Debt – The Good, The Bad, and the The Ugly – Part 2

Dear Borrow Smart Family,

Debt is not something you should be ashamed of. But it is something that you should want to fix. The below is a continuation from last week:

1. If you have “bottomed out” on debt, if you are really ready to make a change, then your first move must be putting money into a savings account. It’s possible you are in “trouble” because you are lousy at saving money. If you maintain a financial lifestyle of spending more than you earn, then working to pay off debt is like putting a bandage on a broken leg: You’re “doing something,” but it is not going to help. The requirement that you save money out of current income applies to all who work for a living. If you don’t save, then the rest of this advice will be meaningless.

2. Stop using all of your credit cards–no exceptions. If you can’t pay cash for something, then you don’t need it. Cut them up if you must.

3. Make a plan–list each credit card balance and interest rate, then work on paying off the cards with the highest interest rates first–or, if it helps psychologically, pay off a low-balance card just to experience the victory. *Reminder – our BorrowSmart Program is a complimentary program that has this strategy built in! Feel free to e-mail us at BorrowSmart@spmc.com to schedule your review and get your complimentary plan

4. If you are getting a tax refund, if you get a bonus from work, or if you come into any other unexpected clot of money, pay it immediately on your credit card debt.

5. Pay more than the minimum every month on every card. Don’t be fooled: The credit card company is NOT doing you a favor by requiring only a small monthly payment.

6. Reduce the interest rate you are paying by calling each company and asking for a lower rate. Changing your interest rate from 20% to 12% is a pretty healthy reduction. If you can effect this change, next look at consolidating other higher-rate balances into this card.

7. As a last resort, there may be circumstances where it makes sense to refinance your home to pay off credit card debt. The risk here is that you may just go out and run up more debt, making this the worst possible action you could take if you’re simply going to waste the monthly savings. The absolute key here is to use those savings to begin building your savings and financial safety. Often times we can connect you with trusted financial planners who will help by becoming accountability partners to you, along with us, and create a system for you to save consistently and grow your nest egg.

Following these suggestions just might constitute the beginning steps on your pathway toward financial health. Our passion is to help be the catalyst for this bigger, better future!

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Debt – The Good, The Bad, and the Ugly – Part 1

Dear Borrow Smart Family,

There are three types of debt, the “Good”, “Bad”, and “Ugly”. Let’s discuss the differences and provide some direction for addressing your debt-related issues.

When discussing debt with clients, too often they express a sense of guilt or shame that they owe money. One of the first rules we teach is “No Shame, No Blame”. While we do want clients to be free of debt, let’s be clear on one thing: some types of debt are defensible, perhaps even desirable. So let’s dispense with the guilty complex, and the destructive habits of blaming past bad decisions, and focus on greater clarity and understanding of debt.

Good Debt

For at least a moment, forget what those television gurus tell you about paying off your mortgage. They are not necessarily addressing your specific situation, and it is blatantly misleading to pass off such advice as applicable to all. The simple truth is that most of us could not purchase our homes but for the availability of “cheap” mortgages.

Why might it be best for you to carry mortgage debt? There are three primary reasons:

  1. The use of borrowed money, or leverage, allows one to purchase much more home than would be possible if paying with cash–which, in turn, means that one will benefit much more from appreciation of the property over time.
  2. Mortgage interest is fully tax deductible for most middle-class Americans, reducing the after-tax “cost” of this debt by approximately one-third.
  3. Mortgage debt is a hedge against inflation (and is better than gold in this respect because you can live in your house). Paying a locked-in interest rate for 30 years, while inflation eats away at many other investments, is a vital benefit.

Other possible kinds of good debt include loans for education since the debt increases future earning; automobile debt, if you cannot possibly buy a car for cash and don’t buy more car than you need, even at 0% interest; and, in rarer circumstances, debt incurred for investment purposes.

Bad Debt

Even mortgage debt can be bad debt if the interest rate is pretty much anything more than 1% higher than the rate you can readily obtain at the present time (depending, of course, on how long you plan to stay in your house). In this situation you should consider refinancing immediately.

Bad debt generally also includes car loans (the longer the term, the worse the debt), boat loans, vacation house loans (interest is possibly deductible, but you are also probably not using the house enough to be carrying debt on it)–anything involving the payment of interest that is unreasonably high, that is not tax deductible, or that is not for “essentials.”

Ugly Debt

Put as simply as possible: Unpaid credit card balances constitute the absolute worst kind of debt imaginable. Just as compounding interest works meaningfully to your advantage when you are saving for retirement, the compounding of credit card interest charges puts you on a debt treadmill that can be very difficult to escape. While difficult, it certainly is not impossible!

