Anyway, what keeps tripping me up is that I forget that the advertised interest rate for loans is an ANNUAL rate, not a monthly rate. So, for example, with a 6% annual loan, the monthly interest rate is really .5% of the principal balance. Usually your interest rate doesn’t neatly divide into 12, which makes it harder to figure out in your head. So I was wondering if the interest must be paid in full every month or if you can pay the principal instead. He said that the payments are usually applied to the interest first and then the remainder goes to the principal, which makes sense. It also makes sense that you must pay some portion of the principal every month otherwise you will be in a negative amortization situation, where the total balance of the loan is increasing on a monthly basis. This is what a lot of creative home buyers are currently facing.

So this raises the question of a financial tidbit you hear so often: Make an extra payment to your mortgage broker every year, and label it as saying “apply this to the principal balance only.” Doing this in the early years of your mortgage can take years off of the life of the loan, since early on most of your payments go towards paying the interest. For example, with a $200K loan at 6% for 30 years, it takes almost four full years of $1200 monthly payments before more than $250 is going towards the principal on the loan. It sounds like a good idea, but will it ultimately make a difference in the amount you pay altogether as opposed to just a straight-up extra payment? The answer depends on how frequently your mortgage interest is compounded. If the mortgage is compounded monthly, it won’t make a difference provided you make the two payments within the same month (which would happen in some fashion or other, right?). If the mortgage is compounded daily, it will make a difference, but depending on how close together the payments are received, it may not be as dramatic as you think. My advice in this situation would be to make a timely payment for double the normal amount (say $2400 instead of $1200), allowing for the entire balance of the second payment to go towards the principal. This is the approach I have taken with my student loans and it has worked well. By paying them down aggressively when the rates on savings accounts were lower than the loan’s rate, I have managed to knock seven years off the life of the 20-year loan. If rates fall farther, we might consider adopting this approach again, but it won’t save us as much in interest as it has in the past, even though it will retire the loan sooner. This study does go to show that making extra payments early on in a loan (most likely when you can least afford to do so) will potentially save you a great deal of money in the long run.

Also, if you’re capable of more abstract thought, you can see that it’s a better deal to borrow as little money as possible. Here’s one last example to illustrate that point, figures derived using this tool. Suppose you are purchasing a $200K house with a 30 year mortgage at 7%. If you have saved a 20% down payment, you’ll only need to borrow $160K, which you will ultimately repay in full along with $223,214,24 in interest. In borrowing the full $200K, you will ultimately pay back the full principal along with $279,017.80 in interest. Providing your $40K down payment saves you $55803.56 in interest, not to mention PMI or potentially higher rates because of a greater likelihood for default, etc. This is too significant to ignore.

Hooray!

With the help of The Money Writers, Generation X Finance in particular, I was able to put something together in comparing retirement accounts across the border. ; This is part 1 of perhaps many posts about the personal finance comparison between the giant neighboring countries.

I think that the best way to represent the comparison is through a table matrix. ; That way, we can see how their benefits/downfalls compare side by side. ;

The contenders for Canada are: ; RRSPs and TFSA's. ; For the U.S, we have the 401k, Roth IRA and Traditional IRA.

* ; Withdrawals from a Roth IRA have a few stipulations. ; Contributions can be withdrawn at anytime without any penalties or tax. ; The growth on the contributions however, must be in the account for at least 5 years AND the account holder must be older than 59.5 yrs in order for the withdrawals to be tax free. ; They can also be withdrawn for qualifying purchases like first home purchase or disability.

** Generally speaking, you can't place a 401k account under a self directed discount brokerage like E*Trade. ; However, there are some situations where some of the 401k money can be placed in a self directed account.

By the looks of the table, it seems that our RRSP system is very similar to the 401k, and the TFSA is the same idea as the Roth IRA. ; The traditional IRA though is a hybrid between an RRSP and TFSA. ; I may be biased, but it looks to me that Canadian retirement accounts have a slight advantage over our friends south of the border. ; Their mortgage/real estate tax system however, seems to have a big advantage over Canada. ; This will be discussed in another article.

Note that this article is the bare bones basics of all the accounts listed above as there were a substantial amount of details that were not included.

Photo credit: ;PinkMoose

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If credit unions are better than banks, why don’t more people use them?

