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July 2009 - Posts - The Dollar Stretcher
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The Dollar Stretcher

The Dollar Stretcher blog will explore people and money.

July 2009 - Posts

  • Looking for the Positive

     Hello to all my Frugal Friends!

    Wonder if I could ask your help. As you might imagine, many people are depressed by the current economic situation. If they haven't lost a job, they're concerned that they might. Or their income has been slashed. Or a host of other bad financial news.

    Naturally we believe that the best solution for that is to evaluate your situation, figure out what changes could help and then begin to implement those changes.

    But we recognize that there's more to it than that. In order for any of us to take those positive steps we need to believe that they could improve our situation. The problem is that if we're depressed it is easy to think that nothing will help. And then we'll become victims and stay frozen where we are.

    We'd like to help change that reality. One way to do that would be to include some positive quotes in The Dollar Stretcher. Quotes that will help people to believe in themselves and the future they're building.

    We know that motivational quotes will not by themselves solve anyone's financial problems. We're not that naive. But, when teamed with actions designed to solve problems, a good thought could be just what's needed to encourage someone to keep trying, even when they want to be discouraged.

    So could you help us find quotes to share? Either one that's a favorite of your's. Or a source that you use. Any place where they can be found. Just send an email to gary@ stretcher.com with "Positive Quotes" as the subject.

    Thanks! And, keep Stretching those Dollars!

    Gary

  • Reduce Savings to Pay Debts?

    Hello Gary,

    retired early from my job of over 30 years and am now receiving a pension.  I have an outstanding car loan with a balance of about $2500.00 at 4.49% interest. I have a Home Equity loan with a balance of $27,000 at 5.95% interest. I received a bonus from work when I retired for unused sick leave that netted me about $9,000. I put it all in an online savings account as a Contingency fund.  I just received notice that it is once again dropping the interest paid on my savings to 1.39%!

    My goal was to finally have an emergency fund with $10,000 in it.  I am so close, but with the paltry interest being paid is it better to just rid myself of this car loan once and for all with my savings money?  That would leave me with only the home equity loan as debt.  I could then contribute more money each month to accelerate paying that off earlier.  I live a very simple and frugal lifestyle and feel very fortunate to be able to receive a pension in this day and age.  However, I would love to be free of this debt anchor.  Paying the bills and this debt on half pay is proving to be quite a challenge.  Thank you.

    Charles

    Charles,

    You ask a very good question. And, it's one that a lot of people are asking. With interest rates being so low, does it make sense to leave money in a savings account while you're still paying on debt.

    There are really two ways to look at it. The first is from a purely dollars and cents point of view. In that case you'd calculate how much interest you're earning in the savings account. Then you'd calculate how much interest you're paying on the auto loan. And, then compare the two numbers. If you're paying more in interest than you're earning, you'd pay off the loan. Typically that's the case.

    The other way to look at it is to look beyond the interest earned and charged. You might consider: do you have additional flexibility by leaving the money in savings? Do you feel more secure knowing that you have money in savings? Is there some other reason that you expect to want the money in savings later?

    Or it could be that you feel better knowing that the debt is reduced. Maybe you're afraid that money in savings will disappear in wasteful spending if you leave it sitting there.

    Let's look a little closer at Charles' situation. First, the interest earned and charged.

    You could do a lot of fancy math, but you can get a pretty good estimate if you make a few simple assumptions before you start calculating.

    What's the difference between the two interest rates? In this case it's about 3% (4.49% minus 1.39%). We could complicate this by asking whether they're both APR's. Or even considering whether either is taxable. But, that's not really necessary. We're not shooting for absolute mathematical certainty here. Our goal is to just get an idea of how much money were talking about.

    OK, so there's a difference of about 3% between the cost of the car loan and what you're earning at the bank. How does that translate into actual dollars?

    The outstanding car loan amount is ($2500). So that's how much we're talking about. But we can't simply figure 3% of $2500. That's because the car loan will decrease as you pay it off. Suppose that it takes 2 years to pay off, that would mean that it would be about 1/2 that amount (or $1250) midway through the loan. Higher at first, and lower later.

    So in effect it's like borrowing $1250 for the 2 years. It's not exactly mathematically correct (the loan actually goes down slower at first and the rate of decrease goes up near the end of the loan). But it's close enough for our purposes.

    So it will cost Charles 3% of $1250 for 2 years to keep the money in savings. Or about $75 in extra interest (3% X $1250 X 2).

    Now Charles has some information to help him make his decision. If the knowledge that you have the money in savings is important to you then it's worth $75 to keep it in savings. But, it's probably not a life/death decision on either side.

    One other thing that Charles might want to consider is whether he can earn more on his money at another bank. One we've found that generally pays well is ALLY.

    You can use this same strategy to evaluate repaying almost any loan. Figure out how much money is involved and multiply by the difference in interest rates and the amount of time involved. Then take a look at the other factors to decide what's best for your situation.

    Keep on Stretching those Dollars!

    Gary

  • Declaring Your Financial Independence

    Recently we've been examining Financial Independence. We began by asking you what Financial Independence meant to you. We received many great answers. You can check out many of them here.

    We found that there were a number of common themes. Guess that's not surprising. When it comes to finances we may differ in the details, but there are certain desires that are pretty universal.

    We've taken your responses and created a Financial Declaration of Independence. You'll find it here. Please take a moment to visit. There's a good chance that you'll find an area of your finances that you'd like to achieve freedom in.

    Last week we asked you about what resources/tools would be helpful in the journey to Financial Independence. We had some responses in The TDS Community and more via email. We're working to see what we can help make available to you that will be useful in your journey to Financial Independence.

    One resource that we already have in place is an active discussion on reducing debt. It's called "Slaying the Debt Dragon in 2009" and you'll find it here. Not only are participants encouraging each other, they also share tools that are working for them.

    We invite you to join in. As I said before, our details may differ, but we share many struggles. It's much easier to undertake a challenging journey if you have company. It's much easier to stick with a goal if you have stated that goal publicly. So don't try to achieve Financial Independence all on your own. Yes, you'll be the main player in your freedom, but the trip is much easier if you make it with friends.

    We've set up a thread where you can declare your financial independence. You'll find it here.

    We also continue to want your thoughts on the subject of financial independence. We'll be much more likely to put a winning team together if everyone joins in. Just send me an email.

    Keep on Stretching those Dollars!

    Gary

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Gary is a former financial planner and purchasing manager who edits The Dollar Stretcher website <www.stretcher.com> and newsletters. You can follow Gary on Twitter.com/gary_foreman
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