PMI: How to get rid of it!

Private Mortgage Insurance or PMI for short is insurance that only protects the mortgage company not you. If you stop paying your mortgage, this insurance ensures the lender does not lose money on the loan.

Bottom-line is if you have mortgage insurance, you don't want it because it doesn't help you at all. You should want to get rid of it as quickly as possible. So here a couple ways to get rid of it.

1. When your loan to purchase price reaches 80% you can request your mortgage company cancel the PMI. So if you purchased your home for $100,000 and now your loan has $80,000 balance or less you can request the PMI be removed. Also, when it reaches 78% the lender must automatically cancel the PMI.
2. Let's say you got a great deal on your house and/or the value has gone up over the last couple years. You can order an appraisal and have the ratio based on the appraised value instead of the purchase price. For example, you purchase your home as short sale 4 years ago.  The purchase price was $120,000, you put 5% down so the original loan amount was $115,000. The current balance is $105,000; 105,000 divided by 120,000 is 87.5%, not enough to remove PMI. But you order an appraisal and the actual value is $170,000, 105,000 divided by 170,000 is 62%, now you can request the PMI be removed. Often times a minimum of 2 years is required before the appraisal can be ordered. Read you mortgage documentation to double-check.

* Note current FHA loan originated in the past year have some additional stipulations

Understanding How Much Taxes You Pay

An important aspect in financial planning is understanding how much taxes you  pay and why. Below is the table of the federal tax-brackets for 2012. So lets say you make $90,000 from your job in 2012 and you filing you are single. First take  off the standard deduction ($5800) out and you will not pay federal income tax on the first $5800. So the remaining income you are taxed on is $84,200.

So the quick math is 10% of income up to $8700 which is $870. Now take 15% of all income between $8700 and $35,350 which is $3,997.50. Now take $84,200-$35,350 that is all of the income that will be taxed at 25%, this is $12,212.5 So your total taxes out of $90,000 would be $870 + $3997.5 + $12,212.5 = $17,080 which would be an effective tax rate of 19%.

Understanding how the tax brackets work is very important for retirement planning and annual planning, in higher income years it can be beneficial to reduce tax exposure by increasing IRA, 401K, and/or HSA contributions.

2012 Marginal Tax Rate	Single
10%	$0 to $8,700
15%	$8,700 to $35,350
25%	$35,350 to $85,650
28%	$85,650 to $178,650
33%	$178,650 to $388,350
35%	$388,350+

Credit - Why it Matters and How it Works

Like it or not; banks, credit cards, and other lenders use your credit score to determine your credit-worthiness. This score along with total income are used to determine how much and what terms/rate to  lend money to you. So any person concerned with borrowing money either now, or at any point in the future needs to be concerned with their credit score.

The two largest factors in determining a credit score are: payment history and debt amounts. Payment history looks at on-time payments. Debt amount focuses on how much available credit is used (on a per account basis and on the sum of the accounts). For example if one has $10,000 of available credit on all combined credit cards and it currently utilizing $9000 this would have a negative effect on one's credit score. Also, if one has a credit card with a $1000 limit and that credit card has a balance $900 that would also have a negative affect on ones credit score even if the rest of your credit has low utilization.

Two cautions here:

1. In the past I've gotten credit lines for 0% interest rates for medical procedures and for large jewelery purchases. These often show up as credit cards on your credit report, so be aware if you get Laser Eye Surgery for $4000 with the special 0% offer that will show up as 100% utilized on your credit report.  One way to fix this is to negotiate for more "credit" than the purchase will be.  And yes 0% introductory offers do always count in your credit score.

2. Your credit score is based on a moment time, so even if you pay off your credit card bill in full every month you can still run negatively affect your credit score by having over 30% on any one card or the sum of all your cards. Not a major issue but just be aware of this if you are shopping for car or home loans. You can address this problem by requesting to increased credit limits- remember the gold rule, "if you don't ask you don't get!" You can also pay off your card in the middle of month.

