August 2019

Our giving causes others to give praise and thanksgiving to God.

When you give to people in need, God takes notice.

Charity is the hallmark of true faith.

Charity is meaningless if it isn’t driven by a heart of love.

Why is it that our friends’ life events cost us so much money?

If you’ve made it to your mid-20s, you undoubtedly know what I’m talking about. Your friends have begun to get married, and you’ve discovered that their weddings are expensive affairs… for you! And if you’ve hit 30, you probably know that as those same friends have children, social giving pressure is going to cost you even more.

Whether it’s the $25-$50 you might spend on a gift, the hundreds of dollars it will cost you to participate in a wedding or the innumerable expenses and hassles of hosting a bridal or baby shower, you’re going to find yourself shelling out a lot of cash to celebrate with people. Sometimes, these events and their expenses come with social obligations that put us in awkward situations, especially if money is tight.

Your friends and their life events could wreck your budget if you let them… but you don’t have to. Here are five ways to guard yourself against runaway costs of social obligations.

1) Budget for giving.

Your budget is your best tool for keeping your finances in good order, and the more detailed your budget is, the better it will work. Your first defense against runaway gift expenses, then, is to put gift-giving in your annual budget.

A good budget plan should have a line-item for gifts. This can include birthday gifts and other regular gifts for friends and family members that come up every year. But in addition to this, you need to budget a lot of extra money for the wedding and baby gifts that you’ll be giving in the next year or so, even if you’re not sure exactly what they will be or when.

How much should you budget for gifts? That’s going to depend a lot on your income and your social circumstances. But if you have an active social life and a lot of friends, $300 is probably a good place to start.

2) Budget for travel.

If you have moved away from your hometown — or if you have close friends or family members that now live far away — there’s a good chance that you may need to travel to attend weddings, showers, births and other special occasions. In order to do this well, you need to budget for it ahead of time, just like you budget for gift-giving.

Everyone should have some amount of money budgeted for travel every year, whether that’s to attend a church conference or retreat, go home for the holidays or take your family on a nice vacation. But if you anticipate making trips to be part of special life events, you need to allocate more money in this area of your budget than normal — maybe a lot more.

Having a robust travel budget available to you will help take the sting out of making trips to be there for your friends and their happy occasions.

3) Anticipate and prepare.

If you’re close enough to someone that you feel obligated to attend their important events, you’re probably close enough to them to see these events coming before they actually happen. Anticipating weddings, births and other celebrations ahead of time will help you prepare for their associated costs.

If you have a friend whose dating relationship has taken a serious turn, you can probably anticipate that an engagement or marriage may be coming up in the next year or so. And if you think you may be asked to be part of the wedding party, you should start saving money now for your dress, tuxedo or other wedding expenses. This is especially important for expenses that aren’t in your regular budget.

The same thing holds true for babies: If you know that your friends are trying to have children, you should consider saving now for the money you’ll need to host a shower, buy a gift or travel to meet the new children.

4) Be honest.

No matter how strategic you are in budgeting your money and planning ahead for special occasions, there’s likely to be a time when a friend takes you by surprise and brings up something that you genuinely can’t afford. These can be some of the most awkward and difficult social situations you ever encounter. When they do come up, honesty is the best policy.

When your friend is throwing a celebration that you just can’t afford to participate in, the best and most loving thing you can do is to honestly explain to them why you won’t be able to make it. You’re sorry, but you just don’t have the money to travel to Mexico for their destination wedding. You’d love to be in the wedding party, but money is tight and you can’t afford the tuxedo rental. You wish you could celebrate the bachelor or bachelorette party with them, but you don’t have the funds for a night on the town.

Granted, a sensitive friend probably shouldn’t be putting you in this situation anyway, but sometimes they do. It will be a tough conversation when you explain why you can’t afford to participate. But it will be much better than mysteriously avoiding the occasion because you’re tight on cash, or wrecking your budget to attend and then feeling stressed and guilty about it the whole time.

5) Find creative alternatives.

When you do have to bow out of an event for financial reasons, one of the ways to do it gracefully is to find a creative, alternative way to celebrate with your friend. This tells them that you still care about them and are committed to sharing in their joy.

If you can’t afford to play a big role in someone’s wedding, perhaps you can afford to have the couple over for a dinner after they return from their honeymoon. If you can’t afford to buy a baby gift, you could arrange to take dinner to the couple once they’re back from the hospital, or volunteer to come over and help with household chores in those early weeks of parenthood. If store-bought gifts are too expensive, find a way to give thoughtful, homemade items instead.

Social obligations are never a good excuse for making poor financial choices. Good budgeting, strategic planning, honest conversations and creative thinking will help you maintain important relationships while also maintaining your financial health.

——

Photo by Julian Wylegly. Used under Creative Commons License.

Tags:awkward baby birth Christian finance gift marriage money obligation party personal finance shower travel wedding

Borrowing money to get ahead is like building a tower that’s destined to collapse.