Generally speaking, it doesn’t take much to convince clients to pay off their credit card debt–but that’s the easy part of the equation, isn’t it? The real work comes in making a plan to pay this debt off and then sticking to it. Stay tuned for Part 2 when we explore specific strategies to eliminate “bad” and “ugly” debt.

Reminder: As part of our unique service for homeowners, we’re happy to provide complimentary reviews and debt elimination plans. Please contact us at BorrowSmart@spmc.com to see how we may help you further!

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Borrow Smart, Repay Smart: Planning – Begin With The End In Mind

Dear Borrow Smart Family,

Fast forward in time to December 2020.

Imagine yourself sitting alone in your favorite thinking spot!

Looking back over the previous 11 months, what HAS to have happened for you to be happy with your progress in 2020?

We’ve all heard the advice from Stephen Covey, “Begin with the end in mind.” As you set aside time to think and plan for the rest of your 2020, I encourage you to take a different approach this time.

Write what you accomplished or made progress on in past tense as if it’s already happened.

  • What did you accomplish in 2020 that you are most proud of?
  • What personal goals did you achieve?
  • What business or professional goals did you accomplish?
  • How much time did you commit to your growth? Your health? Your family and friends?
  • What impact did you make on the lives of others?

This is extremely important. The mind struggles when trying to accomplish things it deems impossible or two far-fetched. But by describing things in past tense, as if you’ve already accomplished them, the mind begins to see your goals as realistic and achievable.

Start writing. But this time, write it as a summary of how great 2020 was for you; even if it takes extra time to focus on your silver linings. Many of us, have or know someone who has lost a job during this pandemic. Progress is made even amidst loss or setbacks. Be specific in describing all the areas you made progress in. Make it a year you will look back on, and be proud of your grit. Even better, describe a 2020 that others will be proud of.

I wish you all the best!

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Borrow Smart, Repay Smart: How much money should I keep in a savings account for emergencies?

Question: Hi Trevor! How much money should I keep in a savings account for emergencies?

Answer:  Many financial professionals suggest that you put away three to six months’ worth of living expenses for emergencies. We actually call these funds “Cash Reserves,” because the reality is, most things that might happen are not really emergencies. Once established, we also refer to this as your “sleep well at night” account!

If you lose your job, or become disabled and don’t have adequate disability insurance, you’ll need that money to pay your regular monthly expenses, such as mortgage payments, insurance premiums, groceries, and car payments, until you can find another job. Without such an emergency fund, a period of unemployment could put your assets at risk. Similarly, if your car breaks down or your spouse has a medical emergency, you’ll want to have the necessary cash to pay the bills. You don’t want to be faced with an immediate need for cash, only to discover that you don’t have any.

You may have already set up an emergency fund. Did you put the cash in a five-year certificate of deposit (CD) or other long-term investment? In an emergency, you will need to get at those funds immediately. You can certainly pull your money out of the CD early, but you’ll pay a penalty. It’s better to keep some funds more liquid, in a traditional savings account, a money market deposit account, or a six-month CD, for example. That way, the cash will be readily available when you need it.

Finally, keep your emergency fund separate from your everyday accounts. You might even want to use a different bank. Unless you are extremely disciplined, you’ll be tempted to spend those extra funds if you keep them in your checking account. Remember, if you can put off an expense until next week, it is probably not an emergency.

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Borrow Smart, Repay Smart: The Story of the Magic Penny

Dear Borrow Smart Family,

If you had the choice between taking $3,000,000 in cold hard cash right now or a single penny that doubles in value every single day for 31 days, which would you choose?

If you’ve heard this story before, you already know that choosing the penny option is the better choice and will lead to greater wealth. But why is it so hard to believe that choosing the penny will result in more wealth over time? The answer is simply because it takes so much longer to see the payoff. Most of us can’t stand delaying our gratification. This is why in general, the savings rate in the United States is very low compared to other countries, and credit card debt keeps millions of families from achieving financial freedom.

Let’s look at the math behind the story a little closer: Assume YOU choose the $3 million in cash in hand right now, and your best friend chooses the penny gamble.

On day #5, your friend has just 16 cents. You, of course, have $3 million!
On day #10, your friend has $5.12 cents, while you are enjoying your riches.
After 20 days your friend has $5,243, while you are treating your friends and family to dinner.
At this point, how is your friend feeling? He or she has delayed his or her gratification in hopes of making a smart, long-term decision as they are watching you live large with your mounds of cash. But…the invisible magic of “compounding” is about to take effect.

