5 Simple Steps to Reduce Your Financial Strain

This post 5 Simple Steps to Reduce Your Financial Strain appeared first on Daily Reckoning.

Dear Rich Lifer,

Think about the last five years…

Can you recall an unexpected event that led to financial stain? Maybe a health crisis, layoff, leaky roof, or unexpected car repair.

You’re not alone. Approximately two-thirds of U.S. households experience an unexpected event that negatively impacts their financial wellbeing, according to Pew research.

So it’s no wonder the most common cause of money stress is the feeling that you’re just one financial shock away from disaster.

What’s even more depressing, reducing financial stress when you don’t make enough is nearly impossible.

“Even the kind of frugality that will theoretically bring you some relief will often require an investment of time or finances — and lacking money and time is exactly why you’re feeling overwhelmed,” says Emily Birken, author of End Financial Stress Now.

So what can you do if you’re stressed about money?

Birken recommends building some slack into your budget, which is possible at any income. Here is Birken’s five-step plan to help relieve some of your financial stress:

Step 1. Adjust Your Tax Withholding

The average tax refund in 2018 was $2,895, which works out to more than $200 per month. One way to increase your monthly net without having to earn more money is to adjust your withholding.

Birken recommends requesting a new W-4 from your Human Resources department and figuring out the right amount of allowances you should claim using the IRS calculator.

Just remember, the tradeoff here is come tax time you won’t be receiving a big pay day from Uncle Sam. But if it relieves some of your monthly financial worry, the adjustment could be worth it.

Step 2. Start A Surprise Fund

Different than an emergency fund, a surprise fund is slightly less robust and meant to help get you through small hiccups in your budget.

The easiest way to start building a modest surprise fund is to set up automatic savings with your bank.

Even if you sock away $5 a week, that’s $260 you can tap into should the need arise. If you up your weekly auto-save amount to $10 a week, that’s an extra $520 per year. You’ll be surprised how quickly your surprise fund grows and how you won’t notice the small amounts missing.

Step 3. Negotiate Your Bills

Easy wins in creating some slack in your finances include negotiating your bills, suggests Birken. It’s considered easy money because you typically only have to do it once. And if you’re successful, expect to save yourself an extra $20-40 every month.

Even saving $20 per month on your cable bill works out to $240 a year. Think about all the recurring bills you have now that are negotiable.

“Internet, cable, cell phone, and auto insurance are service providers that are willing to adjust their pricing in order to keep customers,” says Birken. “It costs them far more to land a customer than it does to keep a current one happy.”

There are several ways to go about negotiating your bills, do some research on Google and you’ll find scripts and other tactics that can walk you through the process for specific providers.

Step 4. Cancel Unused Subscriptions

Subscriptions you set on auto-pay are easy to overlook. One easy thing you can do is set subscriptions so they don’t auto-renew. When you receive notification that your subscription is about to expire, that’ll give you a chance to gauge whether you need it or not.

For current subscriptions, look through your credit card and bank statements to determine which services you’re signed up for and decide whether you want to cancel or not.

Also identify services you’re doubling up on. Maybe one TV streaming platform is enough or you can drop the gym membership if you’re playing in a hockey league three nights a week.

Step 5. Check Your Bank Balance Daily

It’s easy to leave bills and bank statements unopened to avoid the pain of reality. If you’re serious about adding some slack to your budget, you need to check your bank balance on a regular basis.

I suggest setting a reminder on your cell phone to check once a day. Start extreme and get in the habit of checking daily so you’re more mindful of how much you’re spending and where your money goes every week.

The added benefit of daily checks is if you’re running low on funds, you can catch it before you get dinged on overdraft fees.

You’ll also see your spending habits and know if you have a particularly spendy month. If you’re spending a lot, you can make sure you slow down next month.

These are just a few of the ways you can lessen your financial worries without having to get a big raise or take on a new side hustle to up your income.

Be diligent about saving and keep a close eye on where your money goes and you’ll build enough slack to keep your mind at ease.

To a richer life,

Nilus Mattive

Nilus Mattive

The post 5 Simple Steps to Reduce Your Financial Strain appeared first on Daily Reckoning.

The Importance of Understanding Mortgage Insurance

This post The Importance of Understanding Mortgage Insurance appeared first on Daily Reckoning.

Mortgage rates have been dropping for the past few months, with a 30-year fixed falling to 4% recently according to FreddieMac. And now there’s the possibility that the Fed will lower interest rates this summer. So this could be the ideal time to buy that home you’ve been eyeing.

But suppose you have credit problems or haven’t saved enough for a hefty down payment (20% for most conventional loans)?

