One of our listeners, Bob, called us with a bigg question. He and his wife have some extra money and they are wondering whether they should use it to pay down their mortgage or make some home improvements.

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Both options are very illiquid

You can’t get your money back once you spend it with either option. So make sure you have enough extra cash to cover between six to twelve months of living expenses before you do either one.

A guaranteed return

Paying down your mortgage is one of the safest investments you can make. It’s a guaranteed return equal to your mortgage rate.

For example, if your mortgage rate is 6% and you pay it down early, you’re essentially earning 6% on your money guaranteed!

That’s a decent rate of return right now.

Returns on home improvements are often more sketchy. Start by asking yourself this question:

How does the value of your home compare to other homes in your neighborhood?

If you’re one of the most expensive homes already, making improvements probably won’t do you a lot of good financially. However, this is your home. It’s more than just an investment. So ask yourself a second question:

How long do you plan to live there?

The longer you plan to stay put, the higher the emotional returns – an important point to consider because money isn’t everything. What types of improvements yield the best financial returns? Most major outlays don’t return much if anything. Cosmetic improvements usually show a better return – paint, new floor coverings, landscaping, and those sorts of things. Remodeling the kitchen or bath can yield a reasonable return, particularly if they look a little outdated, as long as you don’t go over-the-top.

Weighing your options

Determine how much it will cost for your desired improvements. Then ask a Realtor or an appraiser to find out the expected increase in your home’s value. Now calculate your return:

Return = (Increased Value – Cost of Improvements) ÷ Cost of Improvements

Compare that to your mortgage rate. If the return for making the home improvements is significantly higher, you might consider making the improvements instead of paying down your mortgage.

Just keep in mind, this is not an apples-to-apples comparison. Paying down your mortgage offers a guaranteed return. Making home improvements does not.

Choosing between improvements

If they go with the improvements, Bob wants to replace the windows. His wife wants to remodel the kitchen. Which would be better for the money?

We wonder why you want to replace the windows, Bob. Is it for cosmetic reasons or are you thinking about energy-efficiency? Perhaps it’s both.

Stimulus for you

We hate to disappoint your wife, but right how is a great time to replace windows or make other energy-efficiency improvements. The Economic Stimulus Act extended and improved the tax credit for these types of repairs.

You get a 30% tax credit up to a $1,500 limit. So you can spend up to $4,500 on qualified improvements.

A tax credit is better than the deduction you’re used to getting on Schedule A. Deductions reduce your taxes by the amount of your marginal rate. Credits reduce your taxes dollar for dollar.

So $1,500 of your new windows could be paid for by the government!

The one cash outlay that pays you back year-after-year

However, it doesn’t stop there. It’s amazing how much air can leak out through poor windows. You’ll save money on your utility bills for years with the right windows.

Your returns for making any energy-efficiency improvements aren’t guaranteed but they’re close. They may also be higher than the returns on a lot of other investments these days. Improving your energy-efficiency is a cash outlay that pays you back year after year!

Thanks for your bigg question, Bob!

Do you have a bigg question?

Please share it with us by calling us 888.455.BIGG (2444) or sending an e-mail to bigginfo@biggsuccess.com.

Please join us next time when we talk about two recent examples of saying, “We’re sorry.”

Thank you for sharing your time with us today. Until next time, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

Subscribe to the Bigg Success feed.

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00391-051109.mp3

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Health insurance is a significant expense. If you’re fortunate enough to be part of a group, your company is probably paying a good portion of the cost. However, companies are increasingly asking their employees to bear a bigger share of the total cost.

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Of course, if you’re self-employed, you have to pay it all. This really hits your budget in either case and, as we look to the future, it appears it will occupy an ever larger share.

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I used to sell insurance years ago so I’m familiar with that side of it. I also approved our group plans when I was in business before Bigg Success.

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When we started Bigg Success, it was an eye opener for me. I went from being an employee with group insurance to being self-employed buying individual coverage. I saw the full cost, not just my share of it. I was amazed at the array of choices. And I couldn’t get some of the coverage I really liked under my group plan.

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Obviously, your age and your health are two major factors in the cost. The other key factors are:

Your deductible. This is the first money that will be paid out. You pay it up to the deductible you choose.

Your co-pay percentage. Once the deductible is satisfied, you begin sharing the cost with your insurance provider. You may split it down the middle or some other arrangement.

Your stop loss. You don’t have to share costs forever. At a certain point, your insurance company will pay 100% of the covered costs.

Your maximum coverage. It will look like a large number (e.g. $2 million) but it can be used up fairly quickly if there’s a serious health problem.

Your maximum out-of-pocket. This compiles the first three factors. Your maximum out-of-pocket equals your deductible plus your maximum co-pay amount. It only considers covered costs so just be aware that your actual out-of-pocket could be higher.

So now we want to talk about three mistakes that people often make when buying health insurance.

Pushing too much risk onto the insurance company. Being too conservative is very costly. For example, the higher your deductible, the less you’ll pay.

