Is Paying Extra on Your Mortgage Always a Good Idea?

Is Paying Extra on Your Monthly Mortgage Always a Good Idea?

As Americans become more conscious about the damage debt can do to their finances, there’s always a question of whether it makes sense to pay down first mortgages and home equity lines so they can direct more money to retirement or other goals.

Like so many questions in financial planning, the initial answer is always the same: It depends on your individual financial circumstances and goals. Enlisting the help of a qualified financial planner is a good first step because they have the tools to look over your entire financial situation – your overall debt, your household budgetary needs and your long-term financial objectives including retirement. From there, you can establish a plan to follow that fits you.

Here are some general questions you should ask first:

Why do you think paying off this particular debt is a good idea? Most of us would love to pay off a mortgage, but is it really a good idea for you at this time based on all your financial priorities? It might make you sleep better at night, but could it have an adverse effect on your tax situation because you would lose the ability to deduct the interest? Also, are there other obligations that should be addressed first? Do you have a plan for what you’d do with the money you’d save if you were finally free and clear of all debt? Owning a home free and clear is an attractive idea, but it’s important to fully understand what this decision would mean for you.

Do you have a budget? Until you understand what you’re spending – and what you can cut – you’ll have no idea how to address this or any other financial issue. Work independently or with a planner to track your spending down to the penny and then plan your attack for spending, investing and savings issues from that point on. Basic budgeting tools are online – Mint.com is a good free resource. Generally, budgets are built this way:

•          Set a time period (one or two months, just to get a baseline) of how long you will track every penny you spend.

•          Review those results and determine which expenses are mandatory and optional.

•          Once the optional expenses are identified, make cuts and determine where those savings will go – in most cases, that extra money needs to go toward higher-rate debt first, then eventually towards savings.

•          Put the finalized budget in writing and check performance every month. At the one-year mark, re-evaluate and reset the budget, and then repeat the process.

How’s your “bad” debt? During the economic downturn, many Americans have struggled with large balances in credit card debt as well as car loans and other borrowings where they’re paying interest they can’t deduct. Unless you’re paying more than the minimum, these are the toughest obligations to get rid of. Most planners advise you attack the highest-rate balances first and work your way down. First, get some face-to-face advice on the debt issues directly in front of you.

What about advice? As mentioned, a financial planner takes a global view of all your spending, saving, investing and tax issues. Tax and estate experts are also good people to have in your corner. Before you make a move to erase mortgage debt, make a phone call or visit and see what they think first.

What about savings? One of the problems with going it alone on financial planning is the “40-car pileup” effect. There are so many problems to solve, with little idea about the order in which they should be solved. If you have an attractive retirement plan at work – one that matches all or part of your contributions – keep that going. It’s also important to build some form of emergency fund. But generally, attack your most detrimental debt first and then based on your time to retirement or reaching other goals, then you can make a clearer path.

Do you really need that property? As people lose sleep over mortgage debt and other financial worries, people rarely ask whether they actually need such a big house, an expensive car or other possessions that lead to debt concerns. These are questions that are as individual as you are. Enlisting the help of a qualified financial planner shouldn’t be all about solving problems and addressing emergencies. Financial experts can help you set a worry-free lifestyle that makes sense for you.

November 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by  James P. Ellman, ChFC and Barry Mendelson, CFP,  local members of FPA.

Ways to Control What You’ll Spend on a Funeral

It doesn’t matter whether a loved one dies suddenly or with warning – funeral costs can be daunting. According to the National Funeral Directors Association, which bills itself as the world’s leading funeral service association, the average cost of an adult funeral in 2010 stood at $7,755, and that amount doesn’t include the price of a gravesite, monuments or flowers – not even the cost of an obituary.

As with most money issues, planning almost always saves money. But particularly with the subject of death, planning can reduce or eliminate a huge source of worry, anguish and conflict among loved ones. So while death is never easy to talk about, it makes considerable financial and personal sense to talk about funeral issues with loved ones before anyone actually needs to. Here are some key questions to ask:

What do you and your loved ones really want? It makes sense to talk with your parents, your spouse or partner or your children about what your wishes and theirs are for your funeral. Of course, many people ask this question without any real warning and deservedly get an answer with a dismissive wave or a flippant remark. But this needs to be a real conversation. There’s real value in talking about exact wishes and even more value in putting those thoughts on paper for formal inclusion with wills and powers of attorney (more on that below). There are many interlocking issues that come into play in this discussion – religion, relationships, and of course, money. Whether the discussion is face-to-face or within a family meeting, detailed discussion and note-taking is the first important step to making sure your wishes or the wishes of a loved one are recorded and followed.

Consider the alternatives: One of the biggest stories in the funeral industry in the last 25 years has been the growth in cremation as a more affordable and acceptable alternative to traditional burial. On average, cremation can cut the price of a traditional funeral by half or more. According to the Cremation Association of North America (CANA), in 1985, nearly 15 percent of deaths resulted in cremation, but by 2007, that number stood at 34.3 percent. By 2025, CANA expects cremations to reach more than half of all funeral services performed. Also, many individuals now consider donating their bodies to science for the study of disease or organ donation, often at little or no cost whatsoever. This allows friends and families to focus spending on a memorial or other financial needs. To investigate this option, the official terminology is “willed body program,” and many universities with medical schools have them.

Do a cost comparison: It’s not the easiest decision, but if it’s your funeral or the funeral for a loved one, it makes sense to plan ahead and to shop smart. A trusted funeral director will follow state guidelines on price lists and answer your questions thoughtfully. Keep in mind that many states do not require you to buy big-ticket items like coffins from the funeral director, and in some cases, expensive processes like embalming are not even required. It makes sense to visit the website of whatever state agency supervises funeral directors where you live to get an overview of what you may or may not be required to pay for at a funeral home and other alternatives that might save you money. You will also have an outlet for any complaints should they arise. Another good resource is the U.S. Federal Trade Commission’s website  which describes the 1984 Funeral Rule that has defined disclosure, pricing and other consumer rights in the funeral industry for the past three decades.

Make funeral planning part of overall end-of-life planning: Whether death comes suddenly or after an extended disability or illness, adults of any age should have proper asset planning and documents in place designating their wishes for their estate, their families and yes, the way they want to say goodbye. It makes sense to consult an expert financial planning professional as well as tax and estate experts to coordinate both financial and end-of-life planning in a way that fits the individual. Commonly, that means having finances in place and a legally written will and specific health, financial and family directives exist to guide survivors through the funeral and beyond.

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November 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Ellman, ChFC and Barry Mendelson, CFP® , local members of the FPA.