Data from U.S. Mortgage Insurers (USMI) revealed that it could take 20 years for a household earning the national median income of $61,372 to save 20%, plus closing costs, for a $262,250 home, the median sales price for a single-family home in 2018.

And by the time you do, housing prices may have substantially increased to the point of becoming out of reach. In other words… it’s like trying to hit a moving target.

The reality is that banks are reluctant to trust potential borrowers who have poor credit or can’t invest much of their own money in a home. They want assurance that you’re a good risk and can be trusted. And in their eyes, the lower the down payment the riskier the loan.

Moreover, coming up with a 20% down payment can be a humongous hurdle for first-time buyers who don’t have much in savings or any equity in a current home.

But lack of cash doesn’t mean you can’t achieve the American Dream…

How Private Mortgage Insurance (PMI) Bridges the Gap

PMI protects the lender in case the borrower defaults on the mortgage.

The premium is based on your credit score, the loan-to-value ratio (LTV) of the home, and whether the mortgage will be fixed or variable rate.

The better your credit, the lower the premium. Another good reason to build good credit.

The LTV ratio is the amount you want to borrow compared to the value of the home securing the loan.

For example, if you hope to borrow $180,000 for a $200,000 home, the ratio would be: $180,000 ÷ $200,000 = 90%.

But if you can come up with more cash and only need to borrow $170,000, the ratio becomes: $170,000 ÷ $200,000 = 85%.

So as far as the lender is concerned, the lower the ratio… the less risk in making the loan.

The Important 78% Mark

PMI isn’t cheap. Typically, it costs 0.3% to 1.5% of the original mortgage amount each year. That means PMI at 1% for a $180,000 loan could cost you $1,800 per year, or $150 per month. The lender tacks this premium to your monthly payment.

So you want to get rid of it as soon as possible.

As you make mortgage payments the amount you owe slowly declines and your equity rises.

When the LTV falls to 80%, you can ask your lender to drop PMI. However, they are not required to do so.

But once it hits 78% (you have 22% equity in the home) they must eliminate the insurance.

So in the above example, when the mortgage drops to $156,000, the LTV falls to 78% and would be canceled. 

There are several ways to reach this mark sooner:

  • Get a new appraisal. It’ll cost you a few hundred dollars, but if your home has surged in value, the additional equity could push the LTV down to the 78% mark. For instance in our example, if the home’s value shot up to $240,000 and you owed $175,000, the LTV would be 73%… low enough to request that the PMI be dropped.
  • The same could apply if you remodel. A new screen room or upgraded kitchen, for instance, could make your home more valuable.
  • Pay a little extra each month and tell your lender to put that money towards the principal… not interest. $50, $75, $100 or so on top of your regular mortgage payment will get your loan balance down faster.

Lenders must tell you at closing how many years it will take until your mortgage is paid down enough to cancel PMI. So be sure you understand where this information is located in the loan documents.

The Downsides…

Before you sign up for PMI realize that there are some important details that the lender might overlook explaining to you in full.

For instance,

  • PMI does nothing to protect you if you can’t make the payments
  • Premiums are not tax-deductible
  • You might have to pay the first year’s premium at closing
  • The lender is the beneficiary. Your loved ones get nothing if you die
  • Reaching the 78% mark could take many years

On top of all that, it could take months to cancel the coverage once you do hit the 78% mark…

Your request must be in writing. The lender may want a certified appraisal, which you might

have to pay for, to assure the home’s value hasn’t fallen below the original estimate. They’ll also request proof that there aren’t any other debts on the property, like a home equity loan or second mortgage.    

How to Avoid PMI

There’s really no way to shop around for PMI. You have to accept what the lender offers. But you aren’t without options…

You could take out a piggyback mortgage to get you enough money for a 20% down payment.

Suppose you want to buy a home for $200,000 but only have $20,000 for a down payment.

You’d take out two separate loans for the same home. The first would be for $160,000 representing 80% of the home’s value. The second loan would be for 10%, which is $20,000.

This is also known as an 80/10/10 loan. The first mortgage is for 80% of the home’s value. You’re putting down 10%. And the second mortgage covers the remaining 10%.

Even though you won’t have PMI premiums to pay, there could be other costs that might make this strategy more expensive.

  • There will be closing costs on two mortgages, rather than one
  • The second loan will probably have a higher interest rate than the first
  • The second loan will typically be variable, which could mean an even higher interest rate in the future
  • The second loan might have a balloon provision that makes it payable in full in 15 or 20 years
  • The second loan doesn’t go away until you pay it off, whereas PMI gets canceled at some point
  • Some lenders will not permit you to borrow down payments.

