Everyone is told that the tax you pay on your home is tax deductible. Back in the hayday of lending often times people would get an interest only loan and live in their “tax shelter.” Well the standard deduction for a married couple in 2009 will be $11,400. That’s an average of $950 a month.

So basically the government is already covering the first $950 worth of interest per month whether you’re paying it or not. The government is covering $5,700 a year or $475 per month if you’re filing single. So it’s not until you’re paying more than $950 a month in interest that you start getting more money back. And because it’s a deduction and not a credit you’re only going to see about 15% of that interest back at the end of the year.

If you get a $200,000 loan at 7% you’ll be paying about $11,400 or more per year for approximately 10 years assuming you pay the minimum due every month. In the first year you’ll pay about $13,936 in interest. Subtract 11,400 that you would have gotten anyway leaves you with an additional $2536 in tax deductions. 15% of that is about $380.

So because you focused on the tax deducation to try to save money you wound up with a whopping $380 in the first year of having your loan. And that amount decreases every year as you pay off your loan until about 10 years later you end up below the standard deduction so the interest you’re paying on your house does nothing to reduce you tax liability.

Now, let’s compare that to the savings you see by paying more on your mortgage than you need to. Let’s take the $32 per month that you saved on your taxes and apply it monthly to your mortgage.

Keep in mind that going the full 30 years of paying your mortgage will result in $279,017.80 in interest. Minus a few thousand in tax savings.

With an extra $32 per month put on your mortgage every month you end up paying $254,333.48 in interest and cut down the time it takes to pay off your loan by about 2 years. That’s a savings of almost $25,000 over 28 years which works out to $74 a month. Minus the $32 dollars a month extra you were spending you end up with an overall savings of $42 per month or about $504 per year.

Significantly better than trying to use your house as a tax shelter.

In my situation I have about $78,500 in interest left to pay on my home in the 10 years left to pay it off. If I were to make the minimum monthly payment I’d have 27 years left to pay and end up paying $190,770 in interest. So I’m saving $120,000 in interest.

I’d have to sell my home in less than 7 and a half years to avoid paying more interest than I would just paying off the house quickly. And in 7 and a half years I wouldn’t own the home. By being smart with my money in 10 years (only 2 and a half years later) I’ll own the home outright. When I sell I get to pocket everything.

Deductions will never make up for paying off debts as quickly as possible. A lot of people pay the minimum on their home mortgage and if they manage to pay it off in 30 years they’ll end up having paid 2-3 times what they price of the home was. So now you have to sell your $150,000 home for $450,000 just to break even.

But a lot of people don’t think about that. They just ignore the amount of money they’re throwing away in interest and in 30 years think they came out ahead when in reality they could very well have lost money on the home. In 10 years I’ll have paid about $240,000 for a $160,000 mortgage and own my home. So in 10 years anything abive $240,000 is pure profit on the home.

In 30 years it would have cost about $380,000 for a $160,000 home which means I end up with $140,000 less than if I had paid it off quickly.

That’s a lot of money lost because you forgot to consider the interest you’re paying on your home.

Peer to peer lending, or person to person lending, is the lending and borrowing money between people without going through a bank.  Basically Bob asks Joe for a loan and Joe sets up the terms and gives Bob the loan if Bob agrees with the terms.  Joe is taking the entire risk of the loan.

There are a few websites out there that faciliate these types of loans.  If you have money to lend and can accept the risk then it might be something worth doing.  Peer to peer lending allows people to get a loan that a bank wouldn’t be likely to give them.  Banks tend to have higher interest rates and higher standards than a non-banker might have.

The biggest risk in Peer to Peer lending is what to do about people who fail to pay.  Established banks have all sorts of legal power to go after people who default on loans.  The average person can’t afford a lawyer to go after someone who owes them only a few thousand dollars.  Especially when that person is out of state.

It’s also difficult to get a credit report for a prospective borrower and be able to come up with a metric to determine the risk.  Banks have that sort of thing down to a science.

