How Interest Works

Do you have debt? Welcome to the club! Almost everyone in America has debt of some kind. Each piece of debt has a built-in interest rate associated with it. It seems that there are a lot of misconceptions in the world about how interest and debt payments actually work. That’s what I want to focus on today. I want you to understand how important that number is and how it impacts your debt payoff.

This can be confusing, but I will have an example at the end to help explain everything.

When you take out a loan to buy something such as a car or house, you receive an amortization schedule breaking down how each payment will apply to principal and interest. Principal is the debt itself, and interest is based off the rate that you qualified for. Interest is calculated monthly based on the amount of principal that is left. This is something that I don’t think is very well explained by those people selling you the loans.

I hear this phrase all the time, “You pay most of the interest in beginning so it isn’t worth paying extra.” Yes. That is true. But it is only true because the principal balance is larger at the beginning of your loan. Don’t let someone convince you not to pay down debt early because of that argument.

I have one more item to mention before the example. Don’t buy things based on the monthly payment. It happens all the time. People will buy a car as long as the payment is under $400 or whatever number works in their mind. Car salesmen know this, which is why they have started spreading loans over 60 and even 72 months. That’s 5 or 6 years! The average auto loan used to be 3 years. If you have ever sat in the sales room finalizing your purchase, you remember them saying that the tire warranty is only an extra $18/month. Focus on the actual purchase price of items and it will save you a lot of money long term.

Example: Congrats! You just bought a house. The final price was $300,000 and you managed to put 20% down so there is no PMI (Private Mortgage Insurance). The loan amount is $240,000 and you got an interest rate of 3.5%. The monthly payment is $1,427.71. You pay for insurance and property taxes in that payment totaling $350 each month.

The first payment is calculated by taking the total principal of $240,000 times 1/12 of the interest rate (3.5/12). Once interest is calculated, add in your insurance/property taxes. Then whatever is leftover is applied to principal. Let’s break down the first payment.

Interest = $700 ($240,000 x (3.5/12))

Insurance/Property Tax = $350

Principal = $377.71

Total = $1,427.71

You only pay down $377.71 of debt on that first payment! That amount is subtracted to calculate the next payment. Let’s break down the second payment.

Interest = $698.90 ($239,622.29 x 3.5/12)

Insurance/Property Tax = $350

Principal = $378.81

Total = $1,427.71

You get the point. But let’s say you wanted to pay down your house early. What would the effect be if you paid an extra $1,000 with your first payment? That would be directly towards principal. Let’s break down the second payment in this circumstance.

Interest = $695.98 ($238,622.29 x 3.5/12)

Insurance/Property Tax = $350

Principal = $381.73

Total = $1,427.71

This doesn’t seem like a big deal, but you just saved about 3 months of payments! That is $2100 in interest. Even if you were just able to pay $400, that would still be the equivalent of a double mortgage payment.

I hope this helps you understand how debt payments work. Paying off debt early does save money. Don’t let someone convince you to keep a loan around because the interest is deductible or that you’re paying extra interest in the beginning. That guy in the cubicle next to you doesn’t always know what he is talking about.

Mike Zeiter, CPA/PFS

Money and Values: Part 2

I received a lot of positive feedback on my last post about defining your values and using money to build a life around them. I wanted to share one story that exemplifies this concept. You may have read this story before in an article or book, but it is one of my favorite examples of how success means something different to each person.

An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.  Inside the small boat were several large yellowfin tuna.  The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “Only a little while.” The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s immediate needs. The American then asked, “So what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siestas with my wife, stroll into the village each evening where I sip wine, and play guitar with my amigos.  I have a full and busy life.” The American scoffed, “I am a Harvard MBA and could help you. You could spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15 – 20 years.”

“But what then?” Asked the Mexican.

The American laughed and said, “That’s the best part.  When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions!”

“Millions – then what?”