Debt increases the risk of real estate investing to unacceptable levels.

Five radical ways to get a leg-up in your fight against debt.

These five habits will help you get out of debt and keep you from ever going back.

In retrospect, we should have seen it coming: The increasingly outlandish practices in the mortgage industry were bound to create trouble for all of us. It was only a matter of time.

Unless you’ve been living under a rock since 2008, you know that large failures in the banking industry caused a giant economic ripple effect that has created one of the greatest recessions of modern times. The trouble started brewing in 2007, and came to a dramatic head in the fall of 2008. And though there have been signs of recovery in the last year or two, economies in America and around the world are still struggling to bounce back from a perfect storm of trouble that has left millions unemployed and millions more deeply in debt.

It didn’t have to be this way, of course. If mortgage banks had stuck with their tried-and-true lending standards over the last 20 years, we wouldn’t be having this conversation. But banks made a lot of mistakes, and so did individual home buyers. If you’re in the market for a new house, this is a great time to learn from those mistakes.

So how did this all happen? Well, it’s a very complicated story (although there are many online resources that give wonderful explanations of it). For our purposes, though, a short version will do:

In the 1990s, the federal government created policies that encouraged banks to give mortgage loans to people that would not qualify for them under traditional standards. The banks made those loans, but did them at higher interest rates to offset their increased risk. The late ’90s were a period of unprecedented prosperity in America, so most of the people who took out these loans were able to pay them back. The banks made a lot of money on these high-interest loans, and the bankers began to see opportunities for big profit.

In the early 2000s, bankers began to get more aggressive with their mortgage lending, giving loans to people who had poor credit or no credit. These were called “sub-prime” loans because the borrowers weren’t well qualified, and they came at very high interest rates. The banks made huge profits, and a vicious cycle began: Driven by greed, the bankers created more and more ways to put people into exotic sub-prime mortgages. More and more people took them, and the bank profits continued to climb.

During this time, the housing market took off, driven by the availability of all of these loans. In some markets, homes were doubling in value every year. People took out exotic mortgages, hoping to buy expensive homes and then quickly sell them for a big profit. It was a perfect “bubble,” and it eventually popped.

By 2006 and 2007, the tide began to turn. People were so deep in sub-prime mortgage debt that they could no longer make their payments, and banks began to foreclose on homes. Though it started slowly, it soon became an epidemic. Banks were losing billions of dollars on these bad mortgages that they had made, and millions of Americans were losing their homes. And it hit investors too — many of those bad mortgages had been packaged into lucrative investment products. So when things began to unravel, banks, homeowners and investors all lost untold fortunes. It came to a head in 2008, when the stock market crashed and several large investment banks collapsed.

That’s an interesting history lesson, but what does it have to do with you? Well, if you’re in the market for a house, you can learn a lot from the sub-prime fiasco. Banks and home buyers made several key mistakes during that period. If you mortgage with discipline, you can avoid those mistakes, and keep your home and financial health on solid ground. Here are some of the biggest lessons to learn:

1) Don’t borrow what the bank says you can afford.

During the sub-prime era, banks were lending home buyers much more money than they should have. A borrower would come into a bank, and the lender would offer him a much bigger mortgage than he could actually afford. That got some people into some pretty big houses… and some pretty big messes. Do yourself a favor: Determine ahead of time how much you can really afford to borrow, and then work out a mortgage that keeps your payments low.

2) Don’t borrow on exotic terms.

Many of the sub-prime mortgage buyers didn’t qualify for traditional (or “conforming”) loans, so bankers created exotic mortgage products that would accommodate them. These included adjustable-rate mortgages, interest-only loans and balloon payments — strategies that kept payments artificially low, while making a killing for the bank. When the bubble popped, people with these exotic mortgages were the first to lose their homes. Steer clear of this when you buy a home: Use only fixed-rate mortgages, and borrow on 15-year terms to save yourself a lot of money.

3) Never borrow more than 80%.

Traditionally, banks have required homeowners to have a cash down payment equaling 20% of a home’s value in order to get a mortgage. In the sub-prime era, though, these rules went out the window. Banks lowered that requirement until many people were buying homes with no cash down at all. But this was a costly mistake: Those folks paid a lot of extra money in private mortgage insurance, and when housing prices fell, they found themselves underwater, owing more on the mortgage than the house was worth. in order to avoid this predicament, go back to those tried and true methods. Always bring a 20% down payment when you buy a house.

There’s a lot more to be learned from the economic mess we’re in right now, and if that interests you, there are many places to start your studies. For home buyers, though, the most important lesson is this: Borrowing more than you can afford for a big house that you don’t really need brings nothing but trouble.

——

Photo by Rick Seidel. Used under Creative Commons License.

Tags:2008 bank borrower collapse home homeowner lender loan money mortgage sub-prime

What would it cost to replace your entire home — and all of the contents inside it — if you were to lose it in a natural disaster?