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But George, I know when I’ve been light on money, it’s scary to think about a large hospital bill. Even a doctor’s bill of $300 – $500 can be a burden when you’re really strapped for cash.

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I understand that, Mary-Lynn. But I’ll give you an example of what I’m talking about. A couple we know has over $50,000 in the bank, yet they insist on having a deductible of $500. They could save a lot of money by being a little less risk averse.

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Not shopping around. As we’ve said, this is a major expense. Like most major expenses, it’s worth your time to try to save some money. So get two, or even better three, quotes.

Make sure you’re comparing apples-to-apples. The plans from two different insurance companies probably won’t be exactly alike.

Settling in. Shop carriers at least every other year. You may be surprised at how much you can save by switching plans.

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This is something I learned the hard way. I liked my insurance company, but when I finally shopped coverage, I was astounded at how much I could save.

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This really boils down to personal preferences. It’s nice to only pay a small amount of money when you go to the doctor. But make sure you’re weighing that convenience against the actual cost.

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The key question to ask yourself is, “How much risk can I afford?

The general rule, in a financial sense, is to assume risks that are small, frequent, and inexpensive. You cover large, infrequent and expensive costs.

But also consider the emotional costs. If it’s going to keep you up at night knowing that you’re bearing a larger share of the burden, then push more risk off on the insurance company.

Think about the impact on your finances and your personal preferences to help you make this bigg decision.

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Please join us next time when we talk about bright, shiny objects.

Thanks so much for reading our post today. Until next time, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

Subscribe to the Bigg Success feed.

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00386-050409.mp3

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Savers Spenders and Investors

(Image in today's post by forwardcom)

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Cash to a business is like blood to our bodies. It has to continue flowing or we won’t survive. As a small business owner, the bottom line is that you can’t run out of cash. So you have to know how to diagnose and treat the source of the ailment before it spreads. With that in mind, here are ten signs that your business may be heading for trouble:

#1 – Lost market share

Your sales may be growing, but your share of the market may be falling. Are they up because you’ve increased prices? Is the growth of your sales keeping pace with the growth of the markets you serve?

Market share is precious – among other things, it provides leverage to raise prices as your costs increase. As competitors enter your market, you have to work even harder to maintain (and hopefully increase) your share.

#2 – Declining customer counts

Your sales may be holding steady, but fewer and fewer people are making purchases. Your remaining customers are spending more, possibly because of price increases. There’s nothing wrong with that, but you have to find a way to attract new customers because a certain amount of customer attrition is natural.

We don’t want our customers to leave because they’re unhappy. But you can’t make everyone happy all the time so even that will happen. We’ll also have customers move away, pass away, grow out of our product or service, and the like.

#3 – Low repeat and referral business

Many businesses actually lose money to get a customer for the first-time. If they break-even, they’re very happy. It’s the follow-up purchases that make a difference to our bottom line.

A healthy percentage of repeat and referral business also shows that your product or service is still meeting the needs of a core base of people. And these people are the ones who will refer other people to you, which is much less expensive than depending totally on advertising to grow your business.

#4 – Declining sales

Right now, a lot of businesses are experiencing this. It may have nothing to do with you – it may be your industry that is experiencing trouble. So you have to ask yourself … is this a long-term trend or is it cyclical? That’s the first thing you have to determine.

Next, ask yourself, will my industry recover? Some industries were facing challenges even before this recession. It’s only accelerating the long-term trend. Other industries will do just fine coming out of it. You have to know which one applies to you.

Once you’re satisfied that your industry will survive, you have to look at your own business. A lot of shake-out is happening even in healthy industries. Isolate whether it’s a problem with your business or the industry as a whole to know your best strategy.

#5 – Disproportionate sales to a small group of customers

Picture this extreme situation – all of your sales come from one customer. You’re totally at the mercy of that customer. It’s like being an employee without the safeguards that go with employment!

Generally speaking, if more than ten percent of your sales are to one customer, you may face trouble at some point. Five percent is even better. Bigg customers are great. But serving a bigg number of customers leads to bigg success.

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Thank you for reading our post today. Join us next time when we talk about five more early warning signs of trouble ahead in your business. Until then, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

Subscribe to the Bigg Success feed.

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00348-031109.mp3

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(Image in today's post by asifthebes)

That creates an opportunity.

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So we’re putting a 180 degree spin on the old advertising slogan – buy now, pay later. This year, we moved to buy now, pay now. Let’s just take one more step – pay now, buy later.

Old ideas, new popularity

The old idea of “layaway” was used more this year than it had been for some time. K-Mart even built an ad campaign around it. It’s not as easy for retailers to administer as buy now, pay later programs – like when you use your credit card – but in today’s economy they’re just happy to make any sale.

Another old idea is also seeing newfound interest – the Christmas Club. Your parents may have done it; your grandparents almost certainly did.

The Christmas Clubs of old didn’t pay a lot of interest and they carried restrictive rules about early withdrawal. Good for those not disciplined enough to leave it alone. Not desirable should a true emergency arise.