P2P lending is in theory a very good idea.  But you need to really do your homework on people before giving them your money.

Probably a year or two ago I was working on the budget and came across Mint.com. Then I saw that they actually expect you to give them your log in information for all the financial institutions you do business with. Oh, hell no.

Looking at the reviews and the numbers of people who are ignorant enough to join the site it’s a colossal epic fail waiting to happen. I don’t even store my log in information for my banks and credit cards on my personal computer. Mint.com is a hackers dream come true. Getting access to their database would grant unlimited access to your finances and the finances of possibly millions of other people.

I’m not sure what kind of guarentees Mint.com is making to protect your money but I’m not willing to take the risk. That’s why my personal finance management site just makes you enter in various information manually. Account numbers and logins are not asked for or required for any of the site’s functionality. Sure it takes a little more effort but it minimizes the amount of information it needs. You don’t need to know that you spent $5 on a latte last month to do your budget properly.

In fact, any budget that expects you to go through the line items on your credit/debit card statements is wasting your time and your money.

It’s wasting your time because the money is already gone and it’s not coming back and it’s wasting your money because it’s giving you the impression that anything more than ZERO DOLLARS is a valid amount to budget for unnecessary crap.

If you want to get a grip on your finances you first need to stop pretending that you can budget for things you don’t need. “I budgeted $50 a month for coffee so it’s okay that I spend the money.” NO IT’S NOT.

Every penny that isn’t demanded by a bill that some company sent you is savings. You’re not making use of your budget to buy coffee. You’re spending your savings. You’re spending your savings on food and gas. The sooner you get that attitude about things the sooner you think harder about wasting food and wasting gas.

If you want to insist on budgeting for gas then this is the way to do it:

1) keep track of how many miles per gallon you’re actually getting
2) calculate the number of miles to and from work
3) multiply by 260 (5 * 52)
4) divide by the miles per gallon
5) multiply by the price of gas rounded up to the nearest dollar
6) divide by 12

That is the dollar amount of gas you’re allowed to budget for a month. Everything else is coming out of your savings. You can do without driving on the weekends but you have to get to work or you lose your job.

See the whole point that Mint.com misses by micromanaging your money is that it’s not telling you the minimum of what you should be spending. It’s telling you what you are spending. If I find I’m spending $200 a month on gas that doesn’t mean anything unless I know that it only costs $50 a month in gas to get to and from work every day. Now I know I’m somehow managing to waste $150 a month on gas.

And I don’t need to know where my money is going to know it’s being wasted. I know the minimum amount of money I have to spend every month to cover bills and pay for gas to get to work. Every day I simply say to myself “today I will not spend any money.” And I keep my money away from me during the day to make that happen.

Managing your budget is not a complicated process. And it’s certainly not a good idea to give out your account details to a web site no matter how secure they claim to be even if they promise to help you manage your money. It’s unnecessary and dangerous.

One of the harder things to do when getting your finances in order is overcoming cravings. Lots of people, if not everyone, has a list of items they would like to buy. Some of those items are day to day things like getting your favorite fast food for lunch or dinner.

To help cure your cravings for little day to day expenses you can make yourself “wallet broke.”

The first step to becoming “wallet broke” is making a budget that only includes the monthly bills you must pay. This includes the minimum payment on any credit cards you have. The total of these bills is the amount of money that will be taken out of your bank account whether the money is there or not. So there’s the motivation to not spend that chunk of money.

Now, you probably see that you have money left over. After all you didn’t include food, gas, entertainment, etc. But those expenses are made on the spot. They’re not scheduled and automatically withdrawn under threat of dings to your credit if the money isn’t there. So take the money out of your checking account. I like to leave at least something in my checking account. That extra money rolls into the next pay period and only after the next pay day do I re-evaluate the extra funds and what to do with them.

