It’s a subject that none of us want to think about.

Getting started

So let’s do something today that we don’t want to do. Let’s evaluate your estate planning and see if it’s adequate for the job. For the record, I am not an attorney and this is not meant to be legal advice. I have been a financial planner and often referred clients to get competent legal advice. This is meant to do the same.

First, let’s create working definitions for a couple of commonly used terms. “Estate” refers to what financial and physical assets that you own (or partially own) at the time of your death. “Estate planning” is the planning that you do before your death to make sure that your wishes are followed after death. A “will” is the most commonly used document to make your wishes known to those who survive you and any appropriate government authorities.

Estate planning

We’ll begin with estate planning. You’ll need to decide what you want your estate plan to do. Someone will need to be named the “executor” or boss of your estate. They’ll assume the responsibility of executing your last wishes. That person does not need to be a lawyer.
Any adult with good judgment will do. Often a family member is chosen but you may want someone from outside the family like a lawyer or bank to do the job.

You’ll want something that will provide instructions on how to distribute your financial assets and physical property. You may want specific items to go to designated persons. Or you may want to make it clear that certain persons are to be excluded from any inheritance.

If you have children you’ll want to specify who you want to raise your kids. Remember that they’ll need someone to take care of them both physically and to manage their finances until they reach adulthood. Quite often minor children are left financial assets in a parent’s estate.

You’ll also want to consider whether any estate taxes could apply. If so, you may be able to take steps to reduce the tax burden your heirs will face. OK, now that we’ve spent some time thinking about what we want to happen after we’re gone, let’s talk about how we make sure that it does happen.

Wills matter
In most cases the primary document is a ‘will’ or ‘last will and testament.’ A will is a very specific document. It’s not a list of items with names next to them that you keep in your safe deposit box or post it notes pasted on a silver tea service that you want to go to little Sally.

A will is a legal document that contains certain elements that are required by state law. While none of these elements are difficult, failure to include them could invalidate the will. And, to complicate matters, each state has slightly different requirements. Make sure that your will is legal in your state of residence. Have it rechecked if you’ve moved to a new state since it was written.

Many single adults think that they don’t need a will. Typically they’re wrong. Without a will it take could months to have someone assigned to sell a car owned by the deceased or pay any bills. There could even be a problem finding someone to pay funeral expenses.

Another common misconception is that married couples can solve the problem by putting everything into joint accounts. Unfortunately not everything can be titled jointly (think of jewelry or home electronics). And, even if everything is held jointly, what happens if both spouses go in a joint accident?

Dying without a will can leave a real mess. State law will determine who is the executor and how your property will be distributed. That might not produce the results you want. For instance, in some cases law dictates that some inheritance goes to children before the surviving spouse.

It’s especially important for unmarried couples. State laws are a patchwork. In some places they recognize common-law marriage the same as one registered with the state. In other places, a life-long live-in partner is accorded no more rights than a complete stranger.

State laws are also problematic for couples in a second marriage. You may think that certain assets that you brought into a second marriage should go to the children of your first marriage. The state might think otherwise.

Bottom line? Just about everyone who has reached adulthood should have a will.

Making a will

Being frugal it’s tempting to want to write your own will or buy a form where you just fill in the blanks. Normally I encourage do-it-yourself efforts. But in this case that could be a mistake.
Remember that if something isn’t done right no one will know until after you’re gone and can’t correct it. A small mistake could be very costly. This might be one of those cases where hiring a professional is good money management.

That doesn’t mean that you can’t shop around to save some money. If you’ve already thought about what you want your estate plan to accomplish you’ll reduce the number of hours the attorney will spend preparing your will. That will save you some money.

Finally, you’ll want to make sure that your executor has access to a copy of your will when you die. They will need it as proof that they can make decisions for you. Give them have a copy of the will, or, if you’d prefer that they not see it, give a copy to your lawyer and let the executor know who the lawyer is. Don’t put the only copy in your bank box. The bank will not let the executor enter just because they say they have a right. The bank will require proof. And that proof is locked in your box.

Planning for your estate does not need to be expensive. Unless your financial or personal affairs are complicated getting the documents prepared isn’t that expensive. But, it is important. Don’t leave a financial mess as a last memory of you for your loved ones.

Take the next step:

Get control of your finances
Lessons from an economic crisis
5 Things money can do

You’re wise to hunt for a job before you lose one.

The number of people dissatisfied with their jobs appears to be increasing. The Society for Human Resource Management survey found that the percentage of unhappy employees has been rising since 2009. People are reacting to job uncertainty by hunting for new jobs

So how can you find a new job that’s perfect for you? Begin with some of the many job sites on the web. You might begin with an article we recently ran on “16 Totally Free Job Sites You Need to Know About”.

