 askdave@willowcreek.org |
Week 1 |
Every week, we will be posting answers to selected questions that you have submitted |
| Question: |
Dave,
I realize I should be saving money regularly, but since I have a lot of debt at high interest rates, shouldn’t I wait until I am out of debt before I begin to save?
Saving or paying off debt is not an “either/or” question. To become financially free involves doing both at the same time. Saving is the only way to avoid future debt since any unexpected expense that hits a person without savings simply becomes more debt. Establishing an emergency savings fund is absolutely critical to financial health. Even when you have debt, this must be a high priority. Set a goal to put aside 3 to 5 months of “bare bone” living expenses in a savings account. This will provide a cushion to absorb financial surprises such as the loss of a job. Continue to be aggressive about paying down the debt at the same time.
The truth of the matter is you will probably not be able to do this unless you are living on a good working budget. By building into the budget categories of both paying off debt and accumulating savings, you will be making tangible progress toward living financially free.
| Question: |
Dave,
We currently have the money to pay off our mortgage of $150,000 at an interest rate of 5.5%, but my wife and I don’t agree on whether we should or not. She thinks we should pay it off and I think we can earn more by investing the money. What do you think?
I believe the smart thing to do is to pay off your home if you can do it and still have an emergency fund. Once you own your home, no matter what happens, you have a place to live. That way you can start investing the money you save by not having a mortgage payment and build for the future. The problem with investing the money rather than paying the mortgage is you “earn” a guaranteed 5.5% with the mortgage versus the uncertainty of what you could earn by investing it. Having a fully paid-off house would put you in a strong financial position and give you great peace of mind! I hate to say it, but I side with your wife.
| Question: |
Dave,
I would like to know your thoughts on interest-only home loans. Seems to me that since the majority of equity you build in a home is through appreciation, that this is a reasonable option. Am I missing something with these loans?
An interest only loan carries with it more risk than most people realize. Especially in today’s housing market, there is no guarantee that every house will appreciate in value. Since no principle is being paid, the risk is high that you may sell your house and after selling commissions and other costs, owe more on the mortgage than you got for your house. Also, mortgage lenders may use the interest only loan to convince someone they can afford a bigger house than they really should buy and then pay the price when they realize they are in over their heads. For these reasons, I think people should stick with conventional mortgages. The reality is, if all you can afford is an interest only mortgage, you are buying a house you cannot really afford. Look for a less expensive home with a conventional mortgage and a down payment large enough to avoid the mortgage insurance (usually 20% down) and you will save both money and a lot of financial stress.
| Question: |
Dave,
My credit rating is not that good as I was not very responsible with my money in the past. What can I do to improve it now that I am trying to be better with my money?
You can’t change the past but you can begin immediately to repair your credit rating. Your credit scores will begin to rise as soon as vendors begin to report that you are paying down your loans and that you are making all your payments on time. The score does not jump all at once ... it creeps up as you create a recent history of paying your bills on time and not going further into debt. It is a little bit like getting in shape. You have to work hard at it for a long period of time, but slowly you start to lose weight and build muscle. It does not happen overnight and if you quit working out, you start to go backwards. The same thing happens with your credit rating. Avoid more debt, pay your bills on time and you will be doing everything you can to improve the rating as fast as possible. The single best thing you can do to help free up money to pay off debt as quickly as possible is by getting on a good working budget. Good Sense has a number of seminars and workshops coming up to help you do that.