How Much Rain Am I Expecting?

I made a decision last week, one that has the potential to shape our financial future for years to come.  It was a hard decision, and I made it while drinking coffee and staring at an Excel spreadsheet.

I decided to stop adding money to our Rainy Day Account.

We all know what the Rainy Day Account is supposed to do -- when you get a time in your life where all heck breaks loose, the Rainy Day Account lets you keep going with your life without going into massive debt or curling into a ball and dying.  Most of us also know that Conventional Wisdom (always a bad idea to blindly trust something with capital letters) says you should have three to six months worth of regular expenses in your Rainy Day Account, though some experts say as much as a year's worth.

I stopped contributing to our Rainy Day Account with just over $7,000 in it.  Not quite three months.

Instead, I turned and started throwing every available cent back toward our mortgage.  Our principal balance has dropped almost $1,000 in the past week.  Some Financial Experts (see, there are those capital letters again -- watch out!) would call this foolish, because once I've socked money into our mortgage, it's terribly hard to get it back out.  It's not liquid.  Now, a Rainy Day Account -- that's liquid.

Instead of explaining why I'm Right and They're Wrong, I'll simply say this -- general advice only works for general people.  If you are exactly like every other person in the world, it will work perfectly for you.  If, however, like my wife and I, you are a unique and personalized individual, you should take any of that general advice and see how and if it applies to you.

Here's why I stopped adding to our Rainy Day Account (your reasons may vary):

• We've got nearly 3 months worth of expenses in there.  Not a ton of money, but a good sum, should something awful happen.
• We've got financial buffers set up in other places.  We have almost $2,000 in a savings account that is supposed to be used just to pay income taxes, property taxes on the house, and homeowners insurance.  If we had an emergency, we could tap into that.
• Our income is diversified.  Most people get their money from one source and one source only, so if they lose that job, they're sunk, and need to fall back on that Rainy Day Account.  My wife and I have income coming from about five general places (a school corporation, a church, a group of piano students, a group of music publishers, and a university), and many more different specific locations within those (we each get income from the school corp for very different jobs, I've got about a dozen different piano students and a half dozen different publishers who pay me royalties, etc.)
• I can always add more to Rainy Day if I think I need to.  Upping the amount in that account is as simple as diverting the next extra mortgage payment into the Rainy Day Account instead.  Since they're both at ING Direct, it's not a hard thing to do.
• Eliminating the mortgage gives our Rainy Day Account more worth.  Right now, $7,000 is less than 3 months worth of expenses.  As soon as we don't have to pay $500 a month in mortgage principal and interest, that $7,000 goes even farther.  Owning our home outright, to us, is the greatest hedge against a financial catastrophe we can imagine.

Reading a lot of Financial Pundits is great, as is reading any sort of Financial Advice column.  But before you buy anything they tell you, think it through in terms of you and your life.  It may be they're right, but it may also be they're trying to give you Sound Financial Advice in capital letters (and we all know what that means...)

Ask, and Ye Shall Receive

As Independence Day lurks just around the corner, I've been taking some time to consider the great American spirit of self-reliance.  As Americans, we are masters of our destinies.  We need not seek the help of others to reach our goals.  We are ... invincible...  [said with whispered awe]

Of course, that's crazy.  Whatever you may think of what it means to be an American, there is nothing wrong in asking for a little bit of help.  At the very least, it is a good idea to let people know what your goals are.  You never know who might be able to help you.  It might just be that helping you is exactly what that other person has been looking for.

For instance, I am a little over 70% finished with my masters degree program.  Come December, I will have a masters degree in curriculum with a focus on technology integration.  (Impressive, right?  I'm thinking of having a superhero costume made of textbook pages, chalk dust, and the logo "CM" emblazoned in sticky tack on the front standing for CURRICULUM MASTER!  Don't worry - no spandex).  During the previous spring semester, I sent an email to one of my professors to say how much I liked her job, and I asked her how I could take it.   So, when a position as grader came up this summer, I was lucky enough to get that position.  Last night, she wrote me an email asking if I'd be interested in teaching a section for IUPUI in January.  I think by taking 30 seconds to write a quick email back in March, I got on her radar, which put me in a position to really go somewhere potentially amazing with my career.  All I did was ask.

The little bit of extra income from this will go toward debt-reduction, which is why this is showing up as a post here.  Plus, I think it's a lesson that applies to many parts of our lives.  If there is something you want, something you need, or something that means a lot to you, share it.  Ask it.  Post it.  Get it out into the universe where it can do some good.  The world is generally a good place to be, and it wants to help you.  Let it.  Just ask.

Yes, We're Still Here

I know it's been about half a year since either my wife or I have posted on Debt Free in 40, but we are still out here, though busy with the rest of our lives.  I'll try to get here soon for a proper update, but in the meantime, you can enjoy the new debt numbers over at the right.  Our mortgage has gone down (though not a great amount), mainly because we've been socking cash away into our Rainy Day fund, as well as using some emergency funds for some nice emergencies ... like replacing our car when it got totaled. 