But today we’re not going to focus on how to do resumes or network to hunt for job openings. Let’s look a little deeper and see if we can’t help you decide what type of job, company and career you should be pursuing. Rather than sending out thousands of electronic resumes, we’ll try to narrow your search so that your efforts become focused.

Begin with some self-examination. That’s something that most of us are too busy to do regularly. But, it’s important if you want to change jobs/careers. Take a few evenings to think about you. What are you good at? Bad at? What things do you like or dislike? What things get you excited? How do friends and family think of you? What events in your life were really important? And, what do they tell you about yourself?

Spend some time alone with these questions. Write your answers down. That will force you to dig a little deeper for your answers. After you’ve finished the self-examination ask some close friends or family to answer the same questions for you. Often they’ll see things that we can’t see about ourselves.

Armed with this self-knowledge, the next step is to do a little dreaming. Think about what your perfect job would look like. Don’t make it practical. If your dream has you showing up at noon so you can sleep in, that’s fine. If it means you take your netbook to the beach and work from there, that’s fine, too. This is a time to be unrealistic. Think big and bold!

Obviously, you won’t expect to find a job that looks exactly like your dream. But you may find that certain jobs/professions share elements with your perfect job. Wherever possible, you’ll want to choose potential jobs that include some of your dream ideas.

Next choose some potential professions to consider. You’ll want to take into account some of the personal traits you’ve discovered, but you’ll also need to be practical. This is the time to learn about any long-term trends for the profession. Use the net to research the field. Will there be job opportunities for years to come or is it a dying profession? Is it one that’s being replaced by robots or computers?

Finally ask yourself if you can picture being in that profession ten or twenty years from now. Will you be able to handle the physical or mental challenges? Or would you be totally bored doing the same things over and over?

You don’t want to change jobs or professions only to find out that you’ve run out of opportunities in a few years. Better to discover that now before you’ve made the effort to find a good job.

By blending the practical and ideal you should have a good idea what type of job and company you’re looking for. So target your job hunt on those targets. Let others send out thousands of resumes. You focus on the few and take the extra steps to increase your odds of success with them. Don’t just send a resume. Send a resume and follow up with a personal call. Use LinkedIn to make friends within the company. Use multiple resources to reach your goal.

Hopefully you’ll find a job that suits your skills, provides ample opportunity in a field that can supply a steady income for many years to come.

Take the next step:

Starting over (Whether you want to or not)
How to love the job you’ve got
Take a lesson: How to manage time wisely

Lately the economy is big news. As someone who discusses personal finance I’d have to say that the discussion is good. But, if you add up all the news reports (print, radio, television, internet) you wonder whether Jane and Joe Consumer are really learning anything. So much of what is being reported has no practical value for folks like you and I. So let’s see if we can learn something from the turmoil all around us.

Lesson #1. “Zero Down” mortgages can be dangerous. “No money down” – sounds like every would-be homeowner’s dream offer. No need to struggle saving a down payment. No need to wait until you do. Just sign on the dotted line. Only one problem. You’re upside-down in your home as soon as you close on it. Yep, you owe more than it’s worth. Unless you managed to keep all the closing costs, origination fees, attorney’s fees, etc out of the mortgage. And, that doesn’t typically happen (because your goal was to show up at closing with nothing but your ball point pen).

So maybe being upside-down in your home isn’t so bad. Guess again! You can’t sell your home (unless you can afford to bring a check to the closing). Yep, you’re stuck. And, you’ll stay stuck until the house appreciates to the point where it’s worth more than the balance of your mortgage.

Lesson #2. “Interest Only” mortgages can be dangerous. Interest only mortgages were sold to help keep your payments “affordable” (oh, how I hate that phrase – it means we’ve done something to your loan that’ll hurt more later so that it doesn’t hurt now). Yes, it’s true, you won’t have a pay a portion of the principal you owe each month. So your payment will be lower. But, because you’re not paying any principal the amount you owe doesn’t go down each month. That means that the only way that you’ll actually own more of your house is if the value of your home increases. If home don’t appreciate? You could end up owing more than the home is worth (see “zero down” mortgage comments).

Lesson #3. The 30 and 15 year fixed mortgages have advantages. Both the lender and homeowner benefit. Because the interest rate is fixed, both know how much the payment will be. For the entire life of the loan. No worry that increases in the interest rate will outpace the borrower’s income.

