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February 26th, 2018 at 10:15 am
When getting your act together financially, you probably wouldn't think to put decluttering on the list. Sure, decluttering feels nice, but does it have anything to do with finances? YES! There are so many benefits to clearing out your crap that it's worth going through the whole house. I can think of 8 quite serious financial benefits:
1. Sell your Junk
The most obvious way to have a financial gain while decluttering is by selling your junk. I use Facebook sale pages or Craigs List for any item that is either common or large (such as generic clothes or furniture). I use Ebay for more unique items like homemade Halloween Costumes, vintage computer games, non-local college paraphernalia etc.
One thing to note is that many items are simply not worth your time. It might take 3 hours to photograph the item, put together an advertisement, and answer endless questions for iffy buyers. Then you might have to rearrange your schedule to be home for them to come get it or package it up and take it to the post office during their operating hours. If the item was only $5, maybe you should just put it in a bag with other stuff and take it to a donation center.
Solution: I've never hosted a yard sale in my adult life because my city is a pain about it, but if you are doing a lot of items, yard sales are a great way to move smaller items that people might not drive out for. Despite taking a lot of time and effort, it is still much easier that listing a bunch of small items separately.
2. Donate your Junk
Don't worry! Even donating your items can directly return you money. If you donate to a charity such as Goodwill, you can write off the items as tax deductions!
They say a penny saved is a penny earned, but I've calculated it out to 1.57 pennies earned after tax savings. If you jump through the hoops to deduct those items, you are saving about a third of the current value of the item. Example: donating a blazer valued at $6 reduces your adjusting tax return income by $6, saving you $2 in taxes. Pull a whole stack of clothes out of your closet and that could add up fast! The Salvation Army put together a generic price guide that will help you determine the value of your donations.
Of course with anything government there's paperwork: If the year's cumulative donations are under $500 in value, than everything is simple (double check me, rules tend to change over time). Just make sure to get a receipt when you drop the items off so you can have proof for audits. Once it is over $500, you need to document more information such as how the value was determined (independent appraisal?, comparing to other prices in the thrift store?). Make sure to get your paperwork done at the time of donation! (more info)
This is all only applicable if you are itemizing your deductions. With the new increased standard deduction, this will apply to many fewer people. Is anyone else bothered that the standard deduction is increasing? Sure it is extra money in my pocket, but for most people, it eliminates charitable incentives by just handing it out to everyone. Okay, my rant is over.
3. Eliminate future Junk
Once you've gone through and purged your belongings, you'll become much more picky about what you buy. I've personally noticed that the more crap I throw away, the less crap I buy. Now, when I see that fun, cheap, non-necessity in the store, I see myself throwing it away in my next purge. No longer tempting.
The bonus benefit to this one is you'll also see an increase in the quality of your products. Example: I used to feel like I needed a new wardrobe. I had so many worn out clothes from high school and almost nothing without pit stains. Once I started going through it and clearing things out, I realized that I have plenty enough good clothes, they were just hiding with the old ones. It's a work in progress, but eventually I'll get rid of all my "meh" shirts and only have "yes" shirts. Basically, I'll get a "new" wardrobe without spending a dime, or at least if I buy something I'll know what I actually need. Moral of the story: if you purge your crap, all you'll have is quality and you won't feel like you need to buy.
4. Open up your space
How much does your home cost per square foot? Mine is less than most because I live in the middle of nowhere, but even my house costs $72 per square foot BEFORE you add in all the interest payments and property taxes over the years. Let's say you clean out 10% of your space. You've effectively just saved tens of thousands of dollars on a larger house!
If you currently rent a storage unit, there are some obvious savings potential there. Even without a storage unit, if you clear out enough space, maybe you'll consider downsizing your home or monetizing some of the space by taking in a tenant.
5. Know what you already have
How many times have you bought something only to discover you already had what you needed? How many opened bottles of the same type of glue do you have? Ever buy something that you know you already have but couldn't find it? Decluttering gives you a chance go dig through all of those piles and know what you already have and where it is so you don't have to hit the stores as often.