The American said, “Then you would retire.  Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

I think you get the point. If all your living needs are met, what else do you want out of life? You can probably live that life with the money you currently make. If your true happiness only comes from climbing into a brand-new car every other year, that’s perfectly fine! Just don’t complain about work every day and how stressed you are. In contrast, if you love your job and don’t want to take on a manager position, that is completely fine as well! Don’t let other people force their life opinions on you. Find what makes you happy and live the life you dream!

Mike Zeiter, CPA/PFS

Money and Values

Someone won $750 Million last night. They don’t need any more money for the rest of their life. Assuming that person isn’t reading my blog, you are probably wishing you had a higher income or more money saved. Shocking! What I want you to do now is think about the reason you want more money. For some people, they want to be able to pay off debt and start an emergency fund. For others, they want to be able to buy a new car/house/boat or all the above. Some families just want stability to pay the next electric bill and still put food on the table. When it comes down to it, money is primarily used to 1) Pay for living needs, and 2) Do things that make you happy. If you had won the lottery yesterday, how would you spend your time each day? Would you be happy doing that for the rest of your life? To answer that, you must identify the values you want to live by.

Making yourself happy seems easy enough. Unfortunately, too many of us spend money on things that don’t truly bring us happiness. We struggle to define our values which in turn leads us to waste money without thinking. That’s why it is important to define your values first, and then focus your finances on make those values a priority. Let’s look at some examples of values and goals.

1) Security: I want to save $1,000 in case of an emergency – This is a great goal! Having an emergency fund will help you get through random expenses such as an auto accident or medical need. The emergency fund reduces your stress when those things happen. Set aside a specific dollar amount out of each paycheck until you hit this goal. You will know exactly how long it will take to establish some security for you and your lifestyle probably won’t change drastically.

2) Adventure: I want to visit Europe next year – This one is common. Many people want to see the world. However, they think that it is impossible because they don’t make enough money. I’m here to tell you that it is possible. Figure out where you want to go, how much it will cost you, and if you can find deals to make it cheaper. Then look through your last three months and see where your money has gone that you would rather have put towards saving for a trip. Every Starbucks and Target run that you eliminate will get you closer to your dream trip. Although, you may value those more than travelling and there is nothing wrong with that.

3) Freedom: I want to quit my job within five years – Here is where it gets interesting. This can be either retirement or quitting your 9-5 desk job to become your own boss. Retirement doesn’t have to be an age if you have enough money to live the life you desire. You don’t need to work a typical office job to survive. If freedom is your most important value, you just need to figure out how much money you need to live the life you want. It may not be possible to quit your job tomorrow, but it is probably more realistic than you imagine.

Think seriously about your life and ask yourself what is truly important. If fitness and health are some of your most important values, then pay extra for the gym membership you want. Why? Because you value it enough to make it a priority in life. A typical gym membership can be paid for by cutting out a few dinners or bar tabs. Not to mention that would probably improve your health as well. Try it in your life. Pick something small that would make your life better based on your values. Figure out how much it would cost, and go find out what you could have cut out of your life to pay for it. You will probably realize that what you spend money on isn’t what truly makes you happy.

I want you to think of money as a tool to create happiness. I know, “Money can’t buy happiness.” You’re correct. You need to make yourself happy first, or no amount of money will help…not even $750 Million. You must define what you value in life so that you know what actually makes you happy.  Once you do that, put your money to work. It won’t buy happiness, but it will fund a wonderful life focused on what is most important to you.

Mike Zeiter, CPA/PFS

Health Savings Accounts

I used to think that taxes were the most complicated thing in our country. That was until I tried to comprehend the bill from my recent ER visit. I had to get four stitches in my leg…simple, right? The bill was ten pages and had about 25 line items on it! I’m glad I didn’t blow my nose, because it probably would have been another $40 for a “Sterilized Nasal Discharge Receptacle”. Thankfully, I had money saved in a Health Savings Account (HSA) that covered the majority of my bill. That’s what I am going to focus on today. I can’t explain half of the healthcare laws in our country, but I can help you understand these accounts.

