What you need to know before you get a Home Equity Line of Credit (HELOC)
How I wish I knew then what I know now about a home equity line of credit (HELOC), also called Equity Line.
Marguerite Tennier (makesenseoflife.com) is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com and amazon.ca
If you are thinking about getting a Home Equity line of credit, “just in case”, read this and thank me later. A word of warning: a Home Equity Line of Credit is not play money and it’s not a savings account. It’s a potential debt.
The greatest advantage of a line of credit is that it usually has a much lower rate of interest than a credit card. A line of credit is a useful product if you have a business – A business line of credit is a financial instrument typically used for an organization’s short-term working capital needs, such as inventory purchases, future project costs, or company payroll. Lines of credit are mainly to help even out the organization’s cash flow.
An emergency fund is freedom. Money is freedom. Money on hand gives you choices. Having a job that pays well is great but financial freedom is more about the money you keep than the money you earn. Some people become financially independent on a modest salary while some are always broke on a much bigger income.
If you loaded your credit cards last month, now that Christmas is over and the credit card companies and various department stores are busy sending out the statements, you might just want to run for the hills or sleep until Spring because you feel like you are drowning in January debt.
Debts cost money, and your health and your relationship too
Unless you have budgeted for the Holiday expenses and only used your credit cards to take advantage of the points,, you may be one of the millions of people who used credit because there was no other way to pay for expenses around the Holidays. If this is so, you probably try avoiding to think about the coming bills. If the bills have started coming in, you may even have put them out of sight because you feel totally stressed at finding out the total of what you now owe.
And this can be you whether you make $30,000 or $150,000 a year. Unless they make a conscious choice to save, there is usually an increases in expenses as the income goes up. I have worked in financial services and I regularly met families with incomes of $150,000 a year who were also strapped with consumer debts almost equal to their income. The advantage you have if you are in a higher income bracket is that you can most likely cut unnecessary expenses just because you have more of them. The drawback you have is you may be afraid to lose your standing with your social network. Continue reading “Drowning in January debt?”
Would you like to have much more money in your pockets? By more, I mean thousands more dollars, tens of thousands more.
Well, you can. But only if you are willing to change certain things about the way you handle your money. Only if you are willing to stop giving it away to the banks in the form of interests. Money issues is what keeps singles and couples awake at night. Money is one of the top causes of fighting for married couples. Financial insecurity is a kill-joy.
I am talking here about the interest you pay on everything when you “buy on credit”. What is buying on credit? It’s buying something without paying for it right away or not paying it in full before the due date on your credit card statement. Things you may have bought on credit include, but are not limited to cars, boats, shoes, clothes, drinks, food, either at the restaurant or the corner grocery store, gifts, trips, furniture, useless stuff, stuff you don’t remember, stuff you no longer own, etc.
How much interest have you paid to get stuff on credit in the past 5, 10 or even 25 years? This can hurt but we only change what we acknowledge. Putting your head in the sand will not change your life, or if it does, it will make it worse.
You see, when you buy stuff on credit, whether it’s a car or a new pair of shoes, we are not really borrowing from the bank, we are borrowing from our future earnings, from our future self.
How much interests
Buy a car on credit over 5 years. let’s say the car sells for $25,000 and the interest is 3% (really low, I know). Interest paid over 5 years: $1,953. If the loan is at 6%, interest is $3,999. Yes four thousand dollars, so the cost of the car is now $29,000. I don’t know about you but for me $4,000 is a good chunk of money. And that’s after tax money.
If you look at the example above, $4,000 after tax money, how much does that mean for you in before tax, or gross income? Around $5,500 to $6,000. maybe more. OK, you may say, that ‘s not much. Maybe a month or less of work.
Let’s say that like many of us you buy 6 cars during your life. Now that puts you at $24,000 in interest alone. To that let’s add the times you bought that big screen TV and only paid minimum each month for 2 years because your car payments and the payment on your honeymoon were taking most of your money. Or the furniture you bought on credit, and the inground pool because they offered such a good rate. Try adding all those charges and if you are the typical middle-aged North American citizen, you have most likely given away between $30,000 and $150,000 in interests alone throughout your life. The more you lived “the good life” the more the giveaway to the banks.