I like to keep cash on hand. However, it’s generally not a good idea to have wads of cash on hand so move most of the extra money to a savings account and just keep some of it as cash. The point of having cash on hand is that it deposits instantly and is accepted everywhere. It also can’t be spent if it’s not in your wallet.

And that is the key to being “wallet broke.” By reducing your bank account to have only the funds to cover the bills that must be paid it’s very easy to not bust out the bank card for day to day expenses. Because you know if you do you could miss a very important payment and suddenly be in a world of hurt. So even though you keep your bank card with you “just in case” it’s very easy to not give in to a craving for fast food or a shiney trinket. The bank card is just enough to fill up your car with gas one or two times.

The second part of being wallet broke is not carrying cash around. That’s right, you keep cash on hand but you don’t keep it in hand. If I know I need to fill up my car with gas that’s a legitimate reason to grab a $20 from my stash and that’s all that goes in my wallet. So when I’m out for the day I only have $20 and I have to put it towards gas or I won’t be getting to work.

You could convince yourself that you can just grab another $20 when you get home but while you’re out you have several hours to think that plan over and suddenly the craving for whatever it is you wanted is gone. You fill up your tank, you go home and the desire to put another $20 in your wallet is gone.

The whole point of being wallet broke is keeping that constant feeling that you “can’t afford it.” And eventually “can’t afford it” turns into “I don’t really want it anyway.” And maybe down the road your wants will go away completely. HA!

It’s not about getting rid of your wants. It’s about becoming conscious of money. You can have the things you want. You’re just learning to control your impulse spending so the things you want are the things you’ve really thought about. Not the things you made 2 second decisions on.

From day to day I want fast food. But I recognize that I’m wallet broke so I can’t afford it in the moment. The moment passes, I avoid wasting money. I also want a new server, a big screen tv and a sleep number bed. I’ve wanted those things for a long time, so for the next several months to a year I take the money I’m not spending on impulse buys and put it away and in not too much time I’ll have all those things without going into debt.

So to sum it up, being wallet broke means:

* carrying around a single bank card that only has enough extra money to cover one or two tanks of gas
* not carrying around cash except when you know exactly how much you need for a predetermined product (gas, food, trinket, etc)
* not having any credit cards in your wallet

Years ago I came up with the idea for “Bank of Ben” after sorting out a lot of financial issues but it never really went anywhere. Then in the last several months I started dealing directly with finances again and started looking at ways to simplify my financial life. And after developing a system using Excel that seemed to be doing rather well it was time to take it to the next step: put it on-line.

Bank of Ben is a financial tracking and planning web-site to help you manage your monthly bills and get out of debt quickly. All your information is entered by hand so you don’t have to enter in account access information for your real bank accounts. It also features a blog with financial tips to help you take control of your own finances.

Bank of Ben also takes over the role of “Stocks!?!” which is a stock portfolio tracking tool. You can now enter in your stock portfolio information at Bank of Ben and track performance. If you had an account with “Stocks!?!” it will work with Bank of Ben and all your information will be available. Both sites make use of the same information. “Stocks!?!” will be shut down soon.

With Bank of Ben you can

* Manage your monthly itemized budget
* Track your investments
* See how much your credit card debt is really going to cost you
* See how much your loans are really going to cost you
* See how you can pay off all your debts quickly and minimize interest fees

It’s very easy to say “I want to be debt free” and come up with a plan so that in some number of years you are debt free. But what you may not even consider is that focusing on being debt free may end up costing you money in the long run.

The above chart represent two scenarios. The blue line represents paying the minimum amount due on each debt and then putting the payment into some interest earning account until 30 years have gone by. So let’s say I owe $100 a month on a credit card and in 2 years it’s paid off. For the next 28 years I put $100 a month into an interest earning account.

The purple line represents the debt focused mindset. As debts are paid off the payment is applied to the next highest interest bearing account. Money isn’t put into an interest earning account until all the debt is gone.

