Coffee to Car Payments

My Intermittent Quest for Washboard Abs

Last spring my girlfriend and I were over visiting my Grandma.  While we were there a lady from her church popped in to say "Hi.".  I used to go to the same church but I hadn't seen this lady in ten years or more.  She took one look at me and said "Derek!!  It's been years.  You look good fat!!"  Now the last time I'd seen her I probably weighed about 165 pounds but, as human nature goes, I wasn't happy because I couldn't see my abs.  Fast forward to last spring, I'd lowered my expectations and was pretty OK with myself at 210 except for the first 30 minutes after my Men's Health magazine came in the mail. 

A couple weeks later I went for my annual physical.  My politically correct doctor informed me that "..my body mass index was a little high."  So, for the next 2 or 3 months my girlfriend and I started walking at least 3 times a week and we even lifted weights like 6 times (total).  We both lost 10 or 15 pounds but then the progress started to slow and we lost interest.

It's all too common to get discouraged or just plain lazy once the new wears off.  You go back to relaxing and cussing those people who can eat anything they want, don't exercise, and still are the same size they were in high school...all because they have "good genes."

"Okay, Derek.  That's great but what's it got to do with money or financial planning?"

I was getting to that.  One thing that comes up often when I'm talking to people about the Home Ownership Accelerator is that they could just do it themselves without refinancing.  The fact is it's true to a point.  There are software programs that you can buy that range in price from $99 to $3500 or more.  Some of them are sold directly and some through "network marketing."  Don't you feel sorry for your relatives when they try to explain "But it's not MLM!!!  It's network marketing."  Anyway, I digress.  There have been surveys done to follow up with people who have purchased these programs and the truth is that, within 6 months, close to 70% of them are not using it anymore because they still require extra effort and discipline.  It's sort of like the 2 1/2 months worth of Nutri System food you've got left in you pantry right now.

The #1 reason people choose the Home Ownership Accelerator over other options is because this loan allows them to set it and forget it and get on with living their life.  Sort of like being born with "good genes"

Oops!  Gotta run.  I just got an email about washboard abs.

Use your IRA before retirement to fund those dreams too.

Some of us are blessed to be doing what we love to do and make a living from it.  For a lot of other people, their bucket list may include the dream of owning their own business.   Late last year, I reconnected with an old friend of mine.  We worked together waiting tables and bartending about 8 years ago.  I asked what he was up to.  He said about two years ago, he was able to buy an established baseball card store.  He said he was like a kid in a candy store and loved it.  I've stopped in several times to see him and he always seems to be enjoying himself.

I wrote in a previous post about rolling your money over to a self-directed IRA which allows you to use the money you've saved over the years to purchase or fund the business of your dreams before you retire and with no taxes or penalties.

I stumbled across a story today about a music teacher who makes roughly 30% on his money.  What is his sideline.  Well, his passion is music.  So, he still teaches.  As any parent knows, kids have a hard time making up their mind whether or not they want to play an instrument or maybe deciding what type they want to play.  Well, the parents at his school are relieved of having to shell out the money for an instrument and then end up putting it on Craigslist six months later for half what they paid for it.  This teacher used his IRA money to buy instruments and then rents them out to his students for up to $60 per month.  Not bad for an investment of less than $1000 per instrument.

My point is simple.  If you've got a dream chase it.  With a self-directed IRA, the only limit is your own imagination.

Different Strokes for Different Folks

  I try really hard to emphasize on my site that there is no one-size-fits-all approach to any type of planning.  That is why you need to make sure your "tax guy, financial guy, mortgage guy, whatever guy" takes the time to understand your priorities.  The same goes for the decision to rent or buy a home.  I received this comment from a lady who calls herself "People Power Granny"

"For the last 32 years we have made house payments. We're out of that maze now, and are renting and liking it very much. Plus we're saving gobs of money. Check out why at peoplepowergranny.blogspot.com. And of course, vote in my poll on which you prefer."

Granny's post is titled "Wanting a New Home?  You'll Save $$$ if You Rent!"  She definitely makes a valid point; however, I'd suggest that the real savings is in the headaches that come with being a homeowner.  You are responsible for repairs instead of being able to call your landlord.  You put a lot more of your own hard work into the home.  That's why they call it "sweat equity".  Then, at the end, you get to cash out of your "investment" and down-size or even rent to eliminate these headaches when you retire.

I think back over the last five years and recall how every weekend is spent either working on a home-improvement project or feeling guilty for not doing so.  I remember how excited we were when we gutted our bathroom and made it bigger,  included a monstrous whirlpool tub and then found out the hot water heater didn't have the capacity to fill the dang thing.  I remember having guys at the house until midnight in the ten days leading up to our Christmas party two years ago getting all the finishing touches put on our remodeled living room so we didn't have to have HGTV show up with cameras so we could pretend it was a theme party.  Now, we're getting ready to do the kitchen.  The end result will be great but, we'll be using a toaster oven, microwave, and hot plate to prepare meals for a couple months.  Not to mention we'll have to walk through the mess to get to the back door since that's our primary entrance. Oh, the joy of owning a home!  I kinda agree with Granny.  I'd at least like to rent for two months and come back when the kitchen's done.

