Nobody wants to think about what happens after they pass away, but the fact is, there are a lot of financial matters involved that are best taken care of before that happens. The worst thing that can happen is to die unexpectedly, with nothing in place, and leave your loved ones with a big financial headache on top of their grief.
I recently experienced the loss of my mother, and I can say wholeheartedly that I was in no shape immediately after her passing to think my way through all the things that needed to be done. Luckily for me, my mom planned ahead, at least a little. She bought a small insurance policy specifically for final expenses. With one phone call, the company took care of the bill at the funeral home, and sent me the remainder of the policy funds. I didn’t have to worry about writing a check on the day I received her ashes. Trust me, that day was hard enough.
Life Insurance vs Final Expenses Policies
My mom chose the final expenses type of policy because she couldn’t afford a regular life insurance policy. She didn’t work, and lived off of meager Medicare funds. She was also a lifetime smoker, so her premiums for life insurance would have been very high. This policy was under $50 a month, and she paid it diligently because she adamantly did not want to be a burden on me and my family. The final expenses policy paid the funeral home directly, while a regular life insurance policy would have been sent to me, and I would have paid the funeral home from that. I may have had to pay the funeral home first, which could have been a problem if I didn’t have the money.
For any policy that includes life insurance or just final expenses, the cost will be determined usually by the person’s age and health status. Therefore, it is generally much cheaper to put in place when you are still young and healthy. This is the same for insurance such as long term care and health insurance. The earlier the better, before you have health issues that will drive up the cost.
As always, when looking for a policy, shop around first. Compare what you will get out of it as well as the overall cost. Buying while it is still relatively low cost will give you peace of mind, knowing you are taking a big financial weight off of the loved ones you leave behind. Take it from me, the weight of their grief is heavy enough.
When it comes to thinking about ourselves eventually getting old and needing extra help, most of us have a tendency to shy away. No one wants to envision ourselves as frail or sick, especially when we are young and in the prime of life. Unfortunately, when it comes to any type of insurance that relates to our health, that is exactly when we should be planning for the future. Just like retirement, the earlier you start planning and saving, the cheaper it is, and the more it will benefit you.
Washington State has recently passed a law requiring everyone to either pay a 0.58% tax to opt in to a statewide long term care insurance policy worth $36,000 in today’s money, or show proof of their own policy. If you purchase your own policy before this goes into effect, you can opt out of the state version. Once you opt out, you cannot opt back in. This has sent most of us into a scramble to learn about Long Term Care insurance, and try to figure out if the state policy is what we want.
It turns out, the state policy has some glitches. First, if you aren’t able to opt out, you will get charged automatically from you paycheck. The tax is a percentage of your earnings, so people who earn more pay more. It also is only good as long as you remain a resident of Washington State. Plus, you have to pay into the plan for 10 years (with some exceptions), before you can use it. If you never use the long term care insurance, you just lose the money you paid in. For these reasons, many people are looking into getting their own private policy.
While these policies vary, and they are not exactly cheap, most of them do offer some advantages over the state plan. First, they don’t require you to live in a certain state. If you move, they move with you. Many of them also come with a life insurance part which means that if you don’t use the long term care, it will convert to a set amount of life insurance in the event of your death. Some offer a higher benefit amount for a similar amount of money. Most do not have a very long period, if any, before the benefits could be used.
So far, the policies that I have found are a bit more expensive, but I am drawn to the benefits. I hesitate to use the state version because there is a good possibility I won’t live in Washington when I would need the benefits. This means I definitely need a private policy. My work is going to offer a policy, but as of this writing, I don’t know its details or its cost. As with any money decision, I will shop around and look at several options before making an informed decision. The one thing I can say for sure, though, is that any policy will be cheaper if you buy it when you are younger and healthier. The longer you wait, the more it will cost you, and likely the less benefit you will get. So, shop around now and save yourself some money and stress. Your future self will thank you.
I am sure it won’t be a surprise to hear that I tend to be a bit conservative when it comes to spending money. If you have read any of my other posts, you probably know by now that I put a lot of thought into purchases-especially those that will cost me a chunk of money. My brain can analyze the purchase to the point of insanity, and in many cases I talk myself out of buying things. Many times, this is a good thing. It decreases the number of times I have buyers regret. I rarely give in to impulse purchases. I save a lot of money by not buying things I ultimately didn’t need.