Create-your-own Christmas Club

But you don’t need a Christmas Club Account to fund next year’s Christmas presents. You can create your own – probably using a Money Market Account or a Money Market Fund.

Assume that you plan to spend $2,000 next year for Christmas presents. Right now, you could find a Money Market Account that pays around 2 percent, according to bankrate.com. 

If you were to invest $220 every month, starting in January, you would have your $2,000 by the end of September. Get ready to shop in October, with cash in hand!

You won’t earn much interest because rates are so low right now. But look at it this way – you won’t be paying interest on next year’s Christmas presents either!

Your Club Account … not just for Christmas anymore

A Christmas Club Account is just a fund dedicated for a specific purpose. You can extend this concept beyond Christmas. What if you …

• funded next year’s property taxes in advance? It’s your own escrow account!

• set money aside to pay your insurance annually so you get a better discount?
• paid for your next vacation a little bit at a time before you go? Talk about stress relief!

Getting a kicker

You can do this for any, and every, major obligation or opportunity you have. And here’s the kicker …

For major expenses that are several years away, you can set money aside in an account that may pay higher interest.

Generally speaking, the longer you can wait to get your money back, the higher the rate of interest you’ll earn. For example, if you’re funding a car purchase three years away, you may be able to put money in a 3-year CD.

The key is to match your investment time frame to when you will need the money for the obligation or opportunity.

One caveat

Of course, if you have outstanding debt, especially credit card debt, you’ll probably want to pay that off before you start funding other obligations – even if that means postponing, or cutting back, on discretionary expenses like a vacation.

We got used to easy credit – buy now and pay later with interest. We suggest paying now and earning some interest so when you buy later you’re money ahead!

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Thanks so much for reading our post today. Join us next time when we ask three questions that lead to a brighter future. Until then, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

Subscribe to the Bigg Success feed.

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00296-122908.mp3

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(Image in today's post by kiss kiss bang bang, CC 2.0)

Now we’re trying to slow down our spending and find ways to save money. Today, we want to discuss a new way to think about your purchasing decisions.

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Getting to the numbers

The Bureau of Labor Statistics (BLS) tracks many things, including consumer finances. From their most recent study, we calculated how much the average wage earner makes a year.

We then did some more research to determine how much vacation we take and how many hours a week we work, on average. From all this data, we determined that the average earner made $19.38 per hour before taxes.

Next we looked at spending by category, according to the BLS study. We divided that amount by the $19.38 an hour to determine how long we have to work to pay for what we buy.

The numbers

The average American wage earner works for almost a month to pay for entertainment and dining out.

We work about a week and two days to pay for our vacation. Think about that – we spend more time working for our vacations then we spend on them!

And since we’re nearing that time of year where we’re all feeling extra generous, we also found that we spend a full week working to pay for Christmas presents.

There’s power in this tool for you

It may be useful to think about past spending decisions, but the power of this tool comes in helping you make decisions now.

For example, say you’re the average wage earner thinking about purchasing a LCD HDTV. It would cost you around $600. You would have to work two-and-a-half days to pay for that TV.

Is it worth it to you?

A bigger house

We recently saw that the median price for a house is $200,500. You would have to work two months and a week every year to make your mortgage payment on that house.

You may not be thinking about a bigger house now. But let’s say the day comes when you decide you’d like to stretch a little. The median priced house was requiring 19% of your income; you think you could handle 25%. Now you’ll have to work three months out of every year to pay the mortgage on this bigger house.

Is it worth it to you to work three extra weeks every year just to pay your mortgage? Is there anything else you would rather buy with your hard work?

The formula

So far we’ve talked about averages, but they don’t really matter. What matters is how much you make per hour. Here’s how to calculate it:

Your pay cycle may not be a week, but you can adjust accordingly. The BLS statistics look at before-tax income. Ideally, you’ll look at disposable income – after all taxes have been paid – since that’s the only money you have available to spend.

As salaried employees, we often don’t fully track how much time we work. You may have to track it for a week or two. If you really want the full picture, include your commuting time and any other job-related time.

Invisible expenses

Don’t just think about your major purchases. Consider your invisible expenses – those frequent small purchases that can really add up over the course of the year.

For example, say you spend $5 every day on lunch. Over the course of the year, that would add to $1,275 (assuming one week’s vacation). The average earner would have to work 66 hours to pay for this.

Is it worth it?

You might look at that and decide that it’s not. You start packing a lunch which only costs you $1. Now you would only have to work thirteen hours a year to pay for your lunches.

That’s 53 hours of work that could be spent on something else!

How about a nicer vacation, starting that emergency fund, or paying off the debt that’s keeping you up at night?

So frame your expenditures by the number of hours you have to work to pay for them. Then ask yourself if it’s worth it. It’s a great way to prioritize your spending.

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Thanks for visiting us today. Come back next time when we discuss why you can’t have it all, but you can have all you really want. Until then, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

Subscribe to the Bigg Success feed.

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00276-120108.mp3

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(Image by House Of Sims, CC 2.0)