HSA’s are used in conjunction with High Deductible Health Plans. These plans have deductibles of at least $1,300 for individuals and $2,600 for families. The main benefit of these plans is that the premiums are lower and you can use tax-free money through your HSA to pay for medical expenses. More and more employers are switching to these plans because of the lower cost.

HSA's have two major benefits for tax purposes. First, HSA contributions are deductible in the current year from ordinary income. The deductible amount in 2017 is $3,400 for individuals and $6,750 for families with a $1,000 catch up amount for age 55 or older. If your employer contributes to your HSA, the deduction must be reduced by any amount contributed by the employer.

Example: You participate in a High Deductible Plan through work for your family. Your company contributes $500 to your HSA during the year and you contribute $3,000. You would be able to deduct $3,000 on your tax return. If you contributed the maximum of $6,750 for the year, your deduction would be limited to $6,250 because of the employer contribution.

The second benefit is that the money can be withdrawn tax free in the future if used for qualified medical expenses. Here is where the extra planning comes into play. Most HSA’s allow you to invest in stock or bond mutual funds in the account. If you invest in your HSA, it will grow tax-free as long as it is used on medical expenses when it is withdrawn. In a way, HSA's have the current tax benefit of a traditional IRA, but the future benefit of a Roth IRA if used for medical expenses. Also, you don’t have to be enrolled in a High Deductible Plan when you use the money, it only matters when you contribute to the HSA.

Example: The $3,500 that was contributed to your HSA can be invested in the account. Let’s say the money is invested for the next 20 years. The investment in the account can continue to grow tax free. The investment then grows to $15,000 in the future. You would be able to withdraw that money tax free if it is used for qualified medical expenses.

The double tax benefit that I described above is the main reason to use an HSA to supplement retirement savings. Another benefit is for individuals/couples who have 401(k) plans, or other employer sponsored retirement plans, but make too much money to contribute to a Traditional or Roth IRA. HSA's allow them to put additional retirement savings in a tax-sheltered account instead of a taxable account or non-deductible IRA.

As you can see, HSA’s can be beneficial for both tax savings and retirement planning. Six figure healthcare costs in retirement are a reality right now. HSA investments can be used to reduce the burden that you will incur later in life. Try to contribute enough each year to cover your maximum deductible. With all that being said, I always advise people not to invest in your HSA if you expect to need the money for medical expenses within the next five years. The last thing you want to do is have your investments drop in value right when you need to withdraw the money.

Healthcare is always changing so these benefits may not last forever. If you can maximize your HSA contributions, it will significantly impact your long term financial plan. If you participate in one of these plans, make sure you understand how to maximize your savings based on your current financial position. If you don’t participate in one of these plans right now, bravo for reading this entire post that has little to no impact on your life! Hopefully, you will be better informed if you switch to one of these plans in the future.

Mike Zeiter, CPA/PFS

Get Out of Debt

With the exception of our mortgage, my wife and I have been debt free for over two years. It’s a great feeling. Debt is a burden. It sucks owing someone money. Unfortunately, it has become common place in our society and people can justify almost any purchase. This can lead to trouble when they can’t afford to make some of their payments. When people decide that they need to take control of their finances, debt always seems to be the priority...which is awesome! I love hearing people say, “I’m sick of these payments, I want to get out of debt.”. But how do you actually do it?

It’s simple, right? Just keep making extra payments until your debt is gone. Yes and no. While that is a true statement, it is generally going to take you a long time if you just start throwing extra money here and there without a plan. Let me walk you through my process of getting out of debt.

1. Stop going into debt – This sounds silly, but I’m serious. The first step is making the decision that you won’t go into more debt. This is the most important step because there is no point in getting out of debt if you start maxing out your credit cards down the road. Mortgages are generally the only debt that I would allow yourself to keep using going forward.

2. Decide on an emergency fund – Make sure to save at least $1,000 in the bank before you begin paying off debt. This will protect you from using debt in case of emergencies. You can save more, but once you get more than $3,000, you should probably use some of that to pay off debt.