Living Rent Free! Things you don't think you need to spell out

In the winter, it's not appropriate to open your windows, put an exhaust fan in and run a space heater.

Yogurt and other items need refrigeration.

You use the bathroom, so you need to take turns cleaning it!

Paper towels and toilet paper are not included and it is not appropriate to put toilet paper in the paper towel rack.

If you make less than 14000 per year you cannot afford 550 per month rent.

Living Rent Free! - Buying

So now you've determined the location and the size of the house you would to purchase. Now it's time to start looking and eventually buying! As a buyer there is no point in not using a licensed real estate agent (it doesn't cost you anything, well sort of....but that would require a separate blog post)

1. Find out how much money you have available, by getting pre-approved by a lender
2. Look at the monthly cost of different loan amounts, just because you can get X dollars doesn't mean you should!
3. Begin working with a realtor to narrow your search and locate properties that fit your criteria

Additional tips and considerations:

• When looking at houses pay particular attention to the major systems: roof, heating, A/C, bathrooms, and kitchens. These are going to be the most expensive items to replace or update, so these need careful consideration when comparing houses and eventually making an OFFER.
• Right now it is still a buyers market, make lots of low offers! If it isn't embarrassingly low, it's not low enough.
• To get the best deal possible, the SELLER MUST WANT TO SELL MORE THAN YOU WANT TO BUY.

Living Rent Free! - Choosing House Location and Size

So you are interested in purchasing a home and renting out rooms, to offset the mortgage, here are some thoughts to get you started!

Picking a Location
Not all locations are created equal for renting out rooms. The two most important things to you need to know about an area are: is there demand for room rentals and what are the prices. You can get a quick idea of both of these by using Craigslist, look in the "Housing wanted" category, are there lots of people seeking rooms who have not found one yet? Next, look at the "Rooms/shared" categories this will give you an indication of price and amount of available rentals. Often time there a lot of postings but don't worry many of them are duplicates. Browse around; get a feel for the prices and types of rentals available. I always find it preferable to ask slightly less money per month but charge first, last months, rent and a one month security deposits. It also allows you to be more slightly more selective picking the roommates.

Picking House Size/ Configuration

Certain house configuration lend themselves to being ideal room rentals. Given the choice a 3BR/2BA or a 4BR/2BA are preferable, and if you luck enough to find a 4BR/3BA it is a very nice layout. As the owner of the house, I prefer to have my own bathroom, but this is really up to you! Any more than 3 people sharing a bathroom will become bothersome so keep that in mind when considering a 4BR/1BA or even 3BR/1BA home.

Other Factors to Consider

Some other factors that make a home more desirable for room rentals are:

• Adequate off-street parking
• Washer and dryer in-house
• Private bathroom for each bedroom
• Full kitchen
• Access to public transportation
• Adequate jobs in the area
• Universities in the area
• Community recreation included- pool, walking trails, gym, or tennis courts

Living Rent Free! - Introduction

Wouldn't living rent free be nice?  And I'm not talking about living with your parents, I am talking about living in your own house for free. Many people in their twenties and beyond currently share rental properties with 2, 3, or even 4 other roommates. Why not continue this lifestyle but own the house and collect rent?

I will give a very simple example for how this works. You have a 3 bedroom house, the mortgage is $1000 per month and your rent out 2 bedrooms for $500 each. That is $1000 per month, now you are living for free! Well almost, there is a lot more responsibilities.

I will be doing a series blogs on this topic; explaining the pros and cons and laying out a step-by-step plan.

Power of the Mind

I am big believer in the power of the mind. If you think about something enough it will eventually come true, within reason of course.

A funny example of this happened the other day while shopping at Trader Joe's. I was holding a glass bottle of unsweetened ice tea to read the labels, and I began imagining dropping the bottle, maybe because I had opened toed shoes on, I'm not really sure why I had this image in my mind. But sure enough a second later "boom" I dropped the bottle and it shattered everywhere, whoops! I guess the mind is a powerful thing.