I hope to post something more later this week, but for now, know we're still out here, we're still alive, and we're still hammering away at the debt.

2010 Wrap-up

I know it's been a while since either my wife or I have blogged here -- chalk it up to being a musician during the Christmas season.  Oddly enough, it seems as we get closer to the actual day of Christmas, the less pressure there is on us as musicians, as if the whole of the world got so much Christmas spirit from the 1st to the 20th of December that they're just ready to have a Silent Night for a change. 

At some point I'm hoping either my wife or I can post something meaningful or useful here, but for now, I thought I'd give you a bit of a wrap-up for the year 2010 and let you know where things stand with us.

First of all, as you can see at the right, as of this writing, we've paid off over $36,000 of our original $124,000 of debt.  That's a great feeling, but there's still a long way to go.

Even more important, we've got our student loan whittled down to just under $1,600 -- payments I have scheduled for the next couple of days will drop it below $1,000 before the year's out, and it ought to be gone before we celebrate Martin Luther King, Jr.'s birthday.  That's been our main goal the past six months or so, and it's paying off.

Sadly, to get the loan to that place, I made the decision to decimate our Rainy Day account, at least temporarily.  I know that most financial experts will tell you this isn't a smart move at all, but for us, it made sense.  We still have enough money coming in from several sources, so a financial crisis would have to be pretty major to wipe us out.  We're both still relatively young and fit, so a medical crisis is unlikely, at least before we get the Rainy Day funded back to where it was.

Replenishing and bolstering the Rainy Day fund is our next goal immediately following the payment of the student loan.  Thankfully, to help that out, I should be getting royalty checks from some of my music publishers in the first couple months of the year.  I'm really not worried about having less than $700 in our Rainy Day account, because in an absolute rock-bottom, worst-case scenario, we do have just over $50,000 combined in our IRAs.  Yes, there would be penalties there, but if it was between taking the financial penalty and being destitute and out on the street, we'd take the penalties.

When we do turn our attention to Rainy Day, we're likely going to sock away as much as we possibly can.  The economic climate still doesn't feel all that great, and our public schools -- at least the part we know well here in central Indiana -- are taking a huge hit.  I'm an hourly employee, and relatively cheap for what I do and what they pay me, so I think my odds of having a job with the school for next year are still pretty good.  My wife, on the other hand, is a certified music teacher, earns half our household income from her one job (as opposed to me who needs three or four smaller jobs to make my half), and music, tragically, seems one of the things likely to get cut in such a time.  We know there's a very real chance her income will fall next school year, so we're not just going to get our Rainy Day back around $6,000, but are going to take it as high as we can, hopefully around $17,000 or so by the time her contract -- and her regular paychecks from this school year -- run out in early August.  That $17,000 isn't enough to fully cover our expenses for a year, but in a worst case scenario, that would keep us afloat for a good six months or so.

After that?  Well, it's still too early to tell.  I'm still hopeful we can pay off our mortgage by the end of our 40 months, but like all good dreams, that outcome isn't certain.  What I do know is that at the end of our 40-month experiment, we will have less debt than we do now, and far less debt that we would have had if we had never undertaken this experiment in the first place. 

With the new year just around the corner, it's time to start thinking of what you want your 2011 to look like.  If you want to improve your financial situation and get yourself out of debt, then I invite you to join us and share your success stories.  There's never a better time to start than right now. 

Ellen and I wish you all a very Merry Christmas and a joyous New Year, and we hope that peace and prosperity will follow you all the days of the coming year.

Giving Thanks

For those of us here in the United States, it's Thanksgiving Day, and while my wife and I are thankful for a great many things, one of the things we're most thankful for right now is how well our financial life is going.  In an economy that's still in the tank, where countless people are without jobs and are having to make some terrible financial choices, we're not just surviving, but are actually managing to dig ourselves out of the debt hole we've been in ever since we got married.  In a good economy, this would be cause for thanks; in today's economy, we are grateful beyond words that we're able to do so much to help our future selves live a financially-free life.

Wherever you are today, whoever you're spending your Thanksgiving with, my wife and I wish you the biggest of blessings in your life, and extend to you our hopes that you'll be able to improve your financial life in the months and years to come.

Happy Thanksgiving.

Breaking the Barrier

October 14, 2010.  A date which will live in infamy.  Okay, so maybe it's not as grandiose as all that, but today was the day we officially broke below $100,000 in terms of debt owed.  We haven't owed this little money since we bought our house back in 2004.  We also have about another $1,500 poised to go toward the loans in the coming days, so that will drop us even further.