3. List out all of your debts – Mortgage, auto loans, credit cards, student loans, medical bills, business loans, home equity loans, and even personal loans from family. Find your most recent statement from all of these loans and write down the remaining principal amount due along with the interest rate.

4. List out minimum payments – You must make these minimum payments each month.

5. Create a “budget” – This doesn’t have to be extremely detailed, but you need to figure out an amount of money that you can set aside each month for additional debt payments. These additional payments will be in excess of your minimum payments. This step is important because I want you to have a defined amount each month. If you tell yourself, “I’ll just throw the extra money at the end of the month at my debt” this will take forever.

6. Pick a strategy – What type of person are you?

a. Debt Snowball – You love a victory. You know this will be tough for you and will need motivation throughout. This strategy is for you. Pay off the smallest debt first. Once that is paid off, add the minimum payment from that debt to your monthly amount and attack the next smallest debt.

b. Debt Avalanche – You’re a numbers person. You don’t need victories throughout this process. You just need to know that you are maximizing your savings in the long run. Pay the debt with the highest interest rate first and then move on to the next one. This can be more difficult because it could take a longer time to get that first debt paid off which may cause you to lose motivation. However, it will save you the most money.

7. Hold off on the mortgage – Always save your mortgage for last. Just make your normal mortgage payments. The interest is tax deductible and it is generally(hopefully) your largest debt so I want you to focus on non-mortgage debt for now.

8. Execute – Begin your debt reduction journey.

9. Don’t give up – There will be months when something comes up and you don’t make anything but the minimum payments. That’s fine. Just get back on track next month. Remember, as long as you don’t take out more debt, you are still moving in the right direction.

10. Live debt free – Anyone can do it. You will feel free without those monthly payments. Stay out of debt the rest of your life. A mortgage is OK, but it still isn’t necessary. Don’t be afraid to tackle that too.

Sorry for the longer post than usual, but this is an important one to a lot of people. You can get out of debt! You don’t have to suffer for years to do it. You just need to make it a priority and develop a plan. Don’t let debt payments control your life. It’s just not worth it.

Mike Zeiter, CPA/PFS

Finding Your Net Worth

When I ask people about their long-term financial goals, a common response is “I want to become a millionaire!” My follow up question is always, “So what does that look like?” I ask that question because most people respond, “I want to have $1 Million.” Having that much is great, but you still may not hit your goal. I want to focus on the definition of a millionaire. It seems that people have a misconception of the term. A lot of people view a millionaire as someone who has $1 Million or makes $1 Million per year. That’s not necessarily the case. A millionaire is someone whose net worth is greater than $1 Million.

Net worth is probably the most important personal finance number that isn’t talked about enough. Your net worth is equal to your Assets (What you own) minus Liabilities (What you owe, aka debt). This number should be the focus of most of your financial decisions in life.

Net Worth = Assets - Liabilities

Assets include your house, bank accounts, retirement accounts, car, and anything else that can be sold to someone. Liabilities/Debt include mortgages, car loans, student loans, credit cards, and anything else you owe someone.

Two great books about this topic are The Millionaire Next Door and Rich Dad, Poor Dad. They do a great job of explaining the importance of buying assets and reducing your debt. When I read them, I learned that most millionaires are self-made and did not inherit their wealth. The most successful people lived below their means and invested in assets throughout their lives. Another great topic is how to invest in assets such as stocks and real estate that will pay you back over time. Boats and cars don’t pay you back unless you sell them. They also go down in value over time which means that mere ownership decreases your net worth.

This is how people measure when they can retire. Anyone can retire when they can live off their assets for however long they expect to be alive. Retirement doesn’t have to be based on an age that you think will be a good time to stop working. It is based on the ability to pay for your expenses without needing employment.

That’s why I want you to sit down and calculate your net worth. Make it a priority in your life. Think about how your financial choices impact your net worth. If you do that, you will set yourself up for long term success. You can also figure out exactly what your wealth will look like when you become a millionaire.

