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Reap What You Sow
Spring is the time to think about planting wealth for yourself so that you can reap the rewards all life long.
by Ilyce R. Glink
March 1, 2006
T
he trees are budding, the crocuses are blooming, and for most Americans, their debt is
growing. Last year, Americans officially spent more than they earned for the first time since the
great Depression. Your home equity may be sprouting as fast as your flower garden, but tapping into
that equity can cause your net worth to plummet.
But it isn't too late to turn around your finances this year. For most Americans, a house
becomes the single largest asset they own. When the mortgage is paid off, it becomes the
cornerstone of their net worth.
But buying a house and paying off the mortgage is only the start of a solid
financial future. There's more you can do. Perhaps you can spring into savings this month by
tapping into these ideas:
Put yourself on a budget. The proverbial "belt tightening" strategy isn't particularly sexy,
but it works. The goal is to spend less than you earn, not just less than what you earn plus the
amount your house rose in value. And what money you do spend you should spend carefully.
Buy in bulk (if it's cheaper), at sales, and in advance of when you'll actually need
something - which should help you avoid running to a convenience store at 3:00 a.m. and paying more
than at the grocery store. Use coupons if you can. Make a special dinner at home instead of blowing
$150 at a pricey restaurant. Give gifts of time not those that cost you a week's salary.
The way to get rich is to watch your pennies. The dollars will take care of themselves.
Pay off your charge cards. The average American has more than $8,000 in credit card debt.
That's in addition to a mortgage and a car loan. Of course, the reason we have debt is that we
spend more than we earn. Simple as that.
Debt isn't much of a problem unless you have financial dreams you hope to achieve. Like
sending your kids to college, or owning your own home. For future homeowners, every dollar you
spend to pay down your charge card debt or car loan each month is a dollar less that you'll be able
to put toward your monthly mortgage payment.
Lenders decide how much money to lend buyers based on a complex formula that compares how
much you earn with how much debt you carry. If you decide to purchase a new car on credit two
months before you start looking to buy a home, lenders will add that car loan into your total debts
and decrease the amount you can spend on a home.
If you're just about ready to shop for a home, don't make any big purchases that will either
reduce the amount of money that you have for a down payment (if every penny counts), or will
otherwise limit your ability to qualify for a loan.
Finally, while you're paying off your charge cards, remember to pay them on time. Paying on
time, over time, is the sure fire way to improve your credit history. And these days, paying on
time is the only way to avoid that nasty little surprise called a Penalty APR, which happens when
credit card companies check your past credit history, notice a late payment from years ago and
promptly jack up the interest rate on your card to 30 percent or more. Ouch!
Pay yourself first and last. This little bit of common sense is particularly helpful if
you're trying to save for a down payment or another major purchase.
Each month, make out an invoice to yourself for the amount you wish you were saving. It
could be $50 or $500. When you pull out your checkbook to pay your bills each month, take out the
invoice and literally pay it first. Then, if you have any cash left over in your checking account
at the end of your bill-paying session, pay yourself again.
The high-tech way to do this, of course, is to have the financial institution electronically
pull the money out of your checking account each month. Remember to mark this down, however, or you
could wind up bouncing checks and needlessly spending additional dollars.
If you've got cash in your pocket, you're likely to spend it. Once the money is out of your
bankbook, you won't be tempted to spend what you can't see. It doesn't matter where you put the
money, although if you write the check to your Roth IRA account, you'll get a bonus: the money will
grow tax-free. Want another idea? Send the second check to your child's 529 college savings plan.
The money will also grow state and federal tax free, depending on which plan you choose (check out
www.savingforcollege.com for the latest news on 529
plans).
If you're saving for a down payment, Roth IRA accounts and 529 college savings plans
won't work. Instead, open up a brokerage account, money market account, or even a savings account.
Just make it as inaccessible as possible, so you won't be tempted to spend those last few bucks.
Pre-pay your home loan. Another way to save big over time is to contribute a few extra
dollars each month to your mortgage. Because of the way compounding works, every dollar you pre-pay
saves you hundreds or thousands of dollars in interest over the life of your loan.
If you make one extra payment per year (either in a lump sum on January 1, or in 1/12
payments attached to your monthly payment), you'll cut your 30-year loan to about 22 years,
depending on the interest rate. If you make two extra payments per year, you'll cut your 30-year
loan almost in half.
If you don't want the hassle, but still want the savings, get a 15-year loan instead of a
30-year loan. Imagine buying your first home and paying it off by the time your toddler is ready
for college.
Refinance when interest rates drop or when your credit improves.
Refinancing your loan can be a good way to find extra money in your budget each month. If you can
save even $50 per month, that's $50 you can invest in yourself and your future.
Refinancing with a no-cost loan may be a good way to go, particularly if you'll be staying
only a few years in your home before selling. Otherwise, consider paying some costs or fees and
taking a long-term view with a super-low interest rate.
Keep up with your home maintenance. If you keep your home in good shape, you'll spend
less over the years than if you let little things build into big problems that need replacing
instead of repairing.
Regularly walk through your home, including the basement and attic, and around the exterior,
looking for signs of rot, moisture, or pest infestation. The sooner you take care of these
problems, the easier and cheaper they will be.
Contribute the maximum to your retirement plan. If your employer offers you a retirement
plan, your best bet is to take full advantage of it. But fund your retirement savings to the
maximum anyway. If your employer doesn't offer a retirement plan, open up an IRA as quickly as
possible.
Retirement plans offer you tax-deductible and tax-deferred growth. That means, your money is
growing far faster than if you had to use after-tax dollars or if you had to pay taxes on your
earnings each year. If your employer matches your contributions, every dollar of that match is free
money.
Save your change. Every day when you get home, empty your pockets (or wallet) of change into
a glass jar. After two weeks, drop the change and your lowest denomination bill into the jar. At
the end of a month or two, take it to the bank. You'll be shocked by how much you'll save and how
you'll never miss it.
Creating a solid financial future isn't about winning the lottery or speculating on a hot
stock tip. It's about being smart with the dollars you have in your checking account at the end of
the month and the change left in your pocket at the end of the day.
Ilyce Glink is a syndicated columnist and WSB talk show host. For more saving tips, visit Ilyce's website, www.thinkglink.com.