6. Shopping in your Junk
The best place to shop is your closet. This week, a friend asked me when I start my Christmas shopping. I gave the quick answer of "last year", but the truth is I don't really shop. I scrounge and squirrel away.
Most things I give away cost $0-1. I am not above re-gifting items that would become clutter at my house and love re-purposing old things. For example, I made an old pajama shirt into a toddler apron for my niece and I made string art out of some scrap particle board covered by a poor fitting t-shirt with finishing nails and embroidery thread. Just this month I turned a polo shirt into a gym bag and some dog fencing into a tomato trellis.
7. Reduce country's consumption
When you give away or sell the decluttered items, you are redistributing items to people who want it more than you do. If all items were redistributed optimally, we would buy much less as a whole. This leads to less consumerism, stronger savings, greater physical investment, and actual growth (despite flawed GDP theories). In other words, this is how you make America great again.
8. What goes around comes around
When a friend thinks of me, I'm much more likely to think of them. This isn't because I require other people to give me gifts before I'll return the favor, but because their action created an association between themselves and looking out for other people. I bet as you find thoughtful items to pair your family, friends, and associates with, you'll inspire others to do the same. Don't be surprised when you become the recipient.
Even more than just getting things from your associates in a circle of giving, donating actually boosts your income! It sounds backwards, but there is statistical evidence to back this up. Arther C. Brooks set out on a quest to prove that earning more leads to more giving, but kept getting what he believed to be erronious results: giving leads to more earning. My guess is this has something to do with the fact that giving makes you happy which leads to interview accpetances and boosts job performance. In any case, what a great excuse to donate!
Basically, as backwards as it sounds to the usual "frugal hoarders", decluttering is one of the best ways to get started on a frugal life!
Resources to Help You!
Not sure where to begin? Here's Heasly's list of places to purge for her "40 bags in 40 days" callenge.
Having a hard time getting rid of "just in case" items? You could try the 20/20 rule by "the minimalists" or your own modified version: If it costs less than $20 to replace and can be found within a 20 min drive, just replace it when you need it.
Don't know whether to trash, donate, or sell your finds? Here's a guide by "clean and scentsible".
Also from clean and scentsible:
"If you do not love it, use it, and need it, it should probably be in the garbage or donate pile. If you are having difficulties getting rid of things, you may want to read this post for some helpful tips on overcoming decluttering paralysis"
Good luck friends!
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Note: Any financial choices you make are yours alone. I cannot be held responsible for any results or legal implications of your choices.
February 22nd, 2018 at 12:31 pm
Are you in a constant battle with your budget? For the first two years of my marriage, I was too. We wanted to be financially responsible and were taught that financially responsible people kept budgets. But budgets are hard. Luckily, there is something much more effective than a budget to keep you and your family on the right financial path!
Let's start by learning why budgets don't work:
Why Your Budgets Fail:
1. There is no correct allotment
This is probably the main reason people fail. We tracked our expenses for months. We figured out how much we spent at grocery stores, gas stations, bills, etc. We set our budget to those amounts. We failed, repeatedly. The reason being that if the allotment was too low, you struggle, run out, then fudge.
If the allotment is even a little high, you feel like you don't need to try in that category and you actually get worse. When you see an extra $20 in your "bills" fund you think about what monthly payments you could get that cost $20 or wonder how much more comofortable the house would have been if you set the AC one degree cooler. If you see it in your "groceries", you relax a little and buy a little nicer meat or more cottage cheese (probably overspending the $20). If you see it in your "apparel" budget, that cute pair of shoes is not only irrisistable, but "deserved" as a reward for your financial prudence. You get the picture.
No matter what amount you choose, in some months you will have extra and in some months you will struggle.
2. Categories are confusing
To start off, you've got to set up clear, mutually exclusive categories. Is nail polish "toiletries", "apparel", or the "wife's discretionary"? Is the soda you buy for a party "groceries" or "fun"? It is a personal choice, but you need to think it through ahead of time.
3. Split receipts are a pain
If you buy your kid some socks at the grocery store, does it add to your "grocery" expenses or does it get split out to your "apparel" category? Costco or Super Walmart receipts are particularly troublesome because just about any type of expense could be on it.