Plus, with every payment a portion of the mortgage is paid off. In small amounts at first, but increasing as time goes on. That means that every payment check is just a little more efficient than the one before. And, the homeowner’s equity increases each month. Even if house prices fall, a portion of the monthly payment will help increase the amount that the borrower owns.

Lesson #4. Not everyone can afford the home that they want. We’d all like it if everyone could afford a nice, spacious home in a good neighborhood. After all, that’s the American dream. But, the truth is we’re not there yet. When you want to own a home badly enough you’ll be tempted to believe anyone who will lend you the money to buy your dream palace. Don’t be fooled. You won’t find them anywhere nearby when you struggle to make the payments. They won’t even recognize you on the street. They sold your mortgage to Freddie Mac or Fannie Mae and you are so yesterday. They’re busy working today’s deal. Don’t place all the blame at their feet. If you buy a house and take on a mortgage without thinking about how different future situations (like a falling housing market) will play out, you have no one to blame but yourself. (and ignorance is no excuse. You don’t have to be too smart to ask for help from someone who knows more)

Lesson #5. Just because the government says it’s okay doesn’t mean that it really is okay. Back in 2004 Congress held some hearings. Problems were identified at that time. You can read what the NY Times reported here. Shortly thereafter the head of Fannie took early retirement as reported in USA Today. At the time some in Congress said that there was nothing seriously wrong and let business go on as usual.

If you took out one of these mortgages since the fall of 2004 you might want to do a little research and see what your representative was saying about Fannie and Freddie back then. They could have prevented you from falling into this trap. It’s sad, but you trusted people for good financial advice and didn’t get it.The rest of us should also check the voting record. Instead of solving a $9 billion problem, now we’re going to have to pay to clean up a $700 billion problem.

Lesson #6. Assuming that house prices will go up is dangerous. Back in 2004 housing prices had been increasing for 25 years. No one knew for sure what the future would bring. History said that prices were going up. But, there was no guarantee that it had to continue without a break. In fact, from about 2002 on many people were predicting that housing prices had to retreat.

Homeowners who bet the house on a rising market are doing just that. Betting their house. Shame on the people who promised them that prices couldn’t drop. And shame on the borrowers’ who believed them.

Lesson #7. Accumulating a down payment before buying a home is a good thing. Sure it’s nice to be able to buy your dream home today even if the only thing you have in your pockets are your hands and some credit cards. But, it’s not a good idea. Here’s why. When you save for a down payment you’re forced to live below your income. So you get used to sacrificing. You also limit your standard of living. Then later when you’ve saved the down payment and buy your home you’ve created the habit of controlling your finances. Not so if you buy with no money down.

Lesson #8. Americans had too much of their wealth tied up in their homes. For the last 25 years housing prices went up. So we didn’t need to do anything to become wealthier. Just stay in our house. That would be ok, but during the same time we’ve been spending just about every dollar we earned. In fact, it was very tempting to use the newly created home equity loans to tap into that new wealth to buy cars, vacations, pay off credit card debt or anything else that came into our little noggins. It also caused us to think that we were wealthier than we really were.

Lesson #9. Just because someone will lend you the money doesn’t mean that you should borrow it. You’d think that if a bank or mortgage company were going to lend you $250,000 that they want to be fairly sure that you’d be able to repay it. Only seems logical. But, in this particular case you’d be wrong. The reason is that the bank/mortgage company was only going to own your mortgage for a short period of time. They sold the loans to Fannie and Freddie. So beyond the first few months they didn’t care whether you could afford the mortgage payments.

They say that one way that we differ from the animals is that we can pass what we learn on to future generations. Let’s hope that’s the case with this mess.

Keep on Stretching those Dollars! Gary Foreman

Save Money and the Environment – It’s possible to do both at once! Find out how in this short article.

We were offered a one-year 2.99% interest rate on an existing Visa account that we didn’t use very much. We wanted to use the card to make a very large purchase with the intent of paying it off within one year.

Luckily we checked the “fine print”. The original purchase will be at 2.99%. But any  subsequent purchases on that card will be charged interest at 15.99%. There’s a huge red flag – the original “loan” must be paid off before any payments will be credited to the new purchases that are made. So what we pay every month goes toward the 2.99% charge and, for example, the airline tickets I later purchased with this card will continue to accrue 15.99% interest charges until I pay off the original purchase sometime next year.

I said we’re lucky because we understand the rules and have put the card away until it’s paid off. I shudder to think how many people don’t catch this little quirk.

-SB, Virginia

SB is right. Many people are being tripped up by the fine print in credit card agreements. She’s fortunate to have caught on before charging up a bunch of stuff at a pretty stiff interest rate.