I have recently discovered the flip side of that coin. There is such thing as being too frugal when it comes to certain things in life. Sometimes saving money can cost you more in the long run. Have you ever bought the cheapest version of something, only to have it break or not work as soon as you got it home? Maybe you talked yourself out buying that tool set you have been thinking about, to have your dishwasher break two days later.
This past weekend, my wife and I thought we would have a nice day at the beach. We took the reliable car that gets the best gas mileage, and off we went. About 5 miles from the town, my car started beeping. It flashed a warning: Low Oil Pressure. We were in the middle of nowhere, on a country road with not another soul or business in sight.
I flashed back to that time a few months ago when I got my oil changed and the mechanic told me there was a small oil leak. They wanted $500 to diagnose the problem, and who knows how much to fix it. Being the skeptic of mechanics that I am, and the person who doesn’t like to spend money without knowing all my options, I declined. I thought I would have someone I knew check it out for me and verify that there was really something wrong before I got it fixed. Well, that person never checked the car out. Now, I was stuck.
I promptly called my roadside assistance company that I have had for over a decade. They are the cheap version of AAA. They cost a fraction of the price. On this day, I found out why. I was about 100 miles from home. The towing that was covered was $100. That probably translates to about 5 miles, after the hook-up fee. I was told I would have to pay the rest when the tow company arrived-a whopping $349! Also, because of COVID 19, the tow company would not allow us to ride in the tow truck, so we would have to find our own way home, with our 120lb dog, to boot. What choice did I have?
I then remembered that my friend happened to be camping in the town that I was now stranded. I gave her a call, and she and her husband came to the rescue. They offered to use their AAA membership, which covered up to 200 miles of towing, plus a rental car and hotel if needed. I asked her what she paid for that kind of coverage, and it turns out it is less than the $349 I was going to have to pay for towing. So, for a lot less than I would pay for one tow, she had peace of mind in knowing that in this type of event she was completely covered for towing and for her own accommodations and ride home. Suddenly, my discount roadside assistance service didn’t seem like such a bargain. My frugality would now cost me a lot more money, and stress.
This was a blatant example of how there can be times that being too frugal can bite you. If you save money, but then have to buy something more than once, or what you bought does not actually provide what you need, then you may not really be saving money at all. You might even create a lot off stress, or get yourself into a sticky situation. Sometimes paying a little more for something will actually be the better bargain. You need to really evaluate your purchase to know if it is something where the cheap version is really worth the initial savings. Although nowadays it isn’t always true because things just don’t seem to be made to last, when it comes to services and some items, sometimes, you get what you pay for.
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For most people, their mortgage is the largest debt they will ever have. It takes up the majority of their income each month, and a lot of that money is spent directly on interest. Mortgages are large loans, which accrue compound interest each day. They are set up so that for many years, most of the payment you make goes to that interest first, before it ever touches the principal. The principal is the original amount you paid for the house. Most also include payments for property taxes and home insurance, and sometimes mortgage insurance as well. This is why you can make payments that amount to thousands of dollars a month, but your principal balance may go down only slightly. Seems like treading water, doesn’t it?
Mortgages are Good Debt
The good news is that mortgage debt is considered “good debt,” meaning it builds credit, rather than hurting it. The value of your house most likely will go up over time, so the amount you owe will become proportionally less than the house is worth. This is where the idea of having equity comes in. Equity is that difference between value and debt. If you wanted to, you could refinance based on the new higher value of your house and use the extra money for things such as home improvement or paying off “bad” debts, such as credit cards and cars. Many people do this in order to save on interest if the new interest rate is lower, and only have one monthly payment. Mind you, they are only saving on short term interest, as the interest they will pay over a 30-year mortgage after refinancing could end up being substantially more than they would have paid if they paid off their credit cards on their own. As a house builds equity, there are other options, such as taking out a home equity loan, otherwise known as a 2nd mortgage, to pay for those things mentioned above. This gives you a second payment every month. If you don’t want a specific amount of money, a home equity line of credit that works similarly to a credit card with a rolling balance could also be used. So, mortgages have some advantages, due to the fact that they are secured by real property that builds value. This is why it is important to make sure when you buy a house that you are getting a good deal. If you pay too much, and the house actually becomes worth less (as has happened before with housing market crashes), you will not have access to these loans and lines of credit, and the mortgage will become negative debt (referred to as upside down). This is unusual, but can happen if you buy at the peak of the market, when prices are highest.