4. You have to break the budget to save money
Last year, we bought a welder and all the accessories from a friend at a crazy good price. We had been wanting one for years and even have a money-making opportunity that requires one. We expected to pay more than twice the price we paid. Had I been on a strict budget, I surely wouldn't have had the required $600 in my "tool" category. I had just bought some other used tools for my husband's Christmas present.
When there are great sales on things you plan on getting, you need the financial flexibility to act.
5. Budgets break your soul
What is the purpose of budgeting? Improving your financial security. Budgeters will never get there. You can't feel safe if you are constantly checking your balances and trying to get ends to meet until your next deposit.
I feel so strongly against constantly checking your balances that when I actually was low on funds during college, I haredly ever checked my bank account. Instead, I would only buy things that I needed regardless of whether or not I had the money. Maybe that was reckless, but I felt it was okay because it had a definite end point as I wouldn't be a college student forever. Because I convinced myself every dollar was my last dollar, my dollars stretched like never before and I actually began to build a sizable buffer underneath my expenses. Yes, sometimes I ate "bread sandwiches" or "salsa rice" or even "salsa-supplemented-with-chili-powder rice", but not once was my bank short the funds needed to cover my credit card's auto-pay-in-full. To me, this felt more free than constantly worrying about how much money I had.
No one wants to feel trapped. It isn't fun, it isn't healthy, and it isn't worth it.
What to do instead:
For the last three years, we have used an alternative method: tracking and analyzing expenses. Roughly twice a month, I review my receipts, bank account, credit cards, PayPal, Amazon, and any cash purchases I've noted. Every item on the receipt is categorized and entered into my annual financial spreadsheet. I literally enter how much I spent on eggs in a separate line from my lettuce. My spreadsheet then crunches all the numbers and spits out everything I might wonder about our spending and saving habits. It takes a little time, but I can usually get through it in a half-hour and I don't have to think about it constantly like a budget.
I review that data briefly whenever I wonder about it and in depth annually. Every category is compared to the previous year's averages where we can easily spot any "lifestyle inflation" we've accidentally given ourselves. Usually just knowing you've spent more on apparel than normal curbs the issue. I also double check to make sure our over all spending increases don't out pace our take home income increases. To me, that is the most important thing to consider. We currently live off (not including giving or investing) 50% of our take home income. That is a goal I've worked towards and am so happy to have achieved. I don't want to let it slip.
I didn't solve the problem with identifiying categories, but I have practiced enough years that it is easy for me to search my heart and know the purpose of each item. I think it is actually a benefit now as I force myself to acknowledge that some electronics are "home" and others are "toys".
There are so many advantages!
1. I am not trying to target a specific number with each category which really realieves stress and opens up flexibility for smart deal shopping.
2. I can focus on continual improvement as I try to lower (or maintain) each category's monthly average.
3. I have a record of all purchases and dates. I can filter for specific items and see exactly how many boxes of goldfish I buy annually. This helps me know how much I can buy without worrying about expiration dates. I can figure out exactly how much a baby shower cost me by summing the various items. I can look back and know by my hardware purchases when it was that my father-in-law came over last year and worked on the project car. I can use filters to know roughly how much I spent in sales tax (for tax return purposes). This data captures so many things!
4. I can easily figure out good deals. Since I have the spreadsheet on my phone, I can quickly look up while in a store if I got a better deal on oatmeal at Winco or Costco. For items that I like to compare, I add information in a unit price section so it is even easier.
5. I can crunch the numbers any way I imagine. I am not stuck with some app that has a thousand features, but won't accept formulas as prices or that won't let me search for all entries with the word "cereal" or won't let me consider my expected income (standard paycheck) vs. bonus income (includes overtime, bonuses, side gigs, etc). I am a control freak and this is the ultimate control.
What we still budget
There are only 2 categories that we still budget out: giving and investing. The reason those are still in the budget is because they are more like a quota. We want to spend the full amount each year. For those unique categories we try to increase the expense, not decrease it.