Lawrence LaRose even wrote a book call "Gutted: Down to the Studs in My House, My Marriage, and My Life"  Luckily, Sheri and I will agree immediately on every single detail of our project so I don't have to worry about reading it.  Anyway, home ownership may not be for everyone or at least you may consider other alternatives after you retire.  Fortunately, the Home Ownership Accelerator can also be used to hasten the day and increase your equity position should you decide to cash out, start renting, and spend your weekends doing whatever you like.

Is your home underinsured?

Does your homeowners insurance provide actual cash value or replacement cost coverage if you suffer damage or a total loss to your home and it's contents?  The truth is nearly 60 percent of all homeowners are seriously underinsured.  There are several things to consider but the biggest one is which type of coverage your policy offers. 

Replacement cost coverage calculates the cost to repair or replace your home with one of comparable size using the same quality of materials as your current home and at today's cost.  Many companies are even allowing you to purchase guaranteed replacement cost coverage which allows you to get as much as 25% more than the estimated cost to rebuild.  This type of coverage is the best at ensuring that you will be back at the position you were prior to the damage to your home.  All with minimal out-of-pocket expense to you.

Now, lets look at actual cash value (ACV) insurance.  This type of coverage uses the same calculation of replacement cost but then subtracts depreciation.  Now different parts of your home depreciate at different rates and it is a complex calculation.  So, I won't pretend to be an expert at that.  But let's say that your 40-year-old home that you re-roofed 12 years ago with 25 year shingles and updated with a new furnace and water heater 8 years ago along with various other improvements you have been able to make burns to the ground.  What is the actual cash value of your home?

I don't know either but, one thing is certain.  It is less than what it will actually cost you to rebuild which leaves you with a couple of options:

• Build a nice, cozy home that is a lot smaller than the one you lost using the money you do get from your insurance company
• Build one similar in size and amenities to the one you lost and pay thousands of dollars out of your savings, retirement funds, or loans from friends or family.

One thing that should not be an option at that point is keeping the same agent.

A recent survey conducted by the National Association of Insurance Commissioners (NAIC) found that 64% of the homeowners who responded said that they were insured for replacement cost, 24% said ACV, and worst of all, 12% had no idea.  Veteran and new agents alike make this mistake and it could cost you thousands.  Go home tonight and review your declarations page of your homeowners insurance policy to see which coverage you have.  You'll probably sleep better....maybe...

Niche and grow rich

People questioned my sanity last summer when I chose to add mortgages - more specifically, the Home Ownership Accelerator - to the list of services available through Bridges Financial.  Seems like a particularly foolish time to be getting into the mortgage business.  Since then, whenever I mention mortgages to someone in conversation, they say something like "Boy!  You guys really have it rough right now.  Huh?".  I always try to explain that the Home Ownership Accelerator is a loan program designed for an entirely different type of borrower.  This is not another program for the borrowers who are costing taxpayers, investors, and people in the industry a lot of money and possibly even their jobs.  No, this loan is designed for responsible borrowers who have a fair amount of equity in their homes, good to great positive cash flow, and a demonstrated pattern of financial responsibility.  It's just a matter of time before this program becomes incredibly popular and I'm excited to be the first guy in Iowa talking about it.

Anyway, yesterday I came across this news story about how CMG Mortgage Bucks Mortgage Industry Collapse, Doubles Sales of New Home Ownership Accelerator^® Loan in 2007 .  The story has been featured on several U.S. and even a couple international news sites.  The story confirmed for me what I'd been thinking all along.  Any company that can double their sales and maintain strong underwriting profits (i.e. NO loans in default) is probably a pretty good partner for me to help my clients reach their financial destination.

Just call me "Monty"

Gosh, I love it when a plan finally starts to come together.  I've been working with the Springfield Nuclear Power Plant for months now to try to get a voluntary benefits plan in place for their employees.  I spent a lot of time to get Smithers to even introduce me to his boss, Mr. Burns.  See, he knew Mr. Burns wouldn't spend a plug nickel more than he had to on his employees.  Employers always tend to think of insurance as expensive and benefits as a hassle. 

Finally, one day, I had an idea.  I called Mr. Burns office when I knew Smithers was at lunch.  My thought was that a stingy old coot like Mr. Burns probably brown-bagged it every day.  Well, I got lucky.  He was kind of rude at first but, he couldn't cut me off with his mouth full.  Anyway, I told him that he could offer these benefits to his employees at little or no cost to himself, the business owner, since the employees pay for it themselves.  I went on to tell him that by offering these benefits on a pre-tax basis he would actually save money on the employer portion of his FICA taxes.  He was still a little skeptical and asked what it would cost to get this set up.  I told him that I could actually set up a Section 125 plan through the insurance company at no cost.  Well, he really couldn't say no at that point. 

