Scott On Money: August 2006 Archives

Debt Reduction Tip – Build a (Modified) Balance Sheet

All public companies in the United States publish balance sheets every quarter. Analysts and investors use these documents as a guide to the health of the company and compare them over time to track and predict the company’s progress.

For our purposes we’ll build a very simple balance sheet.

First list your assets. These are any investment accounts, retirement accounts, savings or checking accounts. Add these up.

Now list your liabilities. These are home and car loans, credit cards, student debt, etc.

We’ll throw in a twist by listing the rate (interest rate, rate of return, rate of depreciation) beside each account.

Here is an example:

Assets

Account	Balance	Rate
House	$300,000	4%
Car	$8,700	-10%
Checking	$2,600	0%
Money Market	$2,000	5%
E*Trade	$2,200	8%
Total	$315,500

Liabilities (debts)

Account	Balance	Rate
Mortgage	$290,700		5.85%
Car Loan	$5,600		6%
Chase Visa	$6,400		9.9%
BofA Visa	$7,800		14.5%
Discover	$7,600		7.9%
Total	$318,100

Total -$2,500

What do we do with this? We try to get rid of our debts that have higher rates than our investments. If our investments have lower rates of return then that money is better spent paying down the debt. Before we rush to do that we should see about adjusting the rates.

Can I get a better rate of return on my investments?

Can I get a lower rate on my credit cards?

We’ll cover these topics in another post, for now we’ll assume that this is the best we can do.

At first look we might decide to take the money from our checking, money market and E*Trade accounts and pay off most the BofA Visa with the nasty 14.5% interest rate. This is the right idea but we want to make sure we have a cushion to pay our bills, fix our flats and make sure we avoid deadly late fees. Let’s say we look at our bills and decide we need three thousand dollars which leaves us with about $3800 to pay down the BofA Visa. This will save you over $150 the first year (depending on where we pull the money from).

It is important to put your finance on paper like this (I do it monthly) to look for opportunities to reduce debt and make sure that we take advantage of the money we have. Make your money work for you!

Annual Percent Yield of ING DIRECT Offer Compared to Emigrant Direct Offer

I just got an offer in the mail today from ING DIRECT. If I open a new account with them they will give me $25. The APR they list is 4.35%, but it says that was current as of 6/30/2006, and my Emigrant Direct rate is 5.15%. On checking they haven't increased their rate since the offer.

Does this pay? How do you compare these? Use the APY! This is the standard for comparing these scenarios. We are missing two pieces of data, the length of time we are looking depositing the money and the amount we are investing.

Here are some comparisons.

If we deposit $100 for 1 year:

	Ending Balance	APY
IngDirect	$130.44	30.34%
Emigrant Direct	$105.15	5.15%

If we deposit $1000 for 1 year:

	Ending Balance	APY
IngDirect	$1069.59	6.96%
Emigrant Direct	$1051.50	5.15%

If we deposit $10000 for 1 year:

	Ending Balance	APY
IngDirect	$10461.09	4.61%
Emigrant Direct	$10515.00	5.15%

If we shorten the time to a month (the IngDirect minimum for withdrawing this money):

If we deposit $100 for 1 month:

	Ending Balance	APY
IngDirect	$125.45	25.45%
Emigrant Direct	$100.43	5.15%

If we deposit $1000 for 1 month:

	Ending Balance	APY
IngDirect	$1028.72	40.46%
Emigrant Direct	$1004.29	5.15%

So, as you might have guessed for short periods of time or small initial deposits the ING deal beats the Emigrant deal. So, I plan on depositing a few bucks for about a month and then closing the account.

You might also note that an easy shortcut is that a larger interest rate, given enough time always wins. Really, the only reason to do the math is to find out if the larger rate wins in time to be used for your goal!

The Bite of Fees in Refinancing

I recently refinanced my mortgage. I used bankrate.com to locate a broker.

The good faith estimate came and the fees were a bit higher than what I found on Bankrate but it was still a great deal.

The closing comes and the fees are (surprise) higher than originally quoted. I was stuck as the fees that where already out of pocket dwarfed the saving of dropping the deal and starting over.

What to do?
1) Get the broker or mortgage company to give you, in writing, which fees you'll be stuck with if you don't close.
2) Get the mortgage broker to give you firm quotes for the fees.

A lot of the excuses were around title insurance and such. I got quotes but they were in the ballpark of the good faith estimate or higher so I passed. There is no reason that these quotes can't be made firm.

Learn from my troubles.

Scott On Money

August 31, 2006

Debt Reduction Tip – Build a (Modified) Balance Sheet

August 30, 2006

Annual Percent Yield of ING DIRECT Offer Compared to Emigrant Direct Offer

August 28, 2006

The Bite of Fees in Refinancing