Something about this feels like a birthday -- on my birthday, I'm really only a day older than I was the day before, but psychologically, it feels like I'm really a full year older.  Same thing here -- in reality, we're only a few hundred dollars less in debt than we were yesterday, but breaking through that $100,000 barrier -- from six digits to the left of the decimal to five -- is a huge feeling, the sort that is likely to accelerate our efforts even more.

We're still on track to have the student loan paid off by Christmas (with a little temporary help from our Rainy Day fund in mid-December), and only a little behind on where we need to be to have the mortgage gone at the end of the forty months.  Things keep looking up for me in the music and composing department, so I'm hopeful that will mean extra income that we can throw straight at the mortgage to get ourselves back on track.

Speaking of music and composing, I'm trying to get my other blog, The Creative, off the ground.  I've finally gotten serious about it, I'm posting on a regular schedule, and now all I need are people reading it and sharing in the dialog.  If you're so inclined, head over, take a look at it, spend some time there, and drop me a comment or two if you wish.  Also feel free to subscribe to get the posts delivered to your RSS feed, blog reader, or email.  If nothing else, head back daily to check out the Daily Haiku.

Anyone else have any sort of debt-reduction or other financial success story they want to share?  The comment section is below, so share away!

Bi-weekly Mortgage Payments

I had an email from Jen last week about a deal her bank was offering where, for a small set-up fee, they would switch her mortgage payments from monthly payment to bi-weekly payments, or payments every two weeks, of half the current monthly amount. She suggested I expound on this phenomenon and whether or not it's a good idea.

I'll start with the answer -- yes and no.

First the no: Paying anybody extra, for any reason, to take your money is just foolishness.  They're already taking your money; why would you pay them more to take it?  It's for this reason I have my water bill deducted from my checking account and not paid with credit card -- the water company would charge me a monthly convenience fee to use the card, but not the checking account.  I also pay my auto insurance in semi-annual installments, because if I paid monthly, they'd charge me an extra couple bucks a month. 

I also adamantly refuse to pay my federal taxes by credit card because they charge some extortionate rate to do so.  I send them a check -- they still get the money they're owed, and not a penny more.

Now, the yes: Paying half your regular payment every two weeks is a great way to get yourself debt free faster, but it's simply a trick.  Like all good tricks, however, it works, and here's why:

Say my monthly payment is $1,000.  In a year, I'll pay $12,000.

Now, if I pay half that amount every two weeks, I'll pay $500, but I won't pay that 24 times, because there aren't 48 weeks in a year -- there are 52.  I'll pay that $500 a total of 26 times, so I'll pay $13,000 for the year.

Big whoop, you say.  So what.  Well, here's the "whoop" -- on a regular 30-year loan, the bi-weekly payments (that extra $1000 a year) will have it paid off about 4 years early, and will save you 15%-20% in interest over the life of the loan. 

Bi-weekly payments are also nice because most of us get paid bi-weekly, which means it's easy for us to just assume a set part of every paycheck is our mortgage payment.  This actually makes budgeting easier in the long run, though it can take a little bit to get used to it.

But the answer, my friends, isn't bi-weekly payments; as I said, that's just a trick.  The real answer is Extra Principal Payments (EPP).  The beauty of EPP is you can make them in any amount, at any time.  Check with your mortgage company to see how they need to be notified of extra principal payments (including making bi-weekly payments on your own without their help), but for most of them, simply putting "apply extra payment to principal" is enough to have them do so, instead of taking the money and holding it back as part of your next regular monthly payment.  Others may have different requirements, so check with your lender.

The reason this works is your interest -- the part of the money you pay for the privilege of using the bank's money -- is calculated directly on your principal.  The less principal you have, the less interest you pay.  Since your regular monthly payment pays off all the interest you owe before it ever gets rid of a cent of your principal, the only way to get rid of the loan faster is by making EPP.

 "But Jason," I hear you saying, "don't I need to put Large Gargantuan Amounts toward the principal to make a difference?"

And you hear me saying, "No."  Let's assume a $150,000, 30-year mortgage at 4.5% interest (not hard to get these days).  Just $10 extra in principal a month pays the loan off 9 months early  -- give up the Adult Beverage of your choice one dinner out a month and you're almost there. 

$50 extra a month pays it off 3 years and 7 months early.  $100 extra, and it's 6 years and 3 months.  For the example above, that means you're paying $860 a month instead of $760.  Not a small thing, but not the end of the world, either.

If you want the bi-weekly payment effect without the hassle, take your monthly payment amount (don't include the escrow amount in this unless you want to -- escrow's a whole different ball of wax ... gross) and divide it by 12.  Make that your monthly EPP, and you'll get close to the same effect as making bi-weekly payments.

Whether you switch to bi-weekly payments (being darned sure not to pay anyone for the privilege of taking your money) or just make extra principal payments in any amount, you're cutting the life of your loan, and saving yourself hundreds or thousands in interest you won't pay. 

If you want to run your own calculations, check out the Mortgage Calculator and the Biweekly Mortgage Calculator from Bankrate.com.