Mike Zeiter, CPA/PFS

529 Plans - Q & A

Some events happen in your life that change everything. Many of these events also have a major impact on your finances. I recently encountered one when my wife came into the room and told me that we were going to have a baby! It doesn’t get any better than that.  We were in shock for few days, but the news finally set in, and I realized that I needed to update our financial plan ASAP!

I crunched the numbers for diapers, wipes, and car seats. I poured over our HSA numbers and healthcare coverage. Yes, life with me IS as exciting as it sounds. Then I started thinking about college savings, and I knew that 529 plans were the best place to start. A few Google searches later, I already had a headache. 529 plan rules are set up by the federal government, but the plans are managed by each individual state. Anything gets confusing when you have that many politicians involved so I decided to do the research and share the information with everyone.

I have put together the main questions that people have about 529 plans with some quick and simple answers. I will highlight the main structure of these plans to show you why they are generally the best college savings option. At the end, I will explain the best way to start a plan.

 

What is the purpose of a 529 plan?

529 plans are tax-advantaged savings plans that can be used for college expenses. States have separate programs, but you aren’t required to use the one offered in your state. The best use for these plans is if you have a child that is young and has more than 5 years until they will attend college. The goal is to invest money that can grow tax free for higher education expenses.

What are the tax benefits?

The easiest way to describe the benefits is by looking at a simple example. Let’s say two parents contribute $10,000 to a 529 for their child on his/her first birthday. They invest the money and it grows to $40,000 by the time the child starts college at age 18. Here is the breakdown of the tax benefits.

Year 1: Parents do not receive a Federal tax benefit. They may receive a state tax deduction if they participate in a state that offers a tax deduction. In my home state of Missouri, they would receive a $10,000 deduction on their state tax return for contributions to any state’s plan.

Years 2-17: The investment grows from $10,000 to $40,000 without any tax consequences.

Year 18: The child uses the money for qualified college expenses. No federal or state tax is paid on the gain. This is the biggest benefit. You would normally pay tax on $30,000 of investment gains which would be $4,500 for most people.

Who can contribute to an account?

Anyone! The most common form is parents or grandparents contributing for a child. However, you can contribute to a plan for yourself, your nieces and nephews, or a friend’s child.

How much can I contribute to a Plan each year?

Individuals can donate up to $14,000 per beneficiary per year (in 2017), and twice that amount if they are married and choose to split the gift. There is also a special exemption that allows donors to donate up to 5 years’ worth of gifts in one year without gift tax consequences.   

What happens if my child doesn’t go to college?

If your child decides that college is for suckers, it isn’t the end of the world. The money can be transferred to a new beneficiary that doesn’t have to be your child. If there is nobody else that you can pay for to go to college, the money can be withdrawn and you would pay the taxes along with a 10% penalty on the earnings.

What investments can be set up in the Plan?

It varies by state. Most states allow you to invest in stock or bond mutual funds. Some offer prepaid tuition plans, but those are generally not as beneficial for people.

What can the money be used for?

According to the IRS, “Qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.” As you can imagine, this leaves some room for interpretation. Essentially, expenses for tuition, fees, on campus room and board cost, and required classroom material are covered. Make sure to consult with a tax professional if using the funds for expenses other than tuition and fees.

What happens if they get a scholarship?

Congrats, your child receives a full ride scholarship! If you don’t want to transfer the money to another person, you are able to withdraw the money without penalties for the scholarship amount. That means that the $30,000 in our example before would be taxed like a normal investment.

How do I set up an account?

Now that you know how they work, I am sure you are dying to know how to open an account for your child! The first step would be to research the option in your own state. If your state offers a tax deduction for using their plan, it is probably the best option. Most states have 529 websites that allow you to open a plan online with your information and the beneficiary’s information.

If your state doesn’t offer a tax deduction, or you don’t like the arrangement of the plan, start researching other states. The key items to look for are plans that offer you low cost investment options and don’t charge a commission for investing. Find a plan that allows you to use the money for any school and not just that state’s schools. The most important thing is to make sure you comprehend the plan that you choose. Don’t put money into any investment that you don’t understand!