Credit cards have come a long way. A generation ago there was a ‘one size fits all’ approach. Today, you can choose cards based on their fee structure, interest rates, cash advance provisions or even the rebate offered. But, with all those choices comes the responsibility to know what the credit agreement says.

• The agreement will specify what the card issuer can do with the account.

• The language isn’t always easy to understand. If you have trouble figuring out what something means, call the card issuer and ask for an explanation.

• Don’t use the card until your question is answered.

• All that fine print is actually a blessing in disguise. It will tell you how the card issuer intends to take your money. All you have to do is to read and understand the credit agreement. There’s no reason to get caught.

Most of the traps can be avoided if you know where they are.

1. Low interest rates

• Be careful of zero or low rate offers. Low initial rates typically are only for a limited amount and a short time period. The agreement will explain which purchases or balance transfers are eligible for the low rate. It will also say what you’ll be charged for other non-eligible purchases. That’s the trap SB uncovered.

• You might also find that cash advances and balance transfers carry a different, higher interest rate than other purchases.

• You would expect that variable rate accounts would have changing interest rates. But, even so-called ‘fixed’ rates can be changed. They’re only fixed for 15 days.

2. Credit limit

• When you get the card in the mail don’t assume that you’re approved ‘up to $5,000′ as advertised and that your credit limit is $5,000. Depending on your credit score, you could be approved for something considerably lower.

• Understand what happens when your account goes ‘over limit’. Don’t assume that they’ll automatically refuse to accept a purchase that puts you over limit. Most will actually let you go over limit, but then penalize you with fees and higher interest rates!

3. Other cards

• Another trick is to send you a card that’s different than the one that you applied for. You could be turned down for the card with the low-rate balance transfer but issued one without that special feature. If you use the card you will be accepting the terms on the agreement that came with it. Even if they’re different from the one that you first applied for.

4. Fine print

• You’ll find other little tricks in the fine print. For instance, it’s common for the ‘grace period’ to expire early in the morning. You can be pretty sure that the mail delivery will be later in the day. So your payment needs to be there a day early.

• Look for something called ‘universal default’. It means that if you’re late on another payment, the interest rate on this account will be increased.

• Finally, the lender will have a provision in the agreement that allows them to change the agreement. All they have to do is to notify you of the change in writing. That means that you need to read everything that comes from the issuer. Some have been known to send out amendments that look like junk mail. If it comes from your card issuer you need to open and read it.

SB has learned that you can use credit card rules to your advantage, but if you don’t know the rules your almost certain to lose the game.

This is for the frugal romantic. Last Valentine’s Day I had $8. I went to the local grocery store and bought gladiolas (the cheapest flowers I could find – but very beautiful). I cut red tissue paper into hearts. I also bought strawberries and grapes. I got out all the photos of the two of us and taped them to the wall in a trail leading to the bathroom. The bathroom walls were filled completely with more pictures. There was also a bath drawn waiting for his homecoming and fruit to feed him. It went over very well!  ~ Sandy

Sandy sure has the right idea. It isn’t how much you spend on your sweetie, it’s what you say and how you say it.

Of course, not everyone uses Sandy’s methods. A trip to the FTD.com website offers a dozen roses (their cheapest bouquet) for $40.98 including the service charge. And, according to the Greeting Card Association, only Christmas generates more greeting cards than Valentine’s Day. It’s estimated that we’ll spend over $350 million on candy the week before Valentine’s Day. Wow! That’s a lot of love!

But chances are that Sandy made a bigger impression than any box of candy would have. That’s because her gift emphasized what they shared together.

Gifts with heart

Creating the perfect gift is a matter of thinking about the person who will be receiving it. One way to create a successful, frugal valentine is to highlight something special in your past. Begin by taking some time to think. Pull out your memories instead of your wallet. What were your partner’s happiest moments? Are there special events or secrets that you share?

• Finding a way to commemorate that time or event is the fun part. You don’t need to be very good with words to write a love letter or poem. It’s the memory that you trigger that’s important. Not your choice of words or whether the poem rhymes. Trust me, you won’t get a ‘D’ on this assignment!

• Another possibility would be to celebrate all the things you love about that special someone. Everyone likes to hear good things about themselves. And, who better to tell them than someone they love.You can present those thoughts in a variety of ways. Anything from a recorded message to a series of notes that your valentine will stumble across during the course of their day. Again, eloquence isn’t necessary. You can be pretty sure that your grammar won’t be critiqued.

• Some events can be recreated. Return to the spot of that special picnic or lovers’ lane. Or listen again to the music that you shared before. Just one or two elements from a special time will rekindle wonderful memories.

