Marriage and Money

In his excellent article entitled "Why One of the ‘Worst Financial Mistakes’ Is Actually One of the Best Money Moves", Matt Bell of SoundMindInvesting points out that a married couple keeping separate accounts is troublesome and often indicative of current or future problems in that marriage.

I couldn't agree more.  Over a decade of professional training, teaching household finance and counseling with married couples has shown me that a healthy marriage requires open communications and teamwork, honesty and trust, not self-centered defensiveness.

The Relationship is Vital
Without communication there IS no relationship.  Without a relationship, a couple is in a co-habitation situation, not a marriage.   If there was just one piece of advice that I could offer you to make you more prosperous and happy this would be it:  Communicate with your spouse about money.   Often.  Work hard to understand your spouse's fears, goals and desires and let yours be known.  Spend as much time as it takes to understand each other and come to agreement regarding how your money will be spent, saved and given to others.  Your marriage is worth it.

Men
Go back and read the relationship paragraph above again.  We men must understand the importance of communication.  We aren't often good listeners.  We should lead in our homes by ensuring that this communication and teamwork occurs and by earning and keeping the trust of our spouse.  That means we don't make large purchases, give large gifts, or make any major financial commitment without first seeking the counsel of our spouse.  If you and your spouse cannot agree on it, don't do it.

Ladies
Ladies most always get the relationship part.  No need to re-read that.  Please do not listen to those radical feminists who tell you that you should always prepare for the possibility of a breakup. What they are missing is that when we marry, we become one flesh (Gen 2:24).  To prepare for a breakup means never having been fully committed to the marriage in the first place.  Like with the men, you must earn and keep the trust of your spouse by not hiding things from him.  Cooperate with your husband to agree on how your money will be spent, saved and gifted.  To lead separate financial lives is to invite disaster into our homes.  Mark 3:25 says "A house divided will not stand".

Focus on the Big Stuff First!

Good morning! This excellent post at Faithful with a Few (one of my favorite Christian finance sites) points out that we should take care of the big and important things before we sweat the small stuff.  This is an important truth and so I will make the same point in a little different way.

I have taught a Biblical Household Finance class at my church for many years now.  Often in a class discussion, someone (usually a lady) will go into great detail about how they save a ton! of money couponing or grouponing.  One student communicated proudly that he was saving a boat load of money on gas because he bought himself a motorcycle.  On credit.  Except for his upside-down economics, I really like the way this guy thinks.  :) I been wanting a motorcycle for a long time myself, but mama is terrified of them so no go on da bike.

Let's take a friendly shot at the coupon lady first.  Not that I want to discourage or discount any efforts people make at saving some pocket money.  Everyone knows the old saying: "a penny saved is a penny earned".  That's very true.   However, its just a penny.  Couponing tends to affect the short term.  Maybe save you a few bucks that you can spend somewhere else.  Does it positively affect your long term?  Probably not.  Yes, I've seen the TV show about the whacked out lady who brings home two carloads of stuff for $6.72, but that's not most of us, OK?  Even if it was, I have my doubts about the real economic benefit that 1240 tubes of toothpaste brings to a household anyway.

Now lets poke a little at the motorcycle guy.  Let me get this straight:  you borrowed $12,000 (totally a guess) to save the difference between a 10 mpg truck and a 30 mpg motorcycle?  Are you serious?  Let's do a little math.  Gas is currently about $3.50 per gallon.  Assume you drive 20 miles daily round trip to work.  The 20 mpg improvement in gas mileage would save you a gallon of gas, or $3.50 per day.   That totals up to $17.50 in a 5-day work-week or $70 per month.  The payment on a $12,000 loan at 5% for 48 months is $276.  Interest alone on the borrowed money is $50 in the first month!  So I took on a four year $276 loan payment to save $20 a month in gas.  Not a good plan unless you really just wanted a motorcycle, in which case its brilliant!

Bottom line: To affect our long term net worth, we have to:

• Get and stay on a budget 
• Get out of debt
• After consumer debt is paid off, our budget should include long term investments.  It doesn't make sense to invest until the debt is paid off, though.  Debt is like negative investments.  The best place to invest until the debt is paid off is in debt repayment.  I'll follow up with a whole write-up on this soon to make this point in more detail.

To the extent that pinching pennies enables you to accomplish these goals, more power to you couponers and grouponers!  But if you're really just freeing up some pocket money to go to spend somewhere else, why bother really?  At the end of the day, all the money's gone.

Who's in Control of our Finances?

Here's one of my favorite Bible passages.  It's like a praise and worship service on its on. It also reminds us who is in control of our finances (and everything else).

1 Chronicles 29:11-12: "Yours, O Lord, is the greatness and the power and the glory and the victory and the majesty, indeed everything that is in the heavens and the earth; Yours is the dominion, O Lord, and You exalt Yourself as head over all. Both riches and honor come from You, and You rule over all, and in Your hand is power and might; and it lies in Your hand to make great and to strengthen everyone."

The Debt Spiral

Here's a little diagram that shows how many people get in over their heads...

Household Finance Class

Just wrapped up a 4-week household finance class we offered free of charge at the local public library. It was a great experience. I met lots of new friends and hopefully they learned some things that will help them. Good stuff!

What to Do With Your Tax Refund

Do you really want to get a tax refund?
No. Experts say that getting a refund means you paid too much in taxes. You really want to come out at the end of the year having paid exactly the right amount or owing a little.