According to Monthly Credit Union Estimates (pdf, pp 9-10) by the Credit Union National Association, credit unions’ market share is much smaller than banks’. For the purpose of market share comparison, I’m counting savings and loans — think Washington Mutual and ING Direct — as banks.

I don’t have a good answer to this question of why the credit unions’ market share is so small if the conventional wisdom is that they are better than banks. I’m hoping you can help me figure out. I have a few hypothesis in no particular order. First I will share why I’m not using a credit union myself.

1. Banks have better products. The Fidelity mySmart Cash account I’m using is technically not a bank account. The underlying services are provided by three banks — Fifth Third for depositing the balance, PNC for debit card processing and UMB Bank for checks and ACH. I have yet to see a credit union offering anything that matches Fidelity mySmart Cash although some of the new reward checking offers come close. My credit cards are also issued by banks, not credit unions. These cards offer better rewards. My mortgage was also funded and serviced by a bank, although this is perhaps where credit unions are most competitive. If I ever refinance again, I will probably get it from a credit union. My car loan is through a manufacturer’s finance company. It’s neither a bank nor a credit union.

2. Banks market themselves better. Banks have larger marketing budgets. They advertise on TV, radio, billboards, in newspapers and magazines, and online. More marketing brings more customers. You would think customers choose their banks by the services they get and by the prices they pay, not by who advertises more, but maybe some fall for advertising.

3. Banks have more outlets. Banks have more branches and more ATMs. They are on street corners and in grocery stores. More outlets mean more convenience for their customers. In the world of direct deposits, debit cards, online bill payment, and cash back from grocery stores, I wonder if the benefit of more outlets is more perceived than real. Many credit unions also participate in the CO-OP Network which offers 25,000 surcharge-free ATMs nationwide. Even if one has to pay a few bucks for getting cash once in a while, the customers may still be better off with a credit union. Perhaps customers prefer to do their banking face to face.

4. People don’t know they can join a credit union. This goes with #2 about marketing. In the past you have to be an employee of certain employers or you have to be a member of an association of some kind in order to join a credit union. Nowadays there are many community based credit unions. As long as you live in certain counties, you can join many credit unions in the area. There’s even a FindACreditUnion.com which lets you search for a credit union by your address. I put in my info and I got a list of at least 15 different credit unions around me. I’m pretty sure most people can join a credit union if they really want to.

5. Banks are better than credit unions after everything is taken into consideration. Banks and credit unions compete for deposits and loans. Customers are looking out to their own best interests. After everything is taken into consideration, more people still chose banks. Sure people complain about banks ripping them off by giving them very little interest for their savings and charging them high fees for overdrafts, but after all is said and done, people voted for banks with their wallets. Maybe, just maybe, the conventional wisdom is wrong and banks are actually better after all?

Now it’s your turn. Do you use a credit union for your checking account, savings account, CD, credit card, car loan, or home loan? If not, why not? If you already use a credit union, why do you think more people don’t use one?

Finance Findings is Binary Dollar’s periodic link dump.

• Zecco IS Cheap [Sun’s Financial Diary]
• Traditional Jobs For Men And Women And The Gender Divide [Digerati Life]
• Practicing Basic Tax Diversification [Tao]
• How to Talk Your Way into Debt [Money Smart Life]
• Lazyman’s Prosper Update [Lazy Man and Money]
• Don’t Be Fooled Into Thinking an Oil Change Every 3,000 Miles Is Necessary [Generation X Finance]
• Are Inflated Shipping Charges On eBay Bad? [Mighty Bargain Hunter]
• Why You Need a Budget [Free Money Finance]
• Are You a 0% Credit Card Daredevil? [Five Cent Nickel]
• GEICO Paid Out A Fraudulent Claim [Blueprint]

Send your submissions for Finance Findings to henry@binarydollar.com.

Sponsor: Parlayer - Henry and Matt blog about sports and stuff.

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1. It’s better for your health. I started cutting back on red meat on the advice of a dermatologist. I had very bad acne in college and he told me to abstain from beef because of the synthetic hormones which might cause my acne to be worse. (Stress on ‘might’, but I had nothing to lose.) Plus there are added benefits to cutting out meats like lowering your fat intake and cholesterol counts.

2. