"Getting an Option ARM Because You Live Beyond Your Means"

If you’re living beyond your means, borrowing from high interest credit cards, from a 401K or using an option ARM with negative amortization, aren't the answers to your financial difficulties. Tapping your home equity is certainly not the answer. All the above remedies have one thing in common, they are the easiest solutions consumers XXXXXX, when they face financial challenges, but in the end you are most likely to pay the consequences.

Managing your financial future means taking responsibility for your assets, including your real estate, your stocks, and any retirement accounts you may have. It also means spending less and saving more. And it means living within your means.

I understand that many people face financial challenges at some point of their lives due to unfortunate circumstances. Some of you maybe losing a job, divorcing, may have medical emergencies.

Planning for Entrepreneurship
 

If you hope to join the ranks of the successfully self-employed, you need to do a lot of advance financial planning.
 

Here are the proper steps to take:
 

• Figure out the replacement cost of lost benefits.
 

If you leave a corporate job, you probably leave behind plenty of benefits, too, including health insurance, life insurance, flexible spending accounts, and company matching of your contributions to a 401(k). Exactly how do you expect to pick up the slack and cover those costs yourself?
 

If you have a big financial cushion, then you're sitting pretty. But most people quit their jobs and give themselves six months to get their new venture up and running, and it isn't until after they quit that they sit down and tally up the cost of all the bills they're now 100 percent responsible for.
 

The result is that they run through their emergency cash fund at about double the speed they anticipated. Pretty soon they have no savings left, yet their new business is still far from breaking even.
 

In addition, it's almost a given that in the first two or three years of being self-employed, people give themselves a retirement break: they tell themselves its OK that they aren't setting aside any money while they concentrate on getting their business off the ground.
 

That's a costly gamble. If you were contributing $10,000 a year to your 401(k) and receiving a $1,500 company match, that's $40,000 or so over three years that won't be compounding for you. This is fine if you're incredibly successful (and diligent) and manage to catch up with big retirement contributions once your business becomes solvent, but there's no guarantee it will become solvent at all.
 

• Don't access retirement savings.
 

Your 401(k) is not a business-financing tool. Even those who are at least 55 and thus can make penalty-free withdrawals after leaving a job are reckless to touch their retirement savings.
 

Let's say you use $50,000 to live on in the first year of your new business, and plan to "replace" the money once the business takes off. What if it doesn't take off? You've just siphoned off a serious chunk of your retirement security. Consider that if the $50,000 had stayed invested for another 10 years and grew at an annualized 8 percent, it would be worth nearly $108,000. That could cover a lot of retirement expenses.
 

The no-raid policy is just as important for those in their 30s and 40s. Not only will they be hit with the 10 percent early-withdrawal penalty (as well as the regular income tax everyone pays on 401(k) distributions regardless of age), they're throwing away precious compounding time.
 

Leaving $50,000 untouched for another 30 years would result in it growing to more than $500,000, assuming an 8 percent average annual return. Withdrawing it at age 35, however, means you'd be lucky to have $30,000 left after paying the penalty and tax.
 

• Keep the home-equity tap turned off.
 

It's the height of financial lunacy to tap your home equity to finance a startup. Even if it's relatively safe to assume that your business is going to be successful, you're still converting what was an asset (your home equity) to a debt.
 

Can your new cash flow cover the extra cost of that home equity line? If not, you could lose your house. And who's truly prepared for the cost of the home equity line of credit to go up every time there's an uptick in short-term interest rates? Based on what I've observed over the past year, very few homeowners anticipate their interest rate going up two, three, or four percentage points, and many are now experiencing extreme mortgage stress.
 

• Don't rely on credit.
 

Even if you get a great low-introductory rate on a credit card, it's going to be incredibly hard to keep that rate low for very long. Many introductory rates adjust after six months to a year, and in the meantime the credit card company is scrutinizing your every financial move to see if it can come up with an excuse to boost the rate even sooner.
 

If you insist on financing some of your startup on your credit card, please give yourself a set-in-stone conservative limit you will not exceed. Remember, you can pull the plug on your business, but if you have $20,000 or $30,000 of credit card debt you're going to be paying for that for years to come.
 

Don't expect to just walk away from it: It's never been harder to qualify for bankruptcy, and besides, if you go that route your credit is going to be awful for at least 7 to 10 years.
 

The Responsible Route
 

So how can you responsibly afford to venture out on your own?
 

Start planning for it today. Set aside separate savings that will cover your family's finances for at least a year if you decide to become an entrepreneur. If you can't imagine where to come up with the money, it's time to get back to basics: Scour your spending and make sacrifices so you can build up your entrepreneurial financial cushion.
 

You might also consider taking a part-time job while you're launching your own business. I realize you want to devote all your time to your own business, but keeping some money coming in will go a long way toward giving you and your family financial breathing room.

So, let’s start off 2007 on the right foot financially. Even if you spent every dime you had and rang up your credit card or home equity debt, this is a new year. The best gift you can give your financial future a fresh start.

That way, if there are rainy days ahead, you’ll have an umbrella and perhaps even a pair of funky rubber boots. Here’s my annual list of personal finance resolutions you may wish to consider implementing this year:

• Put yourself on a budget. Let’s start with something simple: Spending less than you earn. Buy in bulk (if it’s cheaper), at sales, and in advance of when you’ll actually need something. (If you wait until the last minute, it’ll be more expensive.) Cook at home more often, and use coupons if you can. Avoid take out and eating out. 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 $9,000 in credit card debt. That’s in addition to a mortgage and a car loan. Debt isn’t much of a problem unless you have financial dreams you hope to achieve – or you like to sleep at night. 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.

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.

• 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 your investment account (mutual fund or Roth IRA) 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.

Once the money is out of your checkbook, you won’t spend it on something else. 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 the plan you choose).

Last year, companies began introducing the Roth 401(k), an after-tax option that allows you to salt another $15,000 away for your retirement. Like a Roth IRA, the cash grows tax-free forever. While there are no income limits, your company has to offer it as a benefit. See your human resources department for details.

• 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 21 years. If you make 2 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.

• Borrow down payment money from your 401(k) or IRA only as a last resort. The government allows you to withdraw up to $10,000 from an IRA account for the purchase of a first home. Whether or not you can borrow any amount from your 401(k) or other retirement plan at work depends on the plan rules (check with your plan administrator).

Either way, carefully think it through before you take the cash from these accounts. If the $10,000 is your entire retirement kitty, you may be jeopardizing a secure retirement. If the $10,000 represents only a fraction of your retirement savings, you may have more flexibility.

The better solution is to simply borrow the money from another source. If you take out a larger mortgage, you may pay private mortgage insurance (PMI). The good news is that for new loans taken out as of January 1, 2007, your PMI premium is tax-deductible and, your tax-deferred cash will continue to grow intact.

• Contribute the maximum to your retirement plan. If your employer offers you a retirement plan, sign up as quickly as possible to take full advantage of it. If your employer doesn’t offer a retirement plan, open up a Roth 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.

You work hard for your money, and spend it on life's necessities and frivolities. But do you know how to make your money work for you -- to manage it, keep more of it, make it grow and protect it so you can enjoy it? There's plenty of financial information available -- magazines, books, newspapers, radio, television and the Internet. There are hundreds of financial companies trying to sell you their products and services. The problem isn't finding enough information, it's finding too much.

But the main focus is to take control of your money and research what you invest in, how you borrow, what insurance to get, etc

Andre Plessis

Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional whose primary goal is to provide the expertise, guidance and skills necessary to obtain the best mortgage to meet your personal needs".
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P.S. If you are at all intimidated or unsure about the mortgage process if you don’t understand how to evaluate your options in getting a mortgage loan our 24 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.

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