Emergency (a.k.a Rainy Day) Fund
Most financial advisers agree a cash emergency fund is the first step toward financial success. An Emergency Fund is Murphy repellant. It is the anchor that keeps the water pump gremlins and transmission demons from dragging you back into debt Hades. So if you don't have one, that's absolutely the best place for your tax refund. Stay tuned. I'll devote a whole article to all the benefits of the amazing, wonderful and life-changing emergency fund soon.

If you have consumer (non-mortgage) debt
Start your emergency fund off with $1000. Everything over that should be paid down on your smallest consumer debt. If your refund is enough to pay off the smallest debt, put the rest on the next largest debt. Continue to pay off consumer debts in order from smallest to largest until either your tax refund runs out or you pay off all your consumer debt. (oh happy day!)

Are you consumer debt free?
Once your consumer debts are gone, the emergency fund needs to be increased to 3 - 6 months worth of living expenses. Wow. Close your eyes and imagine your life with no debt except the house and a large cash emergency fund. Can you say "financial peace"?

Attack your mortgage
If you have no consumer debt and a fully funded emergency fund, use your refund to attack that mortgage. Its absolutely mind boggling how much money you can save in interest payments by putting extra principle down on your mortgage payment. You want to check with your mortgage company to make sure they allow early principle payments and if so, exactly how to do it. I've heard that not all mortgage companies allow early principle payments but never actually seen a specific case of that. My mortgage company takes any amount we send them over the regular monthly payment and applies it directly to principle. That's exactly what I want them to do. However, not all companies do it that way. Some will apply any excess payment to the next month's payment. Others require you to mail a page from your payment book in with your check with a written indication of exactly how you want your payment applied. The bottom line is: you gotta check with your mortgage company to find out what to do.

No Mortgage Nirvana
Honey, if you're consumer debt free, you have a cash emergency fund and a paid off mortgage you're there. Go have some fun with it. Give it to someone in need. Take a vacation. Buy that eclectic chair you've always wanted. Whatever. Why are reading this blog?

Cars and Money

Cars are great aren't they? There's just something we all love about them. Lots of folks see their car as a public statement about their lifestyle and status. Some of us rate our cars by how powerful the engine is and how good the car handles on the road. For others, cars are just transportation; simply a way to get from point A to point B. The neat thing is, there's really nothing particularly wrong with any of those viewpoints.

Unfortunately, many families make big money mistakes with their cars and there is definitely something wrong with that. Here's some interesting money facts about cars.

New Cars are a Money Pit
A new car will lose 60% (or more) of its value in the first four years! Don't believe me? Check out this recent article in Forbes. Kiplinger's Personal Finance Magazine quotes the same statistic. My own experience also says it's true. Back before I had a clue about money, I purchased a brand new 2001 Toyota Avalon for $27,200. I was so proud of my negotiation skills because the sticker price was $30,000. I thought that if ANY car would hold its value well, a Toyota would, right? Nope. When I sold that Avalon in 2005, it's value was just over $13,000. I might as well have flushed the $14,200 depreciation down the toilet.

All cars, with some extremely rare exceptions, depreciate in value. When we realize that cars are an incredibly large expense instead of an investment, it can be a major turning point in our financial lives.

Car Payments Stink
Even worse than paying $27,200 for a new car would be to finance the car and sink even more money into that extremely rapidly depreciating asset.

Let's look at an example. If you paid $27,200 for a car and financed the car for 60 months at 7%, your payment would be a whopping $538 per month. What's really detestable is that you would end up paying a total of $5116 in interest, making the real cost of the car $32,316. That stinks. Not to mention that $538 dollars of your income would be tied up each month. That's a huge amount of money to say "bye-bye" to every month.

Here's why car payments really stink. If you started at the age of 25 and invested $538 in a S&P 500 Index Mutual Fund each month instead of making a car payment, you could start an early retirement at the age of fifty as a millionaire.

Car payments are a horrible habit most Americans have gotten into. They are the ball and chain that weighs down most families and prevents them from having financial freedom.

Leasing Reaks!
The only thing I can think of that would be worse than financing a new car is to lease it. Leasing is the most expensive way to drive a car.

SUVs Have a Steep Price Premium
SUV's have become wildly popular in our culture. The law of supply/demand states that when something is in high demand the price goes up. That being the case, a late model SUV can be expected to come with a price premium on the initial purchase, the tag will cost more and the insurance typically costs more than a sedan of the same make and year model. If you can find a sedan that meets your needs, it will likely be much less expensive to own.

Gas Mileage Has Become A Huge Part of the Car Purchase Decision
A couple of years ago when gas was $1.75 a gallon, gas mileage used to be a fairly insignificant consideration. Now at $4 bucks a gallon, its a much bigger deal. For someone who drives 20,000 miles per year the difference between 20 miles per gallon and 30 miles per gallon represents $1333 per year, or $111 per month. That's a lot of cash to be throwing away in my book.

In summary:

• Don't buy new cars unless you're incredibly wealthy. Most of us can't afford to throw that much money away.
• Pay Cash! Car payments criple your cash flow and the interest payments rob you of your hard earned money
• Less is more. Since cars depreciate so fast, it stands to reason that the less you spend, the less money you lose.
• Never, ever, ever, ever, ever lease a car. Was I clear on that?
• Don't drive a gas guzzler. Gas is an ever-increasing percentage of our living expense. Don't blow any more cash through your tailpipe than you have to.