pay your lender $209,263.35 in INTEREST.  (This means you will have paid way more than double the original price of your house).  Ugh.

15 year mortgage on $150,000 at 7% interest.  Your monthly payment would be $1348.24.  During the 15 years that you pay on your loan, you will pay your lender $92,683.63 in interest.  So even though your monthly payment went up by $250.49, your overall savings on this loan is $116,579.72.  Fantastic!

Yes, you can do this on your own by getting a 30 year mortgage (with the lower monthly payment), but paying at the 15 year payment rate.  This plan gives you wiggle room if you ever hit some hard times and need a lower monthly payment to fall back on.  Just make sure you're the kind of person who is very disciplined and will keep to the 15 year schedule.

Remember, housing is one place you want to be very, very careful with your money.  Your ability to save yourself hundreds of thousands of dollars is very real.  Take the time to do your homework -- and reap unbelievable rewards.

When is it Right to Refinance a Mortgage? (Carole)

First the disclaimer:  I am not an expert.  However, we have refinanced our mortgages a couple of times over the years and so I do have some experience with this subject.  At the end of this post, I'll link to some websites that explain things in much greater detail.

Here are the basics:

Pros of Refinancing your Mortgage:
1.  Lower your monthly payment
2.  Can shorten the length of your mortgage (changing from a 30 year loan to a 15 year loan)

Cons of Refinancing your Mortgage:
1.  You return to the BEGINNING of your mortgage cycle -- meaning that your are at Payment #1 again.
2.  Because you are on Payment #1 again, the portion of your monthly payment that goes toward paying the principle goes back to its smallest amount and your payment portion for interest goes back to its largest amount.
3.  The lender charges closing costs for lowering your interest rate.  You didn't think the bank was going to give you 10's of thousands of dollars for FREE, did you?  Expect to pay at least $2,000 in closing costs.  Obviously the more money you're borrowing, the higher your closing costs will be.
4.  There are many other fees (beyond closing costs) associated with refinancing.  To some degree, it is like you are buying your house all over again.  Remember how fun that was??  Taxes, insurance, and prorated insurance will most likely be due also.

Good Advice

Most experts agree that you need to be able to reduce your loan interest rate by at least 2.0% to make it worth all the fees you will be charged.

Don't refinance if you're selling the house soon.  Go to Bankrate refinancing calculator and see how much your monthly payment will be with your new loan.  Subtract that from your current monthly payment and see HOW MANY months it will take you to save the money you will have spent on closing costs, fees and taxes from your refinance.  Will you own your house long enough to make up this $ difference?

Be careful with ARMs (Adjustable Rate Mortgages) right now.  Home loan interest rates are currently so low, that the chances that your mortgage payment will adjust up in a year or two are very good.  With the economy where it is, this could be dangerous for your financial future.

If you do refinance, go for a shorter length mortgage:  15 year instead of 30.  You will save 10's of thousands of dollars over the life of your loan with just this one change.

Further reading:
Noodling Over a Mortgage Refinance
When is it Right to Refinance Your Mortgage?
Refinancing Basics