For those two “budget” items, we’ve found that is by far easiest to stick to your budget with automation. Make sure to have a percentage of your paycheck deposited into your 401k automatically. Many charities have the ability to accept direct deposits as well. If you can, set up your direct deposit allotments to put either a dollar amount or a percentage into separate banking accounts for savings, giving, investing, or any other allotment you never want to shortchange. Actually, just go to your library this week and check out The Automatic Millionaire by David Bach. He'll walk you through all the what's, why's, and how's of a conservative way to accomplish goals and get rich over time.
There you have it. Don't fight the system. Ditch the budget and do something that actually works!
Download Milly's Free Spending Tracker Here
Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.
January 18th, 2018 at 12:54 pm
When it comes to finances, nothing makes me more excited than seeing a ton of money leave my bank account each month. I just can’t wait to enter it into my “House Payment Analysis” spreadsheet, to see the amount saved go up a few hundred dollars, and be one month closer to payoff. Why does this make me so happy? Well, a lot of it is because I love numbers, but also because we made a plan to own our home in just under 7 years, 76.9% faster than the 30 years the loan was signed for.
Forget the Tax Deduction
Some people say you shouldn’t pay off your house because there are so many tax benefits. While there could be strategy in focusing on debts without tax benefits first, not paying it off for tax reasons doesn’t make any sense. Yes, you won’t get a tax deduction for the interest you are paying, but that’s because you don’t have to pay it at all! Would you rather get $100, pay the bank $100, and have Uncle Sam give you back $20 he took from the other part of your paycheck? or would you rather get $100, keep $80 and give $20 to Uncle Sam without anything extra coming out of the remaining paycheck?
Saving/Investing vs. Paying Down your House
Other people are more comfortable saving their money instead of dropping it into their house. In the current state of things, I can get as high as 1% interest on my savings, maybe 2% if I have a lot to save and can stash it away for a long time in a certificate draft (CD). My mortgage rate is 4.625%. Despite it’s phenomenal performance from 1945 to 1995 even the S&P 500 isn’t set to beat that rate (currently returning about 4.4% or less). In other words, unless you are in a more specialized index, the interest you save on your house is probably your biggest gainer.
If you get a higher return out of savings or dividend stocks than you are paying on your house, and it fits within your risk tolerances, you might do better with a mortgage offset account. That is, pay the minimum on your home and put the excess you could have put on your house into the high return investment. The investment account will grow faster than your house would have paid down. Once you have enough money in the account to pay off your home, you can either withdraw it and become debt free, or keep it for a few more years and pay it off with some money to spare.
Close your Mortgage in Half the Time!
(For a LOT less Money)
So how am I paying it off so quickly? It turns out that just adding a little to your monthly payment can make a HUGE difference. Even $5/month extra will save a few thousand dollars and a few months over a 30 year loan. At the beginning of your loan, most of your payment goes towards all the interest you owe on the principal (the amount needing paid off), not reducing the amount you still owe. You'll just have to pay nearly all of that interest again next month and make you feel like you're running in place. Adding just a little straight to principal will give you much more bang for your buck.
Not sure how to find a few extra dollars? Stay tuned for more posts.
Make sure when you add the little extra that it is explicitly marked as towards the principal. Otherwise, it will likely go towards the next payment and not get any compounding effects.
Here’s my simplified formula to pay off your mortgage in half the time:
Because this ignores some funny exponential math, it isn’t exactly half the time, but pretty close. If your 30 year mortgage rate is over 4.6%, you’ll pay it off a little faster. If it less, it will take a little longer (but you'll be saving more money anyways). You’ll have to do your own math if you are in the middle of your loan or have a different length. Click here for my free fancy calculator so you can see what happens with YOUR numbers.
Your monthly payment has three components:
1. Principal = The principal is actually the amount of money you still owe on the house, but they make it confusing and reuse the term. The principal payment is the money that actually goes towards paying down the house (towards the actual principal).