No matter how fancy or modest your home is, the amount of money that it would cost to replace it probably adds up to a staggering amount. And even if you don’t own a home, replacing the contents of your apartment or rental house in the case of a disaster would cost tens of thousands of dollars. Unless you’re in the unusual position of having a six-figure savings account, you probably don’t have the resources to cover the cost of a home catastrophe on your own.

That’s where homeowners and renters insurance comes into play.

In this series, Understanding Insurance, we’ve been talking about the important role that insurance plays in securing our finances by helping to offset the risk that is inherent in life. We’ve looked at many of the common types of insurance that are important, including auto insurance, health insurance, life insurance and long-term care insurance. Today, we’re going to examine the benefits of carrying policies that protect your home and its contents in the case of a disaster.

Understanding the risks

The safety and stability of our homes is something that we take for granted today, but it hasn’t always been that way. Historically, fire claimed homes around the country with surprising frequency. And although modern construction materials and safety mechanisms have greatly reduced the risk of house fires, disaster still happen from time to time. One electrical malfunction or cooking mishap can send your home up in flames, destroying all of your material goods along with it.

Fire isn’t the only risk to your home. Natural disasters and other weather events can damage or destroy your property as well. Big events such as hurricanes, tornadoes and earthquakes grab the most headlines, but smaller storms and floods can do extensive damage to homes as well. In my hometown, a hailstorm a few years back did an incredible amount of damage, causing home owners all over the city to replace their roofs. Those that had good homeowners insurance were able to repair the damage at minimal personal expense.

The point of homeowners or renters insurance is to protect you and your family financially in case a disaster like this damages or destroys your home and possessions. Since you probably don’t have the cash on hand to pay for a new house and new stuff outright, you pay a small monthly fee for insurance that will reimburse you for the repair or replacement of your home and its contents in the event of a misfortune.

Required for homeowners

If you own a home, you’ve likely already bought homeowners insurance, because your mortgage lender requires you to carry insurance on your property. Your lender has a lot of money invested in your home, and they want some assurance that if something destroys your home, their money isn’t going to go up in a puff of smoke. So they ask you to get homeowners insurance before finalizing a loan. They may even collect that insurance premium as part of your monthly mortgage payment and then send it in to the insurance company — that way they can be certain that the insurance on the house is up-to-date.

This means that if you lose your house in a disaster, the first check that the insurance company writes won’t be to you, but to the bank. If you lose a home with a $150,000 policy, and your mortgage balance is $100,000, the insurance company will pay the bank $100,000 and then give the remaining $50,000 to you.

Homeowners insurance isn’t quite as simple as determining the value of your home and then writing a policy for that amount, however. A good insurance agent will help you take many things into account when drafting your policy. For example, they don’t just look at the market value of your home; instead they examine what it would cost to completely rebuild the same house with current materials and construction costs. That usually comes out to more than the value of the house — so the base coverage on your $150,000 house may start at $175,000.

In addition to the replacement coverage, good homeowners insurance will also take into account the value of the stuff inside your home. You may not think that you have very many valuable belongings — no expensive jewelry, electronics or antiques, for example — but the value of all of your everyday goods still adds up very quickly. The cost of replacing simple things, like your clothes, dishes and furniture, is probably $10,000 or more. These costs are also factored into your homeowners policy as well.

What if you rent?

If you’re a renter, you’re not responsible for the physical premises of your apartment, condo or townhouse, but you still need good insurance. Your landlord carries insurance that will cover the cost of replacing the physical structure in case of a disaster, but that insurance doesn’t extend to you or any of your belongings. If your apartment burns down in a fire, and you don’t have insurance, nobody is obligated to reimburse you for the value of all of your things that burned up in the fire.

Renters insurance changes all that. This is an insurance that you carry to cover the value of your stuff. If you have renters insurance and the building you live in burns down, your insurance company is going to reimburse you for your losses. This makes renters insurance pretty important. Unlike homeowners, who are required by their banks to carry insurance, nobody forces tenants to have renters insurance. But that doesn’t mean you can afford to go without it.

Of course, both renters and homeowners insurance are rather intricate insurance products, and there is much more that goes into them than we can cover here. The important thing to know is that this stuff is really important, and it’s critical to make wise decisions when buying these policies.

You should educate yourself about the basics of these insurances before you go shopping, and work with an insurance agent you trust who will take the time to dig into the details of your situation to find the best insurance for you. And it’s a good idea to revisit your insurance situation every 4-5 years: As life situations change, you may find yourself over- or under-insured, or discover that you could save significant money on your insurance by getting new quotes on the coverage.

Whatever you do, don’t ignore this important component of your insurance life. Because if disaster strikes your home, you can’t afford to be left out in the cold.

——

Photo by dvs. Used under Creative Commons License. 

Tags:apartment Christian finance disaster fire flood home homeowner’s insurance house hurricane insurance money personal finance renters insurance tornado