The interesting thing is that until I start earning about 6% in an interest earning account, it’s best to just throw my money at debts. But, if I can get more than a 6% return somewhere else it’s better to just put the freed up money that was paying debts into the interest earning account.

At the end of 30 years with a 10% annual return on investment I’ll have $360,000 more than had I worried about paying off all my debts first. The sum of the remaining debt is far less than that so I end up ahead overall.

So sometimes it pays to not worry about debt.

There are two key steps to paying off your debts in a reasonable amount of time.

Step 1: Stop creating new debt
Step 2: When a debt is paid off apply the payment to another debt

That’s called “snowballing.” Imagine you have 5 credit cards and you’re paying $100 on each one every month. That’s $500 in total payments. Several months down the road one of the cards is paid off. You may be tempted to relish in the fact you’re only paying $400 a month now in credit cards but the smart thing to do is keep paying the full $500 on the credit cards until they’re all paid off. By the time you get to your last card you’ll be paying off $500 a month on it.

Snowballing of course assumes that your level of income won’t go down and that you can live comfortably at your current level of income.

Otherwise you’re going to have to take the money you were paying on the now paid off credit card and pay regular living expenses.

I did a little experiment and snowballed my credit cards, my mortgage and my student loans. By snowballing all the payments starting with the credit cards and ending with the house I would be debt free in 17 years. I’m in the process of creating the “Bank of Ben” which will be a personal finance site. One of the features that it will have is to be able to show you how to snowball to save the most amount of money and get out of debt the fastest. It’ll show you month by month how your payments are being applied.

You’ll also be able to track your credit card debts, student loan, home and vehical debts and put together a budget. The site won’t require your usernames or passwords to your various accounts. I’d rather do a little more manual work than risk having financial account information stolen.

Some people fear debt. However, society runs on debt and not all debt is bad. Bad debt is debt that was accrued for worthless things such as gas, food, gambling, etc. Those things should be covered with cash. Good debt is debt that is accrued for things that have value such as an education a car and/or a house.

The catch is that you can’t get enough credit to go into debt for the things that have value until you artificially put yourself in debt for the things that don’t.

Your parents should have told you to get a credit card when you’re 18 and charge gas and groceries to it and pay it off every month. People that didn’t play this game end up at a car dealership at some point wondering why they can’t seem to get an interest rate below 20%. Because they didn’t play the game when they were young and maybe pay a little bit of interest then, now they get to pay thousands extra in interest for things they actually need.

In 2001 or so (I was about 21) I was looking to buy a car. I went to the Hyundai dealer and expected to get a cheap car and a reasonable interest rate. Instead they wanted to give me a 20% interest rate and they refused to even pretend to bargain. So I walked out. I had access to another car so I drove that for a couple years. In 2003 I saw Honda advertising Civics for about $160 a month with a lease. I walked into the dealership and at first they said I didn’t have enough credit.

What that means is that I hadn’t been playing the credit game long enough. I’ve never missed a payment but my credit card limits at that time were pretty low and I was 23 so I only had a few years of credit history. I also wasn’t making enough. Then I mentioned student loans. I got the car.

I played the credit card game for a few more years never missing a payment and making use of credit cards responsibly. When the lease was up in 2006 I went to a Mitsubishi dealer and walked out with a brand new Outlander with a 0% interest rate. I went from 20% to 0% in 5 years just by being responsible with debt. I was also making middle class income by then.

This is where it becomes obvious that “saving money on interest” by paying cash for everything is really silly. I bought a $20K+ car interest free. I was able to do that because I had spent the previous 6-8 years not paying cash for everything so that I had a strong credit history. I’m sure I spent some money on interest for credit card debt but in the end I saved thousands more than I spent on this one purchase alone.

Credit is a long term goal. You shouldn’t worry about short term interest. You should try to keep it to a minimum but you shouldn’t fear it.

