Paying Extra Principal On Your Mortgage

This topic may not qualify as news for many people, but I met someone recently who had no idea that a home buyer had this option.

Background: Anyone who has a mortgage pays a certain amount towards principal (the loan amount) and a certain amount towards interest. Over the life of the mortgage, the interest amount can end up equalling or surpassing the principal amount. For instance, a $240,000 loan at a 30-year fixed rate of 5% means that you'd be paying $223,000 in interest on top of the $240,000 amount of the loan. Yes, $463,000, not including insurance and taxes. You can plug in your own numbers here: http://www.mortgagecalculator.org/

And banks are smart -- during the first few years of the mortgage, the payments are allocated mainly to interest and not principal. So a strategy of "hey, it's ok, I'll sell the house in a few years to avoid paying all that interest" won't work.

This is why I hate borrowing money, but it usually can't be avoided if you want to buy a house.

However, one way to grow equity in your house and at the same time reduce the amount you pay towards interest is to make occasional payments towards the principal. If you have an extra $1000 here and there, and your checking and savings accounts are adequately funded for a few months, it's a possibility. Call your lender and inquire if there's a pre-payment penalty (and make sure you don't work with anyone who imposes such penalties whenever you buy a house), and if not, look into making the payments online. My lender allows me to do this with no additional costs or fees. And each time I do it, I reduce the amount of interest I'll have to pay the lender -- which I love.

Guardianship provisions: picking a money manager

Tami Cupit Threet was kind enough to comment upon the entry about selecting guardians for one's kids should the parents pass away. She noted that the person who serves as guardian need not serve as financial custodian for them.

If both parents were to pass away, the assets in their estates will pass to their children, but minor children cannot manage this money. Generally, the person who serves as guardian will also serve as trustee for these assets until the children reach the age of majority, which is 18 in nearly every state.

A trustee has a broad range of powers regarding these assets; this person can buy the kids' clothes and books, fund a private school education, invest money in a college fund, start a small stock portfolio in their names, and so on. Or, the trustee could purchase only the most expensive gadgets for the kids, neglect to sock money away for college, or -- in the sad case of a dear friend -- raid the assets in order to buy illegal drugs.

If you know that your pick as guardian will do a bang-up job caring for them, but you also suspect that he will not make sound financial decisions, you can still name this guardian while naming an additional person to be the trustee of the assets. You can also provide directions for the use of the assets: for example, the guardian can only make unapproved purchases under a certain amount; the trustee must use the assets to send the children to a certain school; the trustee must make regular deposits from the estate assets into a college 529 plan; and so on.

Make no mistake, this arrangement could cause some debates between the guardian and the trustee. But it's preferable to allowing someone to squander your children's assets. You can prepare an arrangement that gives you maximum peace of mind.

Memorialize your Online Logins

This blog addresses ways to minimize angst and stress after a death or incapacitation.

A simple housekeeping tip: make sure that others (S.O., family) have a spreadsheet with your account logins for online banking, investment accounts, the mortgage, etc. The spreadsheet should have the name of the financial institution, a short description of the account, the login URL, and your ID and password.

I also like to review each account every quarter and post the amounts in that same spreadsheet, but that's optional. (Excel tip: if you highlight all the amounts in one column and click the Sigma/Autosum icon, it'll add them all up, and you can get a sense of your net worth.)

My friend Sarah hipped me to this service as well -- for a fee, they'll house your financial info as well as all kinds of other online logins, email, photos, videos, and the like:
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/24/AR2010012402886.html

Roth IRAs rule

You may have seen references to this thing -- what is it?

For 2010, a person who is under 50 years of age is allowed to contribute up to $5000 in a Roth IRA. A person who is 50 or older may contribute up to $6000.

However, one's modified adjusted gross income (MAGI) can limit the contribution -- in essence, if your income is too high, you can only contribute a smaller amount, or none at all. These limitations start to kick in at $105,000 MAGI for individual filers and $167,000 MAGI for married filing jointly.

The huge benefit to the Roth IRA is that it grows tax-free, and that you can take money from it (most often, having reached age 59 1/2, or using it for certain first-time home buying expenses) tax-free. There are very few investment vehicles that allow such tax benefits.

And, regarding estate planning issues, you can designate a beneficiary for your Roth IRA. The beneficiary designation allows for instant transfer upon death; the Roth is free from probate -- the lengthy, costly, yet often necessary process of wealth transfer upon death.

The money in a Roth is often invested in the stock market. Let's assume a modest 5% growth each year and do the math:

Contributions starting at age 30 and ending at age 60 = 30 years of contribution. (If you are older than 30, don't let this throw you; just start ASAP. You'll still see incredible results.)

Let's also assume you contribute $5000 each year, although the maximum rate is adjusted upward every few years -- so you might be putting even more money in as the years pass.

This means that you will have, over 30 years, contributed $150,000 to the Roth.