Given those advantages, most finance advisors and coaches will tell you not to prioritize paying off your mortgage over paying other debts. The idea is that if your house is valued higher than your mortgage, you could theoretically sell it at any time and not have that debt. This is true.
How to Payoff Your Mortgage Early: If you are like me and can’t stand compound interest (unless it is building it for myself)
This article is for those that have decided that they want to pay off their mortgage early anyway. I am one of those people. For me, the idea of owing so much money causes me a great deal of stress. I don’t like the idea that as long as I owe that money, I don’t really own the house. Plus, it represents a lot of my monthly income. I also despise the idea of compound interest when it is compounding my debt and not building my portfolio, like it does in the stock market. I feel that it just is not fair to charge people interest over and over on the same money, and then make them pay the interest before the loan balance. It really makes the cost of the house astronomical, even when you think you are getting a good deal. My own house cost around $200,000, but if I pay that over 30 years, I will pay another $200,000 in interest. In my mind, that is like paying 100% interest! Even though the bank calls it 3.75%, the way it is compounded and paid sure adds up. A straight 3.75% on $200,000 would only be $7500. Now, that would be fair! However, it isn’t the way the banking system does it. Fair or not, if I pay my mortgage over 30 years, I will effectively pay double for my house.
I don’t want to pay $400,000 for a house worth $200,000. Even now that the value of the house has risen, I don’t want to pay that much extra in interest. The value doesn’t matter that much to me because I am not planning on selling the house. It is just a number on paper. This is why I have made it a priority to pay my mortgage off early.
Specific Ways to Accomplish Your Goal
There are a few different ways to do that. The first and simplest way to shave years off your mortgage is to split your mortgage payment so that you pay half of it every 2 weeks instead of paying it all once per month. Because of the way interest compounds and the number of weeks in a year, you will actually end up making an extra payment per year and saving yourself a lot of interest. When I switched, my mortgage was reduced by a whopping 6 years! All it took was a call to my mortgage company to change how I made the payments. Now they come out every time I get paid, which is pretty convenient.
Another way to pay your mortgage off early is to send any extra money you have directly to the mortgage principal. You have to be sure that you specify that the extra money goes to principal, or the mortgage company could just send it toward your next payment or interest, or escrow and it wouldn’t help your balance decrease. By sending money directly to your principal, the amount of your loan that is earning interest is reduced, and so is the amount of interest you will pay. You will find as you do this that more and more of your regular payments will start going toward principal as well. It is a good idea to talk to your mortgage company first, to find out if there are any limits on how many extra payments you can send, or instructions on how to make sure the money goes to principal before sending any extra payments.
I tend to send my extra payments at the end of the month, when all my money budgeted for the month is accounted for. I can plainly see what I have left over and send it straightaway. In the past, I have also sent extra payments on payday, if I got more in my check than I had budgeted for in the first place. I also sent any bonuses or pay raise money. These days, because of the COVID pandemic, I am only sending the extra money I make each check, and not leftover money at the end of the month. I am putting that money into savings, until things seem a little more stable. Eventually, the pandemic will be over and I can send a large lump sum to the mortgage, which will still reduce my interest and the amount of years I have to pay. In the meantime, I have the money if I need it. It is also in a savings account that is earning a little interest, as a bonus.
There are other strategies out there to payoff your mortgage early using home equity lines of credit and other such things, but I am not an expert on those, and so I will not address that. What I do know is that if you send any extra money you have to your mortgage principal as often as you can, your balance will go down, you will pay less interest, and you will pay your mortgage off sooner. If you are like me, knowing that someday I won’t have a massive mortgage payment gives me a lot of peace of mind. I will always have to pay taxes and insurance, but it will still be a substantially lower payment each month than I pay now, and it won’t be just giving the bank free money in the way of outrageous amounts of interest.
As a side note, this strategy is almost the same as the one I used to pay off my astronomical student loan debt. See my blog post on Paying off Student Loans for more information.
Mortgage debt, though considered “good debt” is a very large one. It is possible to pay less interest and pay your mortgage off early by sending any extra money you have directly to principal each month. Even splitting your payments so you pay every 2 weeks instead of once a month will save you a lot of money in interest. Every little bit counts, so send what you can when you can if paying off your mortgage early is your goal.
For helpful products and services, visit my Resources page.