By day #31, your friend’s single penny has multiplied (or compounded) into $10,737,418.24! This is more than 3x your original $3 million!

This simple, yet compelling, story shows why consistency over time is more important. On day #29, your friend has about $2.7 million, still a bit behind your $3 million, but by day #30 your friend pulls ahead with roughly $5.4 million, beginning to leave you behind.

The magic of compounding, along with small steps taken constantly over time, is what can lead to massive success. Just imagine exercising 15 minutes every day versus “waiting” until you suddenly have 1 hour freed up to go exercise all at once on the weekend.

Darren Hardy, the publisher of Success Magazine and the author of The Compound Effect, describes success as a series of small, seemingly insignificant steps, done consistently over time.

What areas of your life could this principle be applied, so you could enjoy the results a month, a year, or 10 years from now?

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Pole Pole! A Lesson from Climbing Kilimanjaro

*Repost from November, 2016

Having just gotten back from climbing the highest mountain in all of Africa, I can say that the journey on Mt. Kilimanjaro taught me many lessons. What was the most important one? Set crazy, big goals that scare you and excite you at the same time…then focus on taking one step at a time in the direction of the goal.

As we began our ascent toward 19,341 feet, the guides would constantly repeat, “Pole Pole” (pronounced poh-lay poh-lay). This means “slow, slow” in Swahili. Honestly, I trained hard before our trip, but there’s just no way to train for how slow they encourage you to walk. Naturally I, and everyone else, just wanted to get to the summit as fast as possible. But going 42 miles, uphill, across every type of landscape you can imagine, with less and less oxygen available as you climb in altitude, requires you to slow down. The advice of “pole pole” forced me to concentrate on the task at hand, one step at a time, and not get too overwhelmed with how far I still had to go to reach the summit.

Every once in a while I would pick my head up, look to the peak of the mountain for inspiration, and then back to my feet. Minutes would go by, and eventually hours. But as long as I knew my steps were in the direction of the primary goal, I was happy.

In business, and in life, we must have goals. Big goals. They push us to grow and get outside of our normal comfort zones.

The secret is to not focus on how far from achieving your goal you are, but rather turn around, and focus on the progress you’ve made. As long as your daily actions are in alignment with your vision of where you want to go, you can be happy and confident.

Pole pole! Sometimes we just need to slow down. It’s not a race. If you know where you want to go, you WILL get there, step by step, if you stay focused and confident.

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Borrow Smart, Repay Smart: Manage Your Energy FIRST

Dear Borrow Smart Family,

I’ve been doing some studying on emotional energy.  Your thinking.  Your feeling. Your vibe, so to speak.  (Which comes from ‘energy vibrations’.)  And how all this impacts our ability to lead our families, build at work, and have the freedom that we believe money and time affords us.

We broadcast energy all around us, every day, to anyone around us.  We also receive energy from everyone around us.  But what KIND of energy?  Happiness?  Excitement?  Gratitude?  Fear?  Anger?  Scarcity?

We control our vibe with our thoughts and feelings.  Others pick up on this and respond to your energy…good or bad.  We are either giving others energy, or taking energy away from them, based on our thoughts and feelings…our vibe.

Like attracts like:  people radiating positive energy will naturally move away from you if you are radiating negative energy.  Even worse, people with a negative ‘vibe’ will seek out others with a negative vibe, bringing their fear, anger, grief, and negativity into your life.   Misery loves company, right?

In business or life, your mindset and vibe tells others whether you are a ‘player’ or a ‘victim’.  Nobody wants to be around a ‘victim’. Colleagues, friends, family, clients and partners…want to be around players.

A negative vibe, a ‘victim’ vibe, can start an awful feedback loop, affecting our relationships around us, and leaving us feeling like we’re in a downward spiral sometimes.  Tough to escape.  Especially since what we focus on…expands in our mind.  (Thanks to our Reticular Activating System).

Whereas top performers, or ‘players’ spend the majority of their life in a positive mental state, giving off positive energy that attracts others.

Knowing this, how do you start your day?  What are your morning rituals that will put you into a ‘player’ mindset, giving on positive vibes? 

When stuff doesn’t go your way, and you feel yourself heading to the “dark side”, how do you control your thoughts/feelings/energy to stay positive…part of the solution…get back to the ‘player’ mindset and vibe…continuing to attract others rather than repel them?