I just had one thing I had to do.  I'd need to Simpsonize my professional portrait to fit in a little better in the little misfit town of Springfield.  "Thank you so much, Mr. Burns!" I said.  He said, "No.  Thank you...and just call me 'Monty'".

Compare this photo to the one in my sidebar.  How'd I do?

There's still time to make your Roth IRA contribution

Even if you've already filed your taxes you can still make a contribution for 2007 to your Roth IRA at any time before your deadline to file (not counting extensions).  The reason is that you make these contributions on an after-tax basis.  So, there would be no need to file again unless your Adjusted Gross Income is below $26,000 (single) or $52,000 (MFJ).  In that case you may qualify for a savers credit on your return and it would probably benefit you to file an amended return.

So, there's no need to think "Oh well. Maybe next year."  If you have the money sitting somewhere to make the contribution, talk to your tax professional about the guidelines for Roth IRA contributions.

I am a big fan of Roth IRAs and here's why:

Let's say you're 40 years old and plan to retire at age 65.  If you contribute the maximum of $4,000 for 2007 and pay taxes on it now, assuming a modest 6% rate of return, you will have $17,167 in tax-free money to use for retirement at age 65

Now, let's say you're 50 or older and have 15 years left till you retire.  Your maximum contribution is $5,000 for 2007.  In 15 years, assuming that same 6% rate of return, you will have $11,982 in tax-free money to do with as you please.

People often tell me "But I'll be in a lower tax bracket when I retire".  Really!  Here's a post from someone who describes "the whole 401(k) thing – apart from the “free money” from your employer "– as "a perfect way to lose money without even trying." 

There are only two reasons you'd be in a lower tax bracket when you retire.

1. You draw a significant portion of your retirement income from a tax-free account like a Roth IRA.
2. You didn't quite reach your goals for retirement. 

The Home Ownership Accelerator Explained in 60 Seconds or Less.

I've spent a lot of time writing about this revolutionary new loan program and various ways that you can use it.  I just felt like I should try to explain the basic concept in one post.  So here goes:

The Home Ownership Accelerator saves you thousands of dollars in interest by converting all of your purchasing power from credit and cash reserves to equity in your home which can be accessed at any time through a full-service checking account built right into your mortgage.  In the meantime however, the unused money is used to offset the principal balance of your mortgage resulting in interest saved.

"Sounds like an interest-only loan.  How do I pay down my balance?"

The key to this loan is "no change to your spending habits".  That means you don't go out and buy a new boat or car or spend money that you wouldn't have otherwise spent.  If you continue your current lifestyle and spending habits, then the money that would have gone to pay interest pays principal instead.

One last note: With this loan you get everything you would get from you current local bank or credit union except for a "brick and mortar" location that you can visit in person.  All transactions on this loan are conveniently done on line, by mail, or through a dedicated CMG "Concierge" service center that you can call.  Ironically the difference between the rate you earn on checking and savings and the interest you pay on your mortgage normally is what pays for a the "brick and mortar" bank you can visit.  With this loan that money goes to you instead to pay for your "brick and mortar" home.

"Home Ownership Accelerator" and the yellow flying house logo are registered trademarks and used by permission.

Mortgage Interest is deductible but...

  In talking with people about the Home Ownership Accelerator, I am often confronted with the question "Won't I lose my tax deduction for mortgage interest if I pay off my mortgage early?".  The answer is always "Yes, you will but, that's a good thing."  The reason is clear once you understand what a deduction actually is.

You are very good at what you do for a living and you are confident that your CPA or Turbo Tax are good as well.  You provide them with whatever information they ask for and then trust them to prepare your return.  When it comes time to file your return, you only look at two lines.  Line 73 is the amount you overpaid or your refund.  Line 76 is the amount you owe.  You then either write a check or wait for one.

I have also become aware in conversations with clients that they believe that their mortgage interest that they paid reduces the amount they owe dollar for dollar and that is what I am trying to clear up here.  Your CPA or software computes your adjusted gross income on page 1 of the 1040 and shows it on line 37.  This amount is carried over to page 2, line 38.  Your mortgage interest is recorded on line 10 of a separate form (Schedule A).  Then the total itemized deductions on Schedule A are recorded on line 40 of your Form 1040.  Line 41 is Line 38-Line40.  One more fuzzy calculation on Line 42 (that may or may not apply to you so, I won't get into it) and you have your taxable income. 

The amount of mortgage interest you pay directly reduces your taxable income and only indirectly the amount you owe.  So quick example and I'll wrap this up.  If you paid $10,000 in mortgage interest in a calendar year and your tax bracket is 28%, you save $2,800 on you total taxes. 

So, it's nice to be able to deduct it but, let me put it another way.  Would you invest $10,000 in anything that was guarateed to be worth exactly $2,800 a year later?  You bought your home because you wanted to own rather than rent so, doesn't it make sense for you to take control of precisely when you stop renting the money too?