 

I hope this has helped you gain some knowledge of 529 plans. My last caveat about 529 plans is this…don’t sacrifice your retirement savings to pay for your child’s education. There are other ways to go to college, but not having money in retirement will put the burden right back on your children.

As always, contact me if you need any help!

Mike Zeiter, CPA/PFS

Personal Business Taxes

Millions of individuals and couples own small businesses. I love it! It’s one of the greatest things about the country we live in. Unfortunately, I have noticed that most of these small business owners don’t fully understand how they’re taxed on their business profits. I have titled this post “personal” business because I want to focus on the businesses run by a single person or a married couple. These are mostly organized as sole proprietorships or single member LLCs. Ultimately, there are three big things you need to focus on to make sure your business taxes are in order: how the IRS sees your business, the types of taxes applied, and quarterly taxes.

How does the IRS see your business?

The IRS considers you and your business as one in the same. Everything your business does is tracked on Schedule C (Profit and Loss from Business Activity) and attached to your personal tax return. Since the IRS views your business as ‘you’, all bank accounts are treated as one. Essentially, it doesn’t matter if you use your business or personal card to pay for something, you are still allowed to take deductions if you paid for an actual business expense with your personal accounts. Most people separate business accounts in order to track income and expenses throughout the year.

What taxes are applied to small businesses?

Your business income is calculated and taxed at 15.3% (self-employment tax for Social Security and Medicare). The income/loss is then added or subtracted from your gross income on the front page of your tax return. This results in your income being taxed at your personal rate as well. You can deduct half of the self-employment taxes paid if you had business income. I stress the self-employment tax topic because most people don’t realize they pay that additional tax on top of the personal tax rate. That is why I suggest setting aside 25% of your net income to pay taxes.

How do you prepare for quarterly taxes?

Don’t forget about quarterly taxes! Everyone must pay estimated taxes. Most people have them come out of each paycheck - small business owners are different and are generally required to pay them quarterly. If you work a regular job along with a side business, you may be able to increase your paycheck withholding to cover your estimated taxes. It is important to make estimated payments so that you can avoid penalties when you file your tax return.

Now that you know what you need and the working parts that apply to small business taxes, find a way to DOCUMENT EVERYTHING. Business miles, expenses, and meals all need to be tracked. I always tell clients to save everything you have just in case. There are a variety of expense trackers you can use that allow you to attach receipts, or it can be as simple as throwing all your receipts in a shoebox and hand it over to your accountant at the end of the year. In the event of an IRS audit, you will need to provide support for any expenses you took for the business.

Good luck with your business endeavors! You probably spend so much time building up your business, but don’t forget to spend some time on taxes. I hear stories about people having to shut down their business because they have to pay 5 years’ worth of back taxes. Don’t let that happen to you!

And as always, if you’re feeling a little lost or unsure of what to do next with your personal or business finances, contact me!

Mike Zeiter, CPA/PFS

Automate Your Finances

Are you worried that you will never be able to get your finances under control? Don’t worry, you aren’t the only one! People always tell me, “I just don’t know everything that is going on financially.” Things have gotten tougher now that everything you buy is sold via subscription (Netflix, Clothes, Meals, etc.). A new toaster for $30? Why do that when you could pay $5 a month and upgrade to a brand-new toaster every year? All kidding aside, I could look at everyone’s situation and lay out a plan that will set them on a path to wealth, but they still must execute that plan. If I could only give one piece of advice to someone in this situation, it would be to automate anything you can!

It sounds like a painfully simple solution to a complex problem. However, the majority of people spend money that they have access to. According to various articles, about half of Americans live paycheck to paycheck. It’s natural to be at the store and say, “I have $200 in my bank account and I get paid Friday, I can afford this.” This is just one reason why automating your finances can make a big impact over the long term.

The tax system may be the greatest example of this. Can you imagine the outrage from people if they were required to write checks during every tax season? Average families would be writing $10,000 checks every April. Instead, the government takes a little bit out of every paycheck. You essentially build up a savings account each year of prepaid taxes that you can use to reduce the amount you owe when you file your taxes. In most cases, people pay in too much during the year and receive a refund. Do for yourself what the government does for taxes.