The American dream is to own your own home. You can’t do it if you don’t have credit. A year after I bought the car I bought a $160K home with a 30 year fixed mortgage at 7.125%. That’s not a “great” interest rate but at the time it was about as good as you could do.

The other reason you shouldn’t fear interest is because you can minimize it. For whatever reason a lot of people pay the minimum they owe on things. Especially cars and houses. Unless you have a 0% interest rate you should be paying more than the minimum. The interest rate on my house is good but if I put an extra $100 a month on the mortgage I pay it off 7 years earlier saving around $84,000.

Like it or not you have to play the game. If I hadn’t started playing the credit game early I wouldn’t have the car, the house and the education I have now. The things that make up the American dream. Now that I have all of that I can stop using credit cards. Which is exactly what I’m doing. They are only used for unexpected large expenses.

If I continue the path I’m on I should be debt free before I’m 50. That gives me 15 years of throwing money into savings and investments. There is around $2000 a month I’m putting towards debts. 15 years with $2000 a month going into savings is $360,000 not including any interest earned.

In short, the game is this, build your credit quickly, achieve the American dream of a house, a car and an education, pay off all your debts, save all the money you were putting on debts for retirement. Retire without a house payment. Do whatever you want.

Powerline Blog has a post about Muslim Mortgages. According to Islam it’s forbidden to charge or pay interest which makes it very difficult to buy a house since few people have enough money to pay for a house in full with cash.

Minnesota has come up with a plan: they buy the house and then sell it for an increased amount “interest free.”

The increased amount is equal to the interest that would be charged through a traditional loan. So basically Muslims are being given a simple interest loan when they buy a house but it’s not called interest. It’s just a higher price for the house.

So let’s say you want a $160,000 property. The bank wants 7% interest. They run the numbers and after 30 years you would pay $230,000 in interest for the loan. You add in the original $160,000 and you’ll pay $390,000 over 30 years which works out to about $1083 a month.

With a traditional loan you can save yourself tens of thousands of dollars in interest simply by paying extra on the mortgage every month. With this “interest free” loan you’re stuck paying $390,000 for a $160,000 house. Paying extra will only cut down the time it takes to pay it off, not the overall cost.

If you could get a real interest free loan that would be awesome but this is just silly.

In today’s economy “living within your means” is back in fashion. However, you have to define your “means.” In the most basic terms it means spending no more than you make. If you take home $2000 a month you spend $2000 or less per month. If you have credit cards and want to use them you don’t put anything on them that you can’t pay off by the time the bill comes due. You don’t create debt.

I would define your “means” as the amount of money you can make in either the first 40 hours a week you work or the salary you have from a single job. It’s common these days for both parents to work or for people to work multiple jobs just to pay the bills. Not because they want to, but because they have to.

Any additional money outside a single full time job should be considered “extra” and not factored in when making large purchasing decisions: anything you have to take out a loan to purchase.

The reason for this is simple: you’re killing yourself.

Back in college I was typically working two jobs and I think for at least a short period I was working three. But after a few years I had learned enough skills to consolidate those two jobs into one higher paying job. And that’s the key; you work, you learn you make more money in less time.

If you’re forced to work 80 hours a week just to pay the bills you’re giving yourself no time to get an education and get into a position where you can make more in less time. Because your bills require you work 80 hours at your current skill level you can’t cut back hours to go to school. You can’t cut back hours to get a life.

And if something comes up, you’re already working every waking hour during the week so you can’t go out and earn more money for an unexpected expense. If you’re living off of a salary or 40 hours a week of hourly pay and an unexected expense comes up THEN you can get a second job temporarily to work that debt off.

The first 40 hours are for living. The next 40 hours are for emergencies and extra spending money.

So really your means are not how much you make but how much you can make without killing yourself. Sure you could work 80 hours a week and afford that $300K house but do you really think you can handle 80 hours a week for 30 years?

If you want to work more to earn more money then go for it. But just keep in mind that the more you extend yourself because you have to, the more you’re going to be hurting when something goes wrong.