Some hints:

  • Gratitude
  • Exercise
  • Reading positive stuff (i.e. not news)
  • Learning something new
  • Music
  • Talking to other positive people
  • Affirmations/Visualizations
  • Sending a note or personal video – focusing on OTHERS and giving

If we don’t invest the time to better control our emotional energy, daily, we will continue to make everything else more difficult in our lives and in our business.

Every day is a GIFT! I wish you all the best.

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Borrow Smart, Repay Smart: Four Reasons You Might Want to Consider Refinancing

Dear Borrow Smart Family,

Owning a home and building equity opens up many opportunities. As a homeowner, there will be times you wonder if refinancing your mortgage makes sense. Rightly so, as there are quite a few reasons getting a new mortgage can improve your financial future if done right. Here are some of the most common (and less common) reasons you might want to consider refinancing your mortgage at some point.

Always remember, there are costs involved when refinancing, and it is a big financial decision. So don’t rush into it, and be sure you work with an expert who can educate you and talk you through the pros and cons of refinancing. Exercise caution before making short-term decisions that can potentially impact your long-term goals.

1. Take advantage of lower interest rates:

This is the most obvious, and the most common, reason homeowners look to refinance their existing mortgage. If interest rates have dropped since you first bought your house, you may be able to take advantage and lower your monthly payment by refinancing and getting a new mortgage. This can provide a quick boost to the ability to save or pay off other debts faster.

2. Get cash out:

If you are considering to consolidate some higher interest debt, or need cash for an opportunity that has come along, you may consider looking into a cash-out refinance. There are limitations, but simply put, you may be able to access some of the equity in your home to achieve the above goals. Often borrowing against your home is less expensive than other options. Your house is not an ATM machine, but done strategically, safely, and within an overall plan, your house can be a valuable financial tool.

3. Get rid of mortgage insurance:

If you bought your house with less than 20% down payment, it’s likely you have monthly mortgage insurance included in your payment. As you pay your mortgage balance down, and your house appreciates in value to the point you have 20% or more equity, you may have the opportunity to refinance and get a new mortgage without mortgage insurance.

4. Change your mortgage terms:

Perhaps you were overly aggressive or just had a fear of debt, leading you to finance your house using a 15-year mortgage. If you find that these higher than normal monthly payments are impeding your ability to save elsewhere, avoid using credit cards for vacations, or even worse, not allowing you to maximize your retirement contributions, you may want to consider refinancing to a longer-term mortgage. Even if a 30-year fixed-rate mortgage comes with a slightly higher interest rate, the lower required payments can free up cash flow to achieve other important financial goals. On the other hand, maybe you hope to retire in ten years, yet you have 22 years left on your current mortgage. If cash flow is good, and your other debts are all paid off, refinancing to a shorter-term mortgage might make sense. Again, this assumes all of your other financial “ducks” are in a row.

If you’re feeling overburdened by debt, please reach out to borrowsmart@spmc.com for a complimentary review of your home equity and current cash flow status. 

I wish you all the best!

refinance-home

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Borrow Smart, Repay Smart: Why Budgets Fail

Dear Borrow Smart Family,

The idea of regimenting your money spending can seem tedious, but it is well worth the effort. If you’re looking to get your money in order, there are 3 main blind spots to consider:

 

Why is a budget important, and what is the bigger goal? What might budgeting mean to your family’s well-being?

People often ask me money questions around buying a first home, that’s why I’ve created a book called Mortgages, Money & Life. It is chock-full-of lessons on looking at owning a home, creating wealth, and making smarter decisions with money. If you’re interested to check it out, it’s available on Amazon HERE.

I wish you all the best!

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Borrow Smart, Repay Smart: Your Choices with Money

Dear Borrow Smart Family,

How do we discipline ourselves to spend money wisely? As an everyday mortgage professional, I help people acquire the largest asset they have – a home. To help borrow the most amount of money they’ve ever borrowed – a mortgage. For the largest line item in their budget… You guessed it, a mortgage payment.

As students, and ultimately, masters of helping clients manage money better, we can identify 3 choices that we all have relating to our money.

The 3 choices are as follows:
1. We can spend it
2. We can save it
3. We can use the money to prepay debt

Every money conversation leads back to those three choices. Debt prepayment, relates to car loans or student loans, that you have a choice to prepay, if needed, every month. I go into a bit more detail below:

 

I desire for you a full life, of no regrets or holding back. Life should be fun! But if you’re feeling overburdened by debt, please reach out to borrowsmart@spmc.com for a complimentary review of your home equity and current cash flow status. I’m here to help. I wish you all the best!

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