2. Interest = The amount charged as interest on the remaining principal. It decreases as you have less money borrowed.
3. Escrow = This covers your home insurance and property taxes. The lender forces you to pay it to a special account to ensure they never get stuck with back taxes or an unfunded burnt down home. Even after you pay off your home, you will continue to pay these amounts, but directly to the insurance and government instead of escrow.
Your loan is worked out such that your monthly payments are constant despite the lowering interest. This is done by increasing the principal payment slowly over time. Principal payment plus Interest should equal a constant.
Here's the equation you've been waiting for. Just look to your statement to see what your numbers are:
Escrow + 1.5 x (Principal + Interest) = amount you need to pay each month to cut your loan length in half!
Alternative way of looking at it because words and math are hard to mix: Take any statement, add the principal and interest payments together, the divide that number in half. The result is the additional amount that you need to pay to principal each month.
Did you notice? You add less than 50% to your payment and it counts as two (200%) payments!
Alternative Double Principal Method
My father had a different approach which also cut the mortgage length in half. He would simply write another check for whatever the principal portion of each payment was and put it straight to principal. The advantages of this method is that the number you need is written right on your statement and it is relatively easy to implement at the beginning when the principal portion is so small. As the principal portion grows, theoretically so does your paycheck making it is okay that you'll be almost doubling your whole payment near the end.
You are going to be SO MUCH better off with this method in comparison to the straight 30 year loan, but I see 3 disadvantages to the Double Principal method in comparison to my half Principal + Interest method:
1. The beginning is when you have the greatest power to knock months off your loan and save money. You won't save quite as much money with the double principal method.
2. You might make more money as you go, but your lifestyle will grow too. I think we all know life only gets more and more expensive. In your future you'll probably add children, catch the travel bug, demand better kitchen appliances, get more picky about food, or otherwise increase your cost of living. Also, I wouldn't count on wages growing faster than inflation for the next decade. We are in a currency war and, in the words of Jim Rickards, "the only way to win a currency war is to stay out of it".
3. Maybe the most significant flaw in this method is you can't automate it. Every month you will have to look at the numbers and make a payment. Autopay won't work. As I learned from David Bach's book, The Automatic Millionaire, the key to growing wealthy over time is automation.
As life gets more expensive and your principal portion jumps up more and more rapidly, you will need a huge amount of discipline and capital to keep this method up. I don't trust myself that much.
Alternative 15 Year Plan
You could instead look into getting a 15 year loan from the get go. The advantage is that they usually have a lower interest rate and they force you to stick to your early payoff plan. This is a great idea if you need help sticking to the early pay off plan. The only problem is you also have to hope life won't throw you any dramatic curve balls in the next 15 years.
Worst case, you do have to drop down to a smaller payment and refinance to a 30 year loan. You'll have to pay closing costs, but those fees will likely be added to the principal so you don't need the cash on hand in your rainy day scenario. It will set you back, but hopefully you'll have enough years paying it off at a 15 year rate that it will make up for the loss.
I personally like the safety net of being able to go back to a low payment for rainy day purposes. This way, I can put the extra principal payments in the "investment" category of my spending tracker
instead of "bills", effectively lowering my living costs.
Unless you can get a substantially lower interest rate and you are confident in your other rainy day funds, I’d just go with the full 30 years and cut it in half on your own. It won't cost much more.
The Home Improvement Pitfall
I have a friend who bought a home at the peak of the market. He and his wife are among the most intelligent people I know, so paying his house off early was a no-brainier for them. They set a plan to pay it off in 10 years despite the high price tag. They stuck with the plan for a while, but as time went on, they made some trade-offs. Instead of paying the extra towards their mortgage, they started paying it into the house with kitchen remodeling and various flooring.
10 years later, when they would have been all paid off, they moved. In that amount of time, the housing market had crashed and they were forced to sell for less than they still owed, even with the updated kitchen. Had they stuck with the plan, they would have come out of the transaction with the entire sale price (minus fees) as liquid money for a down payment on the next home.
Moral of the story: If you pay off your home, you can always sell it for something. Stick to your payoff plan and get there as fast as you can. You never know what the market or your life has in store for you. If the market just goes up, you can always do the projects later. It won’t hurt you to focus on payoff first.
Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.