Compounding by that modest 5%, you will, by age 60, have $347,000. Congratulations, you have more than doubled your money -- and you get all of it, with no obligations to the IRS!

You can open an IRA online -- just go to the Fidelity, the Vanguard, the Wells Fargo websites and take a look.

Review of Mint.com

It's easier to manage your money if it's all viewable in one place. If you conduct online banking, Mint.com allows you to pull together your accounts and view them, as well as prepare a budget structure.

Mint is a cool solution with some nice features, but it's not perfect. When you create your Mint.com account, it asks you to input your login information from your bank(s), your broker, your credit cards, your mortgage holder, etc. so it can present a grid of your assets and debts. Persistence will help. Bank of America and Chase worked right away, but it took days to get Mint to recognize my ING login, and I'm still trying to get Mint and Wachovia/Wells Fargo to talk to each other, probably due to the all the merger and acquisition activity between those two and AG Edwards. Unfortunately, without that Wells Fargo mortgage information, Mint thinks that I own my home outright. (I probably never will.)

Expounding on that last point, if you have a mortgage on your home, you can input its address, and Cyberhomes.com will incorporate your estimated home market value. I don't need to tell you how depressing this can be, but it's crucial information, so, onward.

The most critical information comes from your everyday bank and your credit cards because Mint is able to view all your spending transactions and compile them in a meaningful way. It's pretty good at correctly characterizing purchases as groceries, restaurants, gas, shopping, etc., but you can manually re-characterize anything that it gets wrong. Then it shows you how much you've spent in these categories, which can be an incredible eye-opener. If you've set a budget for these categories, it will show you how much money you have left to spend, or how much you've gone over the limit. You can also view this information over time (monthly, year to date) and generate trending reports for expenditures, income, net worth, assets, and debts.

And, setting a budget is not so painful and mystifying as it can be. Because Mint is able to view what you've spent, it can generate numbers that are suggested by your previous activity. If you wish to spend less, simply adjust the number downward and see if you can make it work.

Because Mint is linked to your accounts, it can generate real-time numbers. This is very helpful, except that pending transactions are not taken into account, so you still have to log into those accounts on occasion to get a truly accurate picture of how much you really have in your checking account.

And of course Mint and its third-party affiliates try to sell you stuff. Credit cards, insurance, CDs, brokerage accounts. However, I don't find it terribly intrusive.

Give it a whirl.

Run One Mile for Your Kids in the New Year

Writing a will and planning your estate would be a huge, huge New Year's resolution. It's like resolving to run a marathon; it takes time, persistence, patience, a sense of humor, and soul-searching (indeed, what else is there to do at mile 22?).

But it all starts with mile one. Can you jog one mile? Any runner will tell you that that's the only thing you need to accomplish to build momentum.

Parents, start small. Run the first mile. If you haven't already done so: Decide who will take care of your kids if you're not around to do so. And memorialize it. Here are the steps:

1) Decide who you'd like to raise your children if something happens to you and your co-parent. Pick one person as the first option and then a second person as the second option. (Only designate a person, not a couple -- couples can split up, and then your kids can end up subject to a custody squabble after you're gone and can do nothing about it.)
2) Secure the agreement of these persons.
3) Open a new document on your computer, identify yourself in the document, and then type that, in the event of your death or incapacity, you want the first person, and if unavailable, the second person, to stand as guardian to your children until the children turn 18.
4) Take it to notary and sign it.
5) Make copies and give to affected persons so it can be located.

That's it! This document can be changed and re-notarized as circumstances warrant, and it can be incorporated into any future wills or estate plans.

Pick a Beneficiary for your Assets

Recall that probate is the court's administration of a will, once the testator (person who wrote the will) has passed away.

Not all assets must be administered through probate, however. Pulling those assets out of the probate process is fantastic because, the longer the probate process, the more expensive it is, and the more time it takes to distribute the remaining assets (those listed in the will).

Several types of assets have paperwork that allow for a designated beneficiary. When the owner dies, the asset passes directly and automatically to that beneficiary. Because a purpose of probate is to determine who gets an asset, an asset with a designated beneficiary is not subject to probate.

Another way to designate a beneficiary is to own property jointly, meaning that both names appear on the title. The legal term is "joint tenancy"; you'll also see "JT w ROS" which means "joint tenancy with right of survivorship". If one dies, the other becomes the sole owner of the property or the account and can manage or dispose of it however she wishes.

Here are some assets that allow for a designated beneficiary or joint tenancy. Remember that, if no beneficiary is designated, then the asset must go through probate.

1) Life insurance policies;
2) Bank accounts (the provision is often called POD or "pay on death");
3) Real estate;
4) Annuities;
5) Small businesses;
6) IRAs;
7) 401Ks (a spouse is, by federal law, entitled to be the 401K recipient, but he or she can waive that right, in writing, and another beneficiary can be chosen).