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Should I Pay Down My Mortgage or Make Home Improvements

bigg_question.jpgBigg success is life on your own terms. The five elements of bigg success are money, time, growth, work and play. Today our focus will be on money.

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 Remodeling the kitchen or bath can yield a reasonable return, particularly if they look a little outdated, as long as you don’t go over-the-top.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!

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

Related posts

9 Questions to Answer Before You Make Extra Mortgage Payments

Are You Throwing Money Away by Owning Your Home?

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Finding a Job After an Extended Time Off

bigg-challenge.jpgKathryn called us on the Bigg phone. Not the Bat phone … we don’t live in a cave!

She said that life on her own terms meant staying home with her two boys until they were both old enough to be in school all day. They’ve reached that point so she wants to return to the workforce. Besides that, she and her husband are looking forward to having some extra money available.

She says she has been checking classified ads and the job boards just about every day. Unfortunately, she’s not seeing many jobs that she’s both interested in and qualified for.

She’s applied for several jobs and had a couple of interviews which she doesn’t feel went so well. She thinks that the eight years she’s been out of the workforce may be hurting her chances. She asked us for our suggestions.

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It’s who you know

Keep in mind that we’re facing a tough job market right now, so you’re not alone in your frustration. One thing to add to your efforts is reaching out to your network. It’s something that a lot of people overlook or don’t place enough value on.

Start by making a list of everyone you know. Then start contacting them. You may start with an e-mail, but try to meet them in person or at least catch up with a phone call.

Be yourself, but make sure you tell them what you’re up to. Also find out what they’ve been doing. You never know … something they say may spark an opportunity for you.

Ideally, you’ll get a referral as a result of this conversation. However, don’t be disappointed if that doesn’t happen. You got to spend some time with a friend or got to know an acquaintance better. They can keep their eyes and ears open for an opportunity for you.

Follow-up, follow-up, follow-up

Be sure to follow up after your meeting or phone call. Let them know how much you enjoyed seeing them. Help with any challenges they may have brought up if you can. If you can help them, they’ll probably go out of their way to help you!

Keep in touch with them. If you see an article they may be interested in, share it with them. If you see a great deal on something you know they like, let them know about it.

The bottom line is: follow-up, follow-up, follow-up.

Interviewing

In her message, Kathryn said she’s had some difficult questions in her interviews. For example, one woman asked her if she thought she’d be able to get to work on time even with her two kids.

Of course, that’s an illegal question, which you have every right to point out, Kathryn. However, you’re probably better off emphasizing that you’ve always been punctual if that’s the case. For instance, we bet you were on time for the interview. Point that out!

The job you’ve been doing

You’ve been a full-time manager for the last eight years. You just haven’t been getting paid directly for it in cash. Don’t underestimate the skills you’ve learned.

Stress what you’ve done and what your strengths are. Bring the skills you’ve learned out in your answers. Have specific examples ready. These will depend on the job you’re seeking. Some examples:

Do you keep your family’s schedule or oversee the finances?

Have you coordinated a remodeling project?

Think about it. You’ll quickly see that you gained a lot of valuable experience.

Preparation

There’s a great way to prepare for interviews: role-playing. Simulate an interview by putting yourself in an environment as close to an actual interview as possible.

Get your husband to ask you questions or find a friend, preferably someone who interviews people as part of his or her job, and practice interviewing until your answers just roll off your tongue.

What suggestions do you have for Kathryn?

Please leave a comment below, call us at 888.455.BIGG or send us an e-mail at bigginfo@biggsuccess.com.

Thanks Kathryn for sharing your challenge with us. We wish you bigg success in your search efforts!

And we’re sure grateful that you checked in on us today.

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Would you like more tips and tools to live your life on your own terms?
Subscribe to the Bigg Success Weekly – it’s FREE!

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Please join us next time when we talk about why you should play more at work.

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/00369-040909.mp3

Related posts

How to Get Noticed in Job Market 2.0

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Strapped for Cash?

money-in-handA recent trend report from TrendWatching highlighted the increasing number of people who are supplementing their income with a part-time business. This report is full of resources that will help you find your opportunity for some spare cash.

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It’s no wonder that so many people are jumping on this bandwagon. We’ve seen increases in our health insurance, our property taxes, and more. It sounds like there’s more to come.