• A way to create a memorable valentine is to use the element of surprise. Most of us have an expectation of when, where and how we’ll receive our valentine gift. Surprising your partner is an inexpensive way to add excitement.

• Lunches offer a wonderful opportunity. If you typically prepare the lunch, it’s easy to do something special for your valentine. Their favorite foods, heart shaped sandwiches, candy kisses or a special note are all inexpensive. Even if you don’t prepare the lunch, sometimes you have the opportunity to get to the lunch box before it heads out the door.

• Sometimes you can spread your surprise out over a number of days. For instance, you could deliver flowers one at a time. Or send a poem one line at a time. If you both have email at work you could send one line every half hour until the poem was completed. You might even want to start a day or two before Valentine’s Day and take days to complete the message.

• Another possibility is to give that special someone a ‘heart attack’. No, not where you call 911. Rather, a flood of hearts in their car, bedroom or office. Simply cut out or print dozens of paper hearts. Overwhelm them.

So, like Sandy, don’t be afraid to avoid the expensive flowers, cards and candy. A little thought and effort could create the best way to say “I love you.” Why not do something memorable for that special someone this Valentine’s Day?

~ Michelle

They’re also known as cash advance loans, check advance loans, post dated check loans or deferred deposit check loans. The Federal Trade Commission has called them “costly cash”. There are over 10,000 payday loan ‘stores’ operating and it’s estimated that they collect over $2 billion a year in fees and interest.

Typically the borrower, in this case Michelle, would write a check for the amount of the loan that she wants plus a fee. The size of the fee is based on how much money she’s borrowing. The lender agrees to hold the check for one or two weeks. Typically until Michelle’s next payday.

At that time Michelle can come in with cash to ‘redeem’ the check, she can let the lender deposit the check or she can ‘roll-over’ the loan until her next paycheck. If Michelle chooses to roll the loan, she’ll incur another fee.

Payday lenders have the upper hand in collecting. If Michelle can’t redeem the loan or refuses to roll it, she’ll be informed that they’ll deposit her bad check. If it bounces she’ll face criminal charges of intentionally writing bad checks. Not to mention bounced check charges from her bank.

Many payday lenders don’t want Michelle to know how much she’s paying. A Public Interest Research Groups survey found that only 37% of the lenders quoted an accurate Annual Percentage Rate even though the federal Truth In Lending Act requires it.

Most loans are governed by ‘usury’ laws. Those laws limit the amount of interest that can be charged on a loan. The PIRG survey of payday lenders found interest rates that ranged from 390% to 871%. The average APR was 474%! The same study showed that in one state 77% of the loans were roll-overs.

Presumably Michelle wouldn’t be taking a payday loan if she could have gotten the money somewhere else. She would have paid less interest by using a credit card cash advance or borrowing from friends or family. A cash advance on a credit card would cost Michelle between 35% and 50%.

She’s considering taking money from her 401k plan. Any withdrawal will be subject to a 10% penalty and will be added to her taxable income for the year. So she’ll probably lose 20% of the withdrawal to the federal government. But that’s better than paying 400% APR.

Michelle may have a better choice. Borrowing from her 401k plan would provide the money she needs now and allow her to pay it back through payroll deduction. She should speak with the human resources department to find out the details about a 401k loan. The biggest advantage is that money borrowed is not subject to tax penalties or added to her income for tax purposes unless she doesn’t repay it.

Other options that don’t involve her 401k should also be considered. If she’s eligible for overdraft protection at her bank she may want to sign up. The bank fees would be less expensive.

Payday loan companies have sprung up primarily to serve clients who don’t qualify for a credit card. If Michelle is among this group she should check her credit report for errors. Roughly one in four reports contain a significant error. A corrected report might qualify her for a credit card. And cash advance privileges.

If Michelle has other monthly payments, she might be able to have one or more of them either reduced or delayed. A call to the creditor might be all it takes.

Another alternative, if she has other debts, would be to see if credit counseling or debt consolidation would work for her. Either could reduce her regular payments and free up some money to pay off the payday loan.

Finally, Michelle should cut any expenses that aren’t absolutely necessary. This is a time for drastic measures.

Michelle is in a tough spot. She needs to get these loans paid off before they force her into bankruptcy. Hopefully one of these tools will help her dig out of debt.

My children’s real father is an alcoholic. He has some very old medical

~ Margaret B.

Someone once said that you should try to spend your last dollar the minute before you die. Although it’s an interesting idea, I’m not sure that it makes for a good financial plan! For most of us the best plan is one that provides enough money for our life and leaves something to our children as a legacy.