I have personally utilized the power of believing in many other, more serious aspects of my life, from sports to academics to work, and even to personal finance. Whether you want to save more money, improve your investment and finance knowledge, or make more money the first step is believing you can!

Greatest Predictors of Net Worth

Lot of studies and statistical models have been performed on a number of predictors for personal and household net worth. Most of these studies have shown education, annual salary, and IQ have a high correlation to to net worth. I am not interested in writing about the already studied and easily sampled data points. I want to examine a couple more "heuristic" indicators of net worth.

1. From personal experience I find the greatest indicator of net worth to be the net worth of those in your social circle and those you spend the most time with
2. I find also there is an inverse relationship between daily television watching hours and net worth. The more TV watched per day, the lower a persons net worth. Think about this one and let me know if you think this is true!

Actions:

1. Surround yourself with like-minded people with similar goals.
2. Watch less TV!

Retirement Accounts: Did you know you can choose to pay your taxes now or later?

I am planning a series of blogs about the two primary "flavors" of retirement accounts. I will break this down into two types: Roth and Traditional (Tax Deferred).

• Roth Accounts- you contribute to these with post-tax money, but the earnings are not only tax-deferred, they are TAX-EXEMPT. This is a very powerful feature meaning if you put $4000 into an IRA in 2011 and in 2025 you retire, the account is now worth $25,000 and you will owe NO TAXES on $21,000 you earned.
• Examples: Roth IRA, Roth 401K, Roth 457(b), and Roth 403(b)
• Traditional Accounts- you contribute to these with pretax money, and the earnings are tax-deferred. These plans offer a way to reduce your current taxable income. For example if I make $60,000 and contribute $15,000 to a 401K my taxable income is now $45,000. Which if I am single, my income between $45,000 and $60,000 were being taxed at 25% versus 15% for income between $8,351and $33,950. The bottom-line is this reduces my current tax liability and if I making more money now than in retirement, this is advantageous.
• Examples: Regular IRA, 401K, 457(b), and 403(b) 

This gives a short background about the types of retirement accounts in the United State today, the next blog I want to delve into some strategy on how to use the most effective combination of both Roth and Regular accounts and why.

Commonly use terminology defined:

• Contributions are the money that you put into the account initially
• Once in the account the contributions are referred to as the basis
• Post-tax means you pay taxes on the money before it goes into the account. 
• Tax deductible/pretax means you do not pay taxes on the money on the way into the account
• Tax-deferred means you do not pay tax on earnings as they accrue. 

Saving Money on Coffee - Buying Quality

Today I want to share a quick tip for saving money on a daily basis. Coffee out at Starbucks is roughly $2 with a latte running about $4. Figure 300 days per year  you have either spent $600 or $1200 per year! Brewing your own coffee costs roughly $8 for beans every 2 weeks, that is about $200 per year.

• Limit your coffee purchases and save money!

There are two cheap and effective ways to enjoy coffee in your own home. I enjoy using the manual pour-over method or brewing espresso with a Gaggia espresso machine. The best pour over device can be had for under $30. A high quality used/refurbished Espresso Machine can be had for under $300, both of theses devices should last at least 20 years, if properly cared for. I find the best value for coffee beans to be from Trader Joe's Brand. Even if you purchase a quality the espresso machine, you will make back your investment in one year!

In terms of time, I find stopping for coffee before work or making my own to be about the same in terms of time. So, I feel there is no time-savings by stopping for coffee versus driving directly to work.

The overarching lesson here: it is worth it to spend money on quality goods that will save money in the long-run!

Getting Started

I am getting started blogging, so I will start by describing the first action item, to get to six figures by thirty.

To have a net worth (Total Assets - Total Liabilities) over one hundred thousand by thirty, one has to live well below their means.  This boils down to saving more money than you spend each month.

My first action item for everyone is to get a mint.com account.  Utilize this to get a handle on your spending, what is your positive (or negative cash flow each month). This exercise can be very eye opening for many to see where their money is going.