The three-income family

Isn’t it interesting, though, that just a few generations ago, most families got by on one income? Then we added a second one in the household with more and more women joining the workforce.

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marylynnI don’t think it was purely a financial decision. It was also about fulfillment for many women, but it certainly helped the family’s income.

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Now a number of people can’t get by on two incomes. They need three or maybe more. If you find yourself in this position, it may be good to ask if all the obligations are really worth it.

Is that life on your own terms – being weighted down by the cost of things you thought you wanted? With careful analysis, you may realize they’re not so important – especially if you find you can’t enjoy life because you’re working so much.

So if you feeling that you need a third income, it might pay to look at your obligations to see if there are areas where you can cut. Spending time finding ways to reduce your obligations might get you further faster than spending that same time trying to make some extra money.

This new trend is about something more important than income.

Many of us now realize more than ever how much we want to be in charge of our own lives. The TrendWatching report mentions that people fantasize about being their own boss, even if it’s just for a few hours a week.

Bigg success is life on your own terms. You’re the entrepreneur of your life whether or not you’re an entrepreneur in the traditional sense.

Some people want to be the boss all the time. According to this new report, that trend is still alive and well. But more and more people are finding ways to be the boss at least part of the time.

They have the security of a full-time job along with the freedom that being in charge gives you part of the time. Freedom with security … what a great combination!

When you find fulfilling ways to make extra money in your spare time, you’re getting synergy working in the five elements of bigg success. If you make the right moves with that extra money, you can accelerate your journey to bigg success, to life on your own terms.

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Would you like more tips and tools to live your life on your own terms?
Subscribe to the Bigg Success Weekly – it’s FREE!

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Turning $3 into a multi-billion dollar business

One way that people are making extra money is by selling their expertise. Another way is by selling, or renting, assets. One clever example of this is ParkingSpots.com, which helps people rent their extra off-street parking spaces.

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georgeI heard Michael Krasny tell his story of the founding of what became CDW. Most of us have probably done business with them. They do a great job. Back in 1982, Michael had a used computer he wanted to sell. The Chicago Sun Times was running a special on classified ads – 3 lines for 3 days for $3. He ran an ad and his phone started ringing off the hook. He realized he had a business here. He was right – within about ten years, the business he started from that classified ad became a Fortune 500 company. Michael Krasny became a multi-billionaire, recognized on the Forbes 400 as one of the richest people in the world! Now that’s bigg success!

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You never know … your idea for making a little extra money may turn into the next Fortune 500 company!

What do you do for extra money?

Share that with all of us by leaving a comment below. You never know … you might earn a little spare cash!

Thank you so much for reading our post today.

Do you think you don’t have enough spare time to make any spare cash? Please join us next time to see how one group people found the time.

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/00366-040609.mp3

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9 Questions to Answer Before You Make Extra Mortgage Payments

Bigg Challenge
One of our listeners, Randy, is considering making paying his mortgage every two weeks instead of every month so he can pay it off faster. He wants to know if this is a good idea..

Bigg Advice
We can’t give you a direct answer, Randy, but we will give you nine questions that will help you determine if you should make the extra payments.

#1 – Do you have any other debt?
Chances are your mortgage is the cheapest debt you’ll ever find, after taxes are considered. So if that’s the case, you should pay off your other debt first.

#2 – Do you have an emergency cash reserve?
The general wisdom among financial planners is that you should have somewhere between three months to a year of living expenses in an account that’s readily available.

#3 – How good is your credit rating?
The better your credit rating, the better chance you have to borrow in the future at a reasonable cost should the need arise. When you make extra payments, you’re essentially investing in an illiquid asset. So if your credit score needs some improvement, work on that first.

#4 – How do you feel about debt?

Some people don’t like having any debt at all. If you’re one of them, and if you’re happy with the answer to the first three questions, then make extra payments!

#5 – What’s your interest rate?
This question gets you ready to determine your best financial move. There are two things you need to know:

  • the interest rate on your mortgage
  • your tax bracket (i.e. how much you’ll pay in taxes on your next dollar of income, that’s called your marginal tax rate).

Multiply your interest rate by (1 – your marginal tax rate) to get your after-tax cost of interest.