Unfortunately, there are some who are not able to reach that goal.Sometimes through misfortune and other times through decisions that didn’t work out. It would appear that Margaret’s ex was one of those people.

The good news for Margaret’s children is that you cannot ‘inherit’ a debt unless you were a party to it prior to the debtor’s death. You must accept responsibility for a debt.

Here’s a simplified version of what happens. When a person dies someone is assigned to handle their estate. Usually that person is mentioned as the ‘executor’ or ‘personal representative’ in the will. If none is designated the state will assign someone.

The estate is used to close out all financial transactions of the dearly departed. First, all final bills are paid. If there are any assets left after that, then the remaining assets are divided according to a will, trust or state law. Be sure to check for life insurance policies. People often have policies that they bought decades ago that are still valid.

If the debts are greater than the assets, then the assets are sold and used to pay as many debts as possible. Secured debts (i.e. mortgage or car payments) come first. Unsecured debts (i.e. credit cards) after. Old medical bills would be unsecured. Any debts that are left after the money runs out would not be repaid and the creditor takes the loss.

Sometimes people try to give away their assets before dying in an attempt to avoid leaving the money to pay debts. Creditors have the right to try to reverse those gifts even after death.

Although Margaret’s children are probably in the clear, they need to make sure that they don’t accept responsibility unintentionally. That can happen in a number of ways.

If you put money into a joint account the money is available for either joint member. A common situation is where an elderly parent adds an adult child to their checking account to allow them to write checks to pay bills for the parent. Any money that either of them has put into the account can be used to pay the bills of parent or child.

Joint credit cards are another potential danger. As far as the credit card company is concerned they can collect the entire account from either person on the account.

So if Margaret’s daughter has a joint credit card with her Dad she will be responsible for any balance after he dies. Even if she never used the card. And, if she doesn’t make timely payments her credit rating will be effected.

You don’t need a joint account to be allowed to write checks or make credit card purchases. A signed request by Dad will get check writing authorization or a second credit card.

If there’s currently a joint credit card she should try to get it closed as soon as possible. If the account has a balance, try to transfer it to a new account in only Dad’s name.

Margaret’s daughter also needs to be careful on how they pay her father’s bills. She should not write checks from her account. It’s unlikely, but there’s no sense giving anyone the idea that she’s accepting responsibility for his debts. If she wants to help him financially, she should write a check to him and deposit it into his account.

It’s probably a good thing for all of us that parents can’t put their children in debt. A lot of us who survive raising teenagers wouldn’t be opposed to a little ‘post-mortem payback’ for those troublesome years!

I was wondering about a program offered through my local electric company. They offer savings of $5-10 off your monthly bill for allowing them to “cycle” your energy resources. I am not at all familiar with this and before I signed up I thought I should learn something about this program. ~ Heather

Heather has discovered one of the more popular energy saving programs in the country. Not only do consumers like the savings, but the program also reduces costs for the electric company. So it’s a classic win/win situation.

How do the programs work?

Actually they’re pretty simple. Florida Power & Light (FPL) calls their program “On Call(r)” and claim to have over 700,000 participants. Their program focuses on A/C, central electric heat, the water heater and pool pumps.

FPL adds a small control box to the homeowner’s appliance that can be run from a central location. The box allows them to shut off the power to that appliance for short periods of time during peak usage. They claim that the homeowner is  unlikely to notice when it is being used since the time is relatively short.

FPL customers have two choices. One is for a 15 minute shutdown. The other for a four hour shutoff. The consumer selects how many of the four appliances that they want included in the program.

For instance, if you have your A/C on the 15 minute program your bill is reduced $21 per year. The four hour program will pay you $63 for your A/C.

With FPL’s program you can save up to $137 per year if you allow them to control all four appliances in the four hour program.

Why do the electric companies offer these programs?

They’re in a tough position. We expect them to supply power whenever we request it. Without fail. That includes the hottest day of the summer when everyone’s air conditioner is running continually.

But the capacity that’s needed for peak demand isn’t needed most of the time. So if the electric company can reduce peak demand they won’t need as much capacity. That could eliminate the need to build new power plants. Which translates into avoiding a major expense for the utility company. FPL claims that their program has eliminated the need to build two additional generating plants.

Consumers generally like these demand response or load management programs.

The electric company pays for the installation. Usually the inconvenience is minor. And the savings help reduce a bill that has had a tendency to increase.

In the future we’ll see even more of this type of demand management. It’s difficult for utilities to get the approval and financing to build new power plants. So they have a big incentive to reduce peak demand.

Some utilities are beginning to offer variable pricing. The consumer pays more for electricity during peak usage times. Less for off-peak hours. So far most of these programs are aimed at large industrial users of electricity, but they’re beginning to reach the consumer market.

Technology is allowing the utility companies to go beyond the old tools.

The demand management boxes are currently controlled by a radio signal, but future technology will allow for computer control of major appliances. That will mean that consumers will be able to turn an appliance on or off using their cell phone or computer.

And the number of appliances that can be controlled will continue to increase. New appliances may be designed with the controlling devices built-in.

So not only is it a good idea for Heather to sign up for the ‘cycling’ program, she should also see what other energy-saving programs are available through her electric company. Some utilities will pay the cost of a duct inspection and will contribute to any repairs needed.  Others offer rebates if you update old inefficient appliances or add insulation to your home. The savings could be significant.

Heather has found one of those situations where she can help her checkbook and the environment at the same time. Plus, she’ll be reducing the amount of energy she consumes. Pretty much a good deal all around!

We began by discussing how they started. “Stop spending. We just said, OK, no more. We won’t buy anything if we can’t pay for it in cash. We cut up all the credit cards. We have an American Express.”

She went on to explain that they kept the American Express card knowing that the entire bill must be paid each month. Eliminating the credit cards was a big breakthrough. “We just stopped spending. If you don’t have a credit card with you, you can’t put it on credit.”

Once they stopped adding to the debt level, the next step was reducing the amount that they already owed. Cara watched her mailbox for credit card offers with low introductory rates. When she found one, she’d switch to that card. When the intro period was over and the rate increased, she’d find another card. Cara began to be concerned that their credit report wouldn’t look good because of all the switching. So she began to approach the credit card companies for a lower interest rate. “I would negotiate with the credit card people.” She’d tell them, “I’ve got these other offers and I’d like to stay with your company. But I need the lower interest rate.” Said Cara, “I’ve gotten some of them to extended the introductory rate.”

Cara grew up in simple circumstances. Her father died when she was three, leaving Cara’s mother to raise seven children alone. Although they struggled financially, all of the children attended some college. Cara has a master’s degree in accounting.

When asked how she managed to accumulate so much debt, Cara thinks part of it was ‘making up’ for her childhood. “A lot of it had to do with going up poor. When I got out on my own and began making a decent living I just wanted to ‘treat’ myself. And I did! If I wanted something I got it.”

When she met her husband, she had about $7,000 in debts and he had some, too. They moved into a $525-a-month apartment in Atlanta. “My car was paid off. He had an older car that was paid for. So we really didn’t have any expenses. We did have our credit cards we had to pay.”

Like many people, a big expense accelerated the growing debt. “His car died. So we wound up getting him a new car. That’s where it started. And a month later I totaled my car. So I wound up getting another new car. We went from having no car payments to two payments. And both of them were leases. That wasn’t a bright idea either, but the payments were cheaper and we wouldn’t have been able to afford a payment on a purchase.”

As young professionals they expected and got salary increases. But, Cara explains, “For each step in salary we also spent more.”

“Then we decided to buy a house.” They didn’t have savings to use for a down payment. “We borrowed money from family. I even took a cash advance on a credit card. Of course, when you move into a new house there are all these things you needed that you didn’t know you needed.”

At the peak, Cara figures they had about $30,000 in credit card debt. She began to be concerned that they wouldn’t have anything saved for retirement. After cutting up the cards, they began to examine other expenses. “I look at everything we’re spending. That helps because you see what you’ve done.

“We do make good money, so that helped. We have an advantage that a lot of people don’t have. Every penny that we’ve got in any kind of bonus, extra salary that we’ve made” went to debt reduction.

But Michael and Cara used more than increasing paychecks to get out of debt. They looked at their expenses and made some lifestyle changes. “We got rid of our cars. We now have two used cars. We took out a home equity loan to buy them. I’ve paid off one of the used cars and a good portion of the other car.”

Even smaller purchases were questioned. Friday night pizzas became a homemade affair. Regular movies and manicures became a thing of the past. Does she miss the old days? “Not really. Especially not the eating out. We eat a lot healthier.”

What advice would Cara pass on to others who are concerned with mounting debts? “Just don’t buy what you want. If I really want something, I’m going to think about it for a long time. I’m going to research all the possibilities. Do I really need it? How much use am I going to get out of it? If there’s something that I don’t need, but really, really want, I’ll still think about it.”

The path to financial freedom has also been a learning experience for the couple. They’ve rediscovered the local shoe repair shop. Secondhand stores were found. “I wanted a pair of jeans. So I went to Goodwill and found a pair for $2.” Cara sought ideas from other sources. She borrowed the Amy Dacyczyn Tightwad Gazette books from the library. “The library has become a great resource for me. We used to spend a lot of time in the bookstores, and a lot of money in them.”