Now calculate how many more years you will need to work to make up for that money, remembering that we are talking after-tax money. One year, two, three, four maybe. I am not kidding you. You may have to work 3, 4 or even more years to make up for those financed expenses. How does that sound? Instead of leaving at 61 like you planned, you will now have to work until past age 65.
Postpone all purchases now – you must not add to the leaks
Make a list of your debts, including your student loan if any
Make a list of what you could do with that money if you did not pay so much interests
Decide what you are willing to eliminate from your expenses to apply to your debt repayment
Redo your list of debts, with highest interest ones at the top
Decide how much money you are going to put toward repayment of that debt each month to pay it as quickly as possible.
Find money in your budget (make more cuts if needed) to start an emergency fund
Once you paid the highest interest card, do the same for card no. 2 and any other consumer debt you have – including your student loan
Continue adding as much as you can to your emergency fund, until you have at least 3 months, preferably 6 months living expenses covered
Once all your debts are paid off, celebrate. Yes you can have dinner out, as long as you can pay cash for it
Revisit the purchases you need or want, and decide how you are going to save money to buy – or if maybe, it’s not a need anymore
Downsize whatever purchase you plan – a $20,000 car will serve you as well as the fancy $35,000 one – better yet, try to find a good second hand for $10,000 – and a $700 stove cooks as well as the fancy stainless stell one at $2,000
Keep a tab of everything you spend – food, restaurant, coffee, magazines, drinks, movies, etc.
Sit down once a month and review your finances – and see if you are on track
One more piece of advice is to read as much as you can on personal finances. Changing our ways can be a challenge. Changing from being a spender to being a saver and, even better, a frugal shopper, will not happen without some work. The best way to help yourself along the way is to have a mental vision of what you hope to achieve in the long term, whether that’s early retirement or being financially free to leave your job and start your business or simply to go to bed each night secure in the fact you have savings and no debt.
I did not include the mortgage in the above discussion but let me say a few words. It’s OK to have a mortgage. Problems arise when people buy too much house. Banks are in the business of making money. They will offer to lend you as much money as they assess your ability to pay. Interests ony a $200,000 house over 25years will run you in the tens of thousands. They do not take into consideration the breathing room you need to feel relaxed about your finances. They don’t care if you can’t take a holiday for the next 10 years or if you can’t afford to fly home for the holidays. You should not borrow as much money as they are offering to lend. Do your homework. Look at monthly payments of all a house entails – taxes, repairs, utilities, etc. Leave some money to be able to make extra payments to lower that mortgage quicker and reduce the amount of interests paid.
I love reading about how even rich people still use coupons, or drive a 10 year old car or like Warren Buffett, live in the house he bought 40 years ago. It makes me feel on par with people who know the value of money. And that makes me very happy. So again, read as much as you can. Educate yourself financially and be one of the ones who sleep peacefully knowing they can face tomorrow financially.
Money mistakes, by Marguerite Tennier, M.A This post may contain affiliate links
Avoid those big money mistakes
Money. Money.. Money. I like to think that I have always been careful with my money. Yet, when I do a quick review in my mind – as I am doing now – I can see where in my life where I could have been a lot better in the money department. I made huge money mistakes that ended up costing me a lot of money.
Mistake no. 1
The first money mistake I remember doing was to neglect investing the cash value of a life insurance my parents had taken for me at birth. I don’t remember how much it was, maybe $1,000. Not much by today’s standard but $1,000 invested at 7% when I was 20 could have grown to close to $15,000 at 60. At 10%, over 40 years, that would have grown to over $45,000. – yes forty-five thousand dollars.
Pearl of Wisdom
Obvious – if you have some money falling from the sky, whether it’s the cash value of a life insurance policy or a gift from a generous relative, and you don’t absolutely need it to survive, invest 90% of it – and treat yourself with the other 10%. If we are talking about huge amounts of money, invest it all now. Consult with an independent financial adviser (fee for service) first. And yes by all means treat yourself but remember that even a million dollars does not go very far these days.