There are other alternatives to conventional PMI.

For instance:

  • The FHA has loans with a 3.5% down payment and provides its own mortgage insurance
  • Your local or state government might have down payment programs
  • The VA has special low-down payment loans that don’t require mortgage insurance

In 2018, PMI helped more than 1 million borrowers purchase or refinance a home with an average down payment of 7% and as small as 3%.

Without this insurance they would have been kept from living the American Dream.

And as long as you understand the ins and outs and are willing to pay a little extra money each month, PMI could make it possible for you to buy your dream home too.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post The Importance of Understanding Mortgage Insurance appeared first on Daily Reckoning.

5 Tips for Less Stress

This post 5 Tips for Less Stress appeared first on Daily Reckoning.

Think about the last five years…

Can you recall an unexpected event that led to financial stress? Maybe a health crisis, layoff, leaky roof, or unexpected car repair.

You’re not alone. Approximately two-thirds of U.S. households experience an unexpected event that negatively impacts their financial wellbeing, according to Pew research.

So it’s no wonder the most common cause of money stress is the feeling that you’re just one financial shock away from disaster.

What’s even more depressing, reducing financial stress when you don’t make enough is nearly impossible.

“Even the kind of frugality that will theoretically bring you some relief will often require an investment of time or finances — and lacking money and time is exactly why you’re feeling overwhelmed,” says Emily Birken, author of End Financial Stress Now.

So what can you do if you’re stressed about money?

Birken recommends building some slack into your budget, which is possible at any income. Here is Birken’s five-step plan to help relieve some of your financial stress: 

Step 1. Adjust Your Tax Withholding

The average tax refund in 2018 was $2,895, which works out to more than $200 per month. One way to increase your monthly net without having to earn more money is to adjust your withholding.

Birken recommends requesting a new W-4 from your Human Resources department and figuring out the right amount of allowances you should claim using the IRS calculator.

Just remember, the tradeoff here is come tax time you won’t be receiving a big pay day from Uncle Sam. But if it relieves some of your monthly financial worry, the adjustment could be worth it. 

Step 2. Start A Surprise Fund

Different than an emergency fund, a surprise fund is slightly less robust and meant to help get you through small hiccups in your budget.

The easiest way to start building a modest surprise fund is to set up automatic savings with your bank.

Even if you sock away $5 a week, that’s $260 you can tap into should the need arise. If you up your weekly auto-save amount to $10 a week, that’s an extra $520 per year. You’ll be surprised how quickly your surprise fund grows and how you won’t notice the small amounts missing.

Step 3. Negotiate Your Bills

Easy wins in creating some slack in your finances include negotiating your bills, suggests Birken. It’s considered easy money because you typically only have to do it once. And if you’re successful, expect to save yourself an extra $20-40 every month.

Even saving $20 per month on your cable bill works out to $240 a year. Think about all the recurring bills you have now that are negotiable.

“Internet, cable, cell phone, and auto insurance are service providers that are willing to adjust their pricing in order to keep customers,” says Birken. “It costs them far more to land a customer than it does to keep a current one happy.”

There are several ways to go about negotiating your bills, do some research on Google and you’ll find scripts and other tactics that can walk you through the process for specific providers.

Step 4. Cancel Unused Subscriptions

Subscriptions you set on auto-pay are easy to overlook. One easy thing you can do is set subscriptions so they don’t auto-renew. When you receive notification that your subscription is about to expire, that’ll give you a chance to gauge whether you need it or not.

For current subscriptions, look through your credit card and bank statements to determine which services you’re signed up for and decide whether you want to cancel or not.

Also identify services you’re doubling up on. Maybe one TV streaming platform is enough or you can drop the gym membership if you’re playing in a hockey league three nights a week.

Step 5. Check Your Bank Balance Daily

It’s easy to leave bills and bank statements unopened to avoid the pain of reality. If you’re serious about adding some slack to your budget, you need to check your bank balance on a regular basis.

I suggest setting a reminder on your cell phone to check once a day. Start extreme and get in the habit of checking daily so you’re more mindful of how much you’re spending and where your money goes every week. The added benefit of daily checks is if you’re running low on funds, you can catch it before you get dinged on overdraft fees.

You’ll also see your spending habits and know if you have a particularly spendy month. If you’re spending a lot, you can make sure you slow down next month.

These are just a few of the ways you can lessen your financial worries without having to get a big raise or take on a new side hustle to up your income.

Be diligent about saving and keep a close eye on where your money goes and you’ll build enough slack to keep your mind at ease.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 5 Tips for Less Stress appeared first on Daily Reckoning.