Cara’s voice brightens as she describes how they got closer and closer to paying off the final card. It’s taken about two years to accomplish their goal. The next step is to finish paying the home equity loan that was used to buy the second car. That’s expected by the year’s end. Long range plans include a well-funded retirement account.

In the meantime, they’re beginning to explore the luxury of being free from debts. Michael has taken a lower-paying job that he enjoys more. Cara thinks of spending more time helping disadvantaged children.

How would Cara summarize their experience for others? “The first thing is to stop spending. Don’t put any more debt on the credit cards. If you want something you’ll just have to do without for awhile. Every extra bit that you earn you put towards the credit cards. Reward yourself once in awhile but do it realistically and within your budget. Just look at where you can cut. That’s what we did.”

Our congratulations go out to Cara and Michael. And a big ‘thank you’ to them for sharing their story.

When I send in my mortgage payment and I send in more than the minimum amount, the return payment stub asks whether I would like the additional payment to go towards escrow or principal.  Which direction would be the best?

Jim

Jim asks a very good question. How you manage your mortgage payments can make a big difference in your financial well-being.

Let’s begin with a little background about mortgages. Many of you will already be familiar with this, so just consider it a review.

What is a mortgage?

When you take out a mortgage you’ve borrowed money. And, you’ve agreed to pay interest to the mortgage company for the amount of money that you owe. On all but a few mortgages, you’ll make monthly payments. Part of that monthly payment will go towards the interest that’s owed for that month. Another part of the payment goes to repay the amount borrowed (called “principal”).

Your mortgage payment may also include an “escrow” account. That’s where the mortgage company collects an extra amount each month from you. Then when your homeowners’ insurance or property taxes are due those bills are paid from money in the escrow account. If there is extra money in the account it may be returned to Jim periodically. But, if there isn’t enough money to pay for insurance or taxes he’ll be asked to make up the difference and increase the amount that he puts into the escrow account each month.

Another part of your mortgage check could go to “private mortgage insurance” or PMI. If your down-payment was less than 20% you were probably told that you’d need to buy PMI. That’s an insurance policy that pays the mortgage company if you default on the loan.

Escrow accounts

Now let’s look at whether any extra money should go to principal or escrow. And the answer is that depends on what he wants to accomplish with it.

Perhaps he’s afraid that the escrow account won’t have enough money to pay for increased property taxes. Then he might want to put some extra in now so that he doesn’t have to worry about coming up with the money later.

But, if he’s not concerned with the escrow account, he should earmark the extra amount to principal. The reason is simple. Prepaying your mortgage is one of the best ways to accumulate wealth.

Consider an example. Suppose that Jim had a 30-year 7% mortgage with a monthly payment for principal and interest of $665. If he were able to put $1,000 toward principal next month it would shorten his mortgage by one year. Or, suppose that he’ll be selling the house in 7 years. In that case, he’ll have $1,700 more when he walks away from the closing table.

How to manage a mortgage

Prepaying your mortgage is often the best investment you can make. You’re guaranteed a rate of return equal to the mortgage interest rate. And, if you ever need to get the money back, it’s fairly easy to take out a home equity loan or refinance your home.

There are some other things that Jim should do to manage his mortgage. The first is to eliminate PMI as soon as he can. If his equity is greater than 22% federal law says that he cannot be forced to buy PMI unless he’s been late with his payments.  Jim will need to monitor this himself. There’s two ways that his equity can increase. Either by gradually paying off the mortgage principal amount. Or, by the value of the house going up due to rising real estate prices.

When he gets over 22% equity, Jim will want to contact the mortgage company and cancel PMI. This is also a good opportunity for Jim. He can take the money that had been going to PMI and redirect it to prepaying principal. His payments will remain the same, but his mortgage will begin to shrink.

Jim also needs to manage his escrow account. Many communities give a discount if you pay your property taxes early. Or, penalize you if you don’t pay on time. Make sure that the mortgage company is taking advantage of any discounts available to you. Remember that your mortgage is one of thousands that they manage and clerical mistakes commonly occur.

It’s also a good idea to regularly shop your homeowners’ insurance. Just because it is being paid from the escrow account doesn’t mean that you aren’t allowed to find a lower rate and change insurers.

Finally, be aware of the different types of mortgages available and refinance if that works to your advantage.

The time when Jim could take a mortgage, make monthly payments and forget about it are over. Managing his mortgage is an important part of building wealth.