There are several places recently I’ve seen a 4.25% 90% LTV (loan to value) mortgage with no points, so we’ll go with that for the current deal. Most of the people I’ve talked to for this article have mortgages between 6% and 7%, so we’ll base the savings on 6.5% for 30 years.

For an average home price of $250,000, refinancing from 6.5% to 4.25% results in a savings of $126,000 over 30 years ($568,800 vs $442,800)! Even the tax-adjusted numbers (25% bracket) of a $94,500 gain isn’t too shabby.

Although I’m not an advocate of paying down your mortgage unless you have a lot of extra money lying around (this is another topic for another day), you could use the monthly savings to pay down the principal on your mortgage if you’re already maxing out your IRA and 401(k).

For an even more striking number than that, your monthly payment will drop an average of $350. That’s $350 a month that could go towards paying high-interest revolving debt, funding your 401(k) or into a savings account. With cashflow being one of the more important things in life, isn’t that worth going to the bank for a few minutes to get an estimate?

We are all about saving money here at Moneyisms, but every once in a while there are things that you should drop the cash on.  Sometimes the satisfaction is worth it, and other times these items will actually save you money in the long run.  Here’s our top 10:

1. Health Insurance – We all know that health insurance is a huge expense, and goes up at a rate many times that of inflation, but having your health is an important part of being able to make more money.  On the flip side, if you don’t have health insurance and you do get injured, it may be a financial load that takes you decades to get out from under, if ever.
2. A Good Suit – Whether it’s for a funeral, a wedding, a job interview or any other occasion that requires you not look like you save money to the extreme, one good suit is well worth the money.  You never know, it may be the difference between you getting or losing that big business deal you’re working on also.  If you’re looking for a bargain, there are many stores that have great deals, such as S&K or The Mens Wearhouse on the East Coast.
3. Keeping Track of Your Credit – I would advocate one of the reasonably priced services that keep an eye on your credit reports and let you know if anything changes, however at a very minimum keep track of your credit history with annualcreditreport.com (the federally-required free service).  Fraudulent activity can take years to fix and be potentially expensive.
4. Gym membership – Many people tout the virtues of not paying for a monthly club, but from personal experience and hearing from others, it’s just too difficult to stick to a home-based training routine.  You can still shop out great deals, such as Planet Fitness at $10/month with no contract.  This goes back to the whole health thing.  You’ll feel better, live longer and have fewer medical costs.  Just go.
5. Food – You might be happy with Ramen noodles, but there’s a reason they’re only a dollar.  Spend the money on quality food, especially if you like to cook at home.  I can make an incredibly good and healthy meal for two for under $10.
6. Wedding Photography – For the singles out there, weddings are obscenely expensive.  From the food to the venue to the accommodations for tens if not hundreds of people…the one thing you don’t want to skimp on is a quality wedding photographer.  This is something you’ll have for the rest of your life – you don’t want your buddy taking the pictures on his Canon PowerShot.
7. Education – Sure, college is expensive, but don’t let that deter you from going to a college of some type, even if it’s a community college.  There are grants, scholarships, and in the worst case – loans.  The advantage in life and in money that you get from a college education is priceless.
8. Vacations – Like a lot of us, I put in 60+ hours per week between my 8-5, this blog and some of my side work.  You’ll get burned out quickly and your quality of work will decline if you don’t take a break and get away from everything every now and then.
9. Backups – How would you feel if you lost all of your pictures, financial data and any other things you may have stashed on your computer?  Whether it’s a DVD or a full-blown Linux box with RAID, don’t skimp on backups.
10. Cookware – This is a strange one, but much more applicable if you normally eat at home to stay within your budget.  Despite how well you think your $30 Wal-Mart set of pots and pans works, spend the money on a good set and see how much better of a cook you are.

Even when spending the extra money to get quality stuff, remember to still search out the deals to get the most for your dollar!  So now that we’ve got my list out of the way, what are some of the things that you like to spend a little more on to get quality?

Cars – love them or hate them, for many people they are the largest area of monthly expenditure besides your mortgage or rent, and therefore one of the best areas to improve your financial standing by making an informed decision.  When it’s time to get your next car, a big argument many times is whether to buy or lease.

As a general rule, I would say to buy your car if you plan to keep it for 5+ years, and also to make sure to purchase when the car is one to two years old to stave off that initial depreciation hit.  If you like driving the latest and greatest though, many times a lease would be the best option.

Upon first inspection, a lease is a complex financial transaction that many people don’t completely grasp, but it’s essentially broken down to this: the manufacturer guesses what its car will be worth in x months, and then you finance the amount between the negotiated price of the car and that guess (the residual), plus interest.

This brings to the forefront one of the biggest things to realize when you are leasing – negotiate it the same as you would a purchase transaction!  The only non-negotiable figures here are the residual and the base money factor (do your research and don’t let them tack on profit here), and in most cases the bank fee. 