#6 – How disciplined are you?

If you’re likely to just spend the extra money if you don’t make extra mortgage payments, then by all means just make extra payments. If you’re disciplined
(or set it up so you don’t have to be), then you’re ready for the next question.

#7 – When do you plan to retire?

In general, the longer you have until you retire, the more aggressive you can be. So if you plan to retire in a relatively short time, lean toward extra payments. If you have a relatively long time before you retire, you’re probably better off investing.

#8 – What could you earn if you didn’t pay off your mortgage early?
You figured out your after-tax interest cost in Question 5. That’s your cost of money. Now you’re going to look at how much you can make from your investments. That’s your projected return. If the return on your portfolio is greater than your cost of money, that’s a sign you shouldn’t make extra payments on your mortgage.

#9 – Will your current portfolio support your desired lifestyle?

If you already have enough money to keep you happy for the rest of your life, why do anything risky? Just pay off your mortgage and reduce your risk even more.

We’ve offered some general advice here. Find a certified financial planner or CPA to help you with your specific situation. 

Want to read more? Here are the
9 questions you should ask before paying off your mortgage
in more detail.

Our bigg quote today comes from Walter Savage Landor:

“We talk on principle, but we act on interest.”

But you shouldn’t pay down your principal unless it’s in your best interest.

Next time, we’ll share a love story with lessons. Until then, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

Subscribe to the Bigg Success feed.

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From Refund to Riches: How to Turn a $2,300 Refund into $723,000!

With tax day upon us here in the United States, a lot of people will get a refund soon. So today, we’ll discuss how to turn that refund into riches.

But this blog is really about “found” money – money you weren’t expecting. The average refund last year (paid in 2007 from 2006 tax returns) was $2,287, according to the IRS.

That’s a nice down payment on a plasma TV!

That’s what a lot of people do – spend their refunds on things that won’t be worth much in a few years.

Instead of that, you could save and invest it. But isn’t that’s boring?

Boring can be exciting when your money starts to compound!

How to turn your $2,300 refund into $643,000!

Say you’re 25 years old and you get a $2,300 refund every year until you retire at 65. We’ll assume that you earn 8% on that money, which may be a little conservative depending on what you invest in.

Under these assumptions, that $2,300 a year invested will turn into a nest egg of over $643,000 when you retire!

Now is that boring?

Age makes a difference. Take the previous example for a 35-year old. Your nest egg is still significant – it’s over $281,000. But by waiting just ten years to start, it will be less than half as much!

But even then, you still create a nest egg of nearly $300,000.

2 ways it can be even better

#1 – Quit loaning the government money at 0%.
That’s what you’re doing when you get a refund – you’re getting your money back, but you don’t earn any interest on it while they hold it. So redo your W-4 so you only withhold what you expect to owe.

Then you won’t get a refund, but you’ll have more money in every paycheck. But here’s the key:

You have to be disciplined enough to invest that money!

Let’s say you do that – Invest your refund check this year, adjust your W-4, and then invest the extra money that shows up in your paycheck. You’re that 25-year old we talked about earlier. Only now …

… you’ll have over $723,000, instead of $643,000. It makes an $80,000 difference!

Doesn’t that open your eyes about the “cost” of a refund?

#2 – Pay off debt that’s costing you more than 8%.

We assumed an 8% return. If you have any debt that’s costing you more than 8%, pay it off first and your returns will be even higher! Once your debt is paid off, start investing to build your nest egg.

Jake’s Take – Top 5 signs that you hired the wrong accountant

#5 – He insists on filling out your return using only Roman Numerals.

#4 – He offers to help you boost your deductions by renting you his wife and kids.

#3 – He spends most of your consultation looking nervous and asking if you're wearing a wire.
 
#2 – He does all his calculations on an Etch-a-Sketch.
 
#1 – His client list includes Leona Helmsley, John Gotti, and the Unibomber.

Our bigg quote today is a Proverb.

“Money grows on the tree of patience.”

So do you want to watch your new plasma TV or do you want to watch your money grow? The choice is yours!

Click on our Comment link below to share your thoughts 
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Next time, we’ll discuss why being imperfect is perfect. Until then, here’s to your bigg success! 

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Subscribe to The Bigg Success Show in iTunes. 

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