Getting Your Budget to Balance – Part 1

You’ve finished entering in your current income and spending into your shiny new budget. Congratulations! Unless, like most folks, you have more spending than you do income, in which case, congratulations! You’ve identified the problem, and now we can get to work.

Start with Expenses

Many people are tempted to start by asking the question “How can I make more money?” If there is an easy answer – ask for a raise and get it, for example – that’s great! But if making more money means getting a second or a third job, you’re looking at committing to spending more of your life working for someone else. There’s nothing wrong with that if it’s the right choice for you, and we’re going to look at those possibilities for sure. But we don’t want to live only to work.
So let’s start with expenses first, and see if we can’t make our financial life balance and achieve our goals by cutting back what we spend.

Look at Big Items First

The bigger the outgo, the bigger the potential gain you can realize by making adjustments. Since your housing expense is almost certainly your biggest expense, let’s start there.

Rent
We will also always start with the lowest-hanging fruit. If you are a renter, go to your landlord and ask if they are willing to lower your rent for a period of time. Explain that you have made a decision to create a better financial life and that you have a plan to pay off debt and build up a savings account. Will this work? Not every time, but it will in a surprising number of cases. You don’t have to move (with the associated expense and hassle) and your landlord will respect you for being honest and trying to better yourself.

If that doesn’t work the next step – if it’s a possibility for you – is to get a housemate. As an adult we’d love to live alone, but as an adult we also have to pay our bills. Having a housemate is not something to be ashamed of. It doesn’t represent today’s failure; It represents tomorrow’s success. And, once again you don’t have to move.

If the first two strategies don’t work out or aren’t enough, it’s time to move. Moving is a hassle and is expensive, so don’t move for a small improvement in your housing expense; make it count. You might have to live in a smaller apartment, or in an older place, or further from town, but the monthly savings potential is huge, and that will afford you anything you want in the future.

Mortgage
If you own your home that’s a different story. The first place to look, obviously, is your mortgage payment. If your interest rate is too high, then it’s time to look into refinancing, if you can qualify. Find a reputable mortgage broker – preferably one that comes recommended by someone you trust – to help you sort out your options.

Even if your interest rate is decent but your payment is too high, you might be able to lower your payment by refinancing and extending your term. Beware, however. Extending your term adds years to your loan, and in the long run might cost you more in interest than just keeping your current loan. But if it solves immediate problems you can always accelerate your payments in a year or two (or three) and get back on track for paying your loan off in the same time frame. If you use the savings from the lower payment to retire high-interest credit card debt you will probably save a great deal of money in the long run.

If you have two loans on your property, then consolidating those two loans might save you quite a bit of money each month. Be aware of the same caution as above, however. Extending your term can add thousands of dollars of cost over your lifetime to the financing. If you do this, have a plan to accelerate this debt when your higher-interest debt is paid off.

Property Taxes
Your property taxes are usually the next-highest bill. It’s very unlikely you can do anything about that, unless you feel your county assessor has unfairly assessed your property. Every county allows for an appeals process, where you can appeal the assessment to get it lowered. It often works. You just have to have solid market data to back up your claim. Check with your county assessor to find out about the process and forms.

Mortgage Insurance
If you have mortgage insurance you might be able to get rid of it. The Homeowners Protection Act of 1999 requires lenders to automatically terminate your mortgage insurance once your loan balance falls below 78% of the original purchase price or the appraised value at the time the loan was originated.

It also requires that lenders to cancel mortgage insurance once your mortgage balance is less than 80% of your current value based on a new appraisal made by the lender (but paid for by you.)

The important distinction is that termination is automatic – you should not have to do anything to make it happen – and cancellation must be requested.

If your principal balance is very close to the termination point you could just pay down the balance to that point (if you have the cash) and notify the lender in case they miss it. (They might; they probably have your loan flagged for when the loan is scheduled to go below 78%, so if it goes down below 78% by acceleration they may not catch it.)

If your balance isn’t close to the termination point but your home has appreciated in value, then you’ll have to contact the lender to request the cancellation. First, check with local real estate agents or online valuation tools to be sure that your property’s value is as high as you think. If they confirm that is, and your principal balance is below 80% of your home’s current value, then contact the lender.

They will charge you an appraisal fee to document the current value. The price of appraisals varies by region and property type, but in many cases you would make that back within a few months once your mortgage insurance is cancelled.

Homeowners Insurance
If you can’t get rid of mortgage insurance, then homeowner’s insurance is probably your last opportunity in this category to save money. Because it is a relatively small expense – compared to mortgage, property taxes and mortgage insurance – your opportunity to save is limited, but you can still shave some costs here and there.

Call your insurance agent and let them know you want to get your premium down. Have them go through your coverage line item by line item to look for ways to do that. Your deductible is a good place to start; most people have far too low a deductible. If you have absolutely no reserve funds at all you might want to stay with the low deductible, but otherwise look at what raising your deductible will do for you.

Next look at coverage. Sometimes folks are sold into huge coverage when it’s not really needed. What is the likelihood someone will sue you for millions of dollars if they trip and fall on your property? Most of the time liability claims end up going for whatever your maximum coverage is. Discuss your risk factors with your insurance agent, and reduce your coverage where you both agree it’s prudent.

Coverage for personal contents is often also set way too high. Is your stuff really worth that much? If your house burns down regardless of what it would cost to replace it most policies only cover what it is worth today – depreciated from use. Having coverage that vastly exceeds what your personal property is worth doesn’t buy you anything. Ask your agent to discuss this with you and again, reduce it where you both agree it’s prudent.

If your agent isn’t cooperative at least you will have learned a lot about what coverage you have and what coverage you need. Armed with this information, now go shopping for comparison quotes. The cheapest quote may not always be the best; be sure to check the reputation of the insurance company. Do they pay their claims as promised? Will they cancel your policy after a single incidence? If so, move on to the next one.

Sara Colley, Staff Writer
Financial Help Desk