Here’s how to do it.

  • Set up any monthly payments (bills and debt) on auto-draft from your bank account. Don’t be tempted to skip a credit card payment any months.
  • If you struggle with savingsSet up a savings account at a different bank than your current accounts. Set up automatic transfers from your checking or from your paycheck. Start with a small amount and increase it every 3 months.
  • If you struggle with debt For those of you really struggling to pay off debt, set up additional payments for the same time each month. Make sure these payments are applied to the debt principal only and your debt will get paid off significantly faster.
  • If you struggle with retirement­ – Log on to your 401k or other workplace retirement plan. Start with at least a 2% contribution per paycheck. If your company offers a 401k with a match, contribute the percent to maximize the match. Automatically increase your contributions every year by 1% if that option is available. Otherwise, log on each year and increase it by 1%. If you don’t have a workplace retirement, set up automatic deposits into an IRA the same way you would a savings account.

Not only will these things help you build wealth, they will also make your life less stressful. You won’t have to worry about how much you can put towards savings at the end of the month. It will happen automatically. My guess is that you won’t even notice a difference in your daily life. This isn’t a get rich quick scheme, but these are the things that average people can do to retire as millionaires. Try it out! I think you will be surprised how successful you can be.

Mike Zeiter, CPA/PFS

Buy or Rent?

For those non-homeowner’s out there, how many times have you heard the phrase, “Buy a house. You are wasting money on rent.”? I heard it constantly after I graduated college. Was I wasting money? In my opinion, the answer is no. I paid someone each month to put a roof over my head. I don’t consider that a waste of money. Also, I knew exactly how much my home cost was going to be each year. It didn’t cost me extra if the water heater went out or a tree knocked over my fence. However, many people will say that it is always better to buy a home. Let’s take a closer look at buying vs. renting.

In the long run, buying a house will always be a better decision. A house is an asset that will increase in value over time. A $200,000 house could be worth $300,000 by the time the mortgage is paid off. Another reason is that a portion of each mortgage payment is increasing your net worth by reducing your debt. Rent payments do not add value to your net worth. Also, owning a home means that nobody can kick you out of your house when your lease expires.

So that’s that! Right? No. Not everyone should go out and buy a house right now. Here are some things to consider before buying a home.

1) Down Payment and Savings – Do you have enough to put a 20% down payment and still have some savings left over if the A/C breaks? 20% down is important so that you can avoid being forced to pay for private mortgage insurance (PMI). PMI can cost you over $100 a month and is generally a waste of money. I would also encourage you to have some savings left over after the down payment in case of emergencies. There won’t be a landlord to come repair the roof if it starts leaking in your bedroom.

2) How long will you live here? – The general rule is that you don’t want to move within 5 years of buying a home. This is because there are costs associated with buying and selling a home. Don’t force yourself to buy a house if you don’t think you will be living there for a while. If you are the type of person who doesn’t want to stay in one place for a long time, don’t buy a house. That’s okay!

3) You love the house – Too many people get house fever. They decide that they want a house and feel the need to buy one right when they start looking. You never know what can happen that causes you to stay in the house longer than you expect so make sure that you love it before you decide to make an offer.

4) Can you afford the mortgage? – Be reasonable. Buy a house where the mortgage payment doesn’t make the rest of your finances tight each month. A good rule of thumb is not to let your mortgage be more than 25% of your take home pay (after taxes and other payroll deductions). You can always buy a bigger house if you get a big promotion in a couple years.

Go buy a house if you read that and still feel that you are financially and mentally ready to be a homeowner. Being a homeowner changes your life. A home is a much bigger responsibility than just making your mortgage payment. However, if you’re ready, home ownership will help you build wealth over the long term. If you aren’t ready to buy a house yet, don’t let someone make you feel guilty for renting! It’s not going to prevent you from financial success.

Mike Zeiter, CPA/PFS