I have a few additional rules for leasing if you’re going to go that route in order to get the most bang for your buck.

1. Pick a car that holds its value well.  Residuals vary greatly depending on the car and mileage.  For example, if you were going to buy a new BMW 328i, the residual for 36 months, 12k miles/year is 63%.  On the other hand, it wouldn’t be wise to lease a Dodge Durango, whose residual for an identical lease is 38%.
2. Pick a car that the dealer is running a special on.  Even the high-end brands have models that they are trying to promote with a good money factor.  A money factor is just an interest rate expressed in a different format.  You multiply by 2400 to get the interest rate (ie a MF of .00118 is an interest rate of 2.832%).

You’ll hear people say that you shouldn’t do a lease, because at the end of the lease you don’t own anything – this is a gross misunderstanding of finance, so don’t fall for that line.  At the end of three years, you’ll own a car as much as they do after a purchase – most car loans go 60-72 months these days, so the bank still owns their car also.  After all, you’ve heard the adage that you buy appreciating items and lease depreciating items, right?

The one thing I would recommend against is purchasing a car at the end of a lease – if you plan to buy your car at the end of the lease, just buy it now.  The goal of the lease is to pay the least amount possible for the amount of time you have the car, and then to turn it back in to the dealership so they take any possible loss from extra depreciation.  On the flip side, if they have underestimated the residual of the car and you think you can make a few grand off buying the car at the end of the lease and then selling it private party, more power to you!  What do you think?  Let me know in the comments!

Recently, a friend was talking to me about his outlook on life, and how he wasn’t going to put his money into a retirement account because he wanted to live his life now and not worry about when he was old – after all, who knows if he’ll still be around?

When you’re in your twenties, that’s sadly the prevalent attitude a lot of times.  I’m 27 now and have been saving consistently towards retirement for about four years now, but I wish I had started back in college (or earlier!).  The beauty of investing for your retirement while you are still young is compound interest.

Many people discount the effect of a few years on the amount of money you’ll have at retirement, but as with most things, nothing is as effective as the hard numbers.

Rick, a 22 year old, just got out of college with his first job at an investment firm at $45,000 a year.  He has been saving what he can for retirement since he was 18.  Currently, at 22, he has $15,000 in a Roth IRA and is putting away the max into his Roth and $10,000 a year into a 401(k) that his company offers.

Total investment: $660,000

Assumed annual gain: 9%

Nest egg at 65: $7,817,968.27

Rick is putting the least towards his retirement, but starts young and ends up with twice Cheryl’s investment and almost four times Randy’s!

Cheryl, a 35 year old real estate agent, lived for the moment for the first 14 years of her professional life with new cars every year or two to impress her clients, and lived well above her means for the majority of her life, and only has $50,000 in her 401(k) currently.  In order to make up for lost time, she maxes out her IRA ($5,000 per year) and her 401(k) ($15,500 per year).

Total investment: $665,000

Assumed annual gain: 9%

Nest egg at 65: $3,709,175.87

Cheryl has at least realized in time that she needs to start contributing towards her retirement, and is at least in a place at this point in her life where she can fully fund her future while living near her expected standard of living.

Randy, currently 50 and at the top of his earning potential, knows he is behind the game from supporting his three kids through growing up and college, and currently has $350,000 in his 401(k).  He also is maxing out his IRA at $5,000 per year and is using the 401(k) catch-up contribution of $20,500 per year.

Total investment: $732,500

Assumed annual gain: 9%

Nest egg at 65: $2,090,955.53

It goes without saying that it’s essential to make the sacrifice necessary to invest in your future at a young age, because after a certain point it’s nearly impossible to catch up.  Don’t make the mistake many of us have!

It’s getting close to that April 15th tax deadline again, so it’s the perfect time to go over 10 of the most overlooked tax deductions to help you get the money you have earned back from Uncle Sam!

If you’re expecting a refund, shame on you that it’s April and you haven’t gotten your money back yet!  Otherwise, don’t feel bad that you’re coming down to the wire - you’ll just be one of the millions of Americans doing your taxes while watching the Final Four this weekend.

1. Loss of Property From a Natural Disaster – If you have lost anything in one of the many natural disasters we’ve seen over the past year, you can deduct either the price paid for the property plus any improvements, or the property’s decline in market value, determined by repair costs. (H&R Block)
2. Home Office Deductions – Do you run a business out of your home?  If so, you may be eligible for a tax deduction on any area of your house that you use solely for business purposes. (H&R Block)
3. College Tuition – You can deduct up to $4,000 in tuition expenses for yourself, your spouse or your dependents.  This is even more useful if your income is too high to qualify for the Hope Credit or Lifetime Learning Credit.
4. Points on a Home Loan Refinance – Did you refinance your home loan this year and pay points on the transaction?  You should be able to deduct that full amount. (Kiplinger)
5. Energy Credits – One of the best things about making your home more energy efficient is that in a lot of cases, the government will foot part of the bill! The credits include 10% of the cost of skylights, outside doors, windows, pigmented roofs and high-efficiency furnaces, water heaters and central air conditioners installed this year in a primary home. The maximum credit is $500, and no more than $200 can be attributable to windows, and no more than $150 claimed for furnaces and water heaters.
6. IRA Withdrawls for First Time Homebuyers – Although we almost never advocate withdrawing from a retirement account because of the dire effects it can have later in life, the IRS allows you to withdraw up to $10,000 from an IRA before 59 ½ in order to make a down payment on a new house.
7. State Sales Taxes - Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state income taxes or state sales taxes. For most citizens of income-tax states, the income-tax deduction is a better deal.  IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren’t the last word. If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its Web site to help you figure the deduction, which varies by your state and income level. (Yahoo! Finance) 
8. Self-Employed Health Insurance – If you don’t work for the man from 8-5 and pay for your own health insurance, you may be able to deduct up to 100% of your health insurance premiums! (IRS) 
9. Accounting Fees and Tax Preparation Software – Did you pay for someone else to do your taxes?  You can deduct that from your taxes (or tell them to!).  If you’re like me and am taking the easy route using TurboTax, you can deduct the cost of the software.
10. Clean Fuel Credit - Credits are good because they are a dollar-for-dollar reduction in tax. And if you bought a new hybrid gas-electric auto or truck in 2007, you can get a conservation tax credit of between $250 and $1,000 and an additional fuel economy credit of between $400 and $2,400, depending on the make and the fuel economy. A hybrid car combines an electric motor with a gas fueled internal combustion engine.  But act quickly. The credit starts to phase out when the auto manufacturer sells its 60,000th hybrid vehicle. That’s the total per manufacturer, not 60,000 per model. Once the cap is reached, the phaseout starts at the beginning of the second subsequent calendar quarter. (MSN)

Several of the citation links after the tips will link you to other lists that you may find useful also.  Best of luck in the tax season!

We’ve all considered it – the hybrid car that will make us appear more environmentally friendly, save us a ton on gas and save the environment.  Beyond the fuzzy feeling you get helping the environment (as much driving can help the environment), I’ve always questioned the validity of the saving money claim they make from improved gas mileage.

I haven’t sat down to research and write an article on the savings until now though.  For comparison’s sake, I have chosen the 2008 Honda Civic as our steed of choice.  Just to get these two cars optioned as closely to each other as possible, I have selected the top-level EX model for the non-hybrid, which comes in at $19,510 base price.  The hybrid model comes in at $22,600.

We’ll assume that you do half highway driving and half of your driving in the city, which places us at an average of 42.5mpg for the hybrid (40 City/45 Highway), and 35mpg for the EX (30 City / 40 Highway).

At an average of 7.5mpg difference, how long would it take to make up that $3,090 difference in the base price?  If you assume that gas is $3.25 per gallon – it’s at $3.05 at my local station as of this morning, but I know that it’s more in other areas of the country – that’s 950.77 gallons, or  33,277 miles more gas we could buy for the EX.

Now the real question is how far we’d have to drive to break even.  Not considering other factors such as maintenance, we can figure this out using the following:

((x/35) * 3.25) + 19510 = ((x/42.5) * 3.25) +22600

Using this formula, we can see that it would take approximately 188,557 miles just to break even while driving the hybrid.

Total cost for Civic EX:

188,557 miles / 35mpg = 5387.34 gallons of gas

5387.34 gallons * $3.25/gallon = $17,508.85

$19,510 initial price + $17,508.85 = $37,018.85 TCO

 

Total for Civic Hybrid:

188,557 miles / 42.5mpg = 4436.64 gallons of gas

4436.64 gallons * 3.25/gallon = $14,419.08

$22,600 initial price + $14,419.08 = $37,019.08 TCO

Given these figures, even the most frugal of us would be hard-pressed to make the hybrid purchase from a financial standpoint.  As time goes on, though, these cars are coming closer and closer in price to their non-hybrid counterparts.  Whether it’s worth it or not to you is a personal decision!

One good thing about the credit card companies is that you can often get a concession from them on fees and/or interest if you have a good account history with them.  All it took was a ten minute phone call to find out the policy on this and to request a “courtesy credit” from them for the amount.

Whether it be a bank charge, a credit card charge or some other fee that you are charged, a lot of times all it takes is a phone call and request to remove it from your account.  Did this work for any recent fees you’ve had?  Let me know in the comments!

I’m not a financial professional for my day job, but it is my passion, and I would love to share it with you and hear your thoughts!

Moneyisms isn’t going to be a blog about getting rich quick or anything like that either - it will be realistic, frugal tips and discussions towards the goal of your financial independence, and hopefully get you thinking differently about financial topics!  Thanks for reading, and make sure to subscribe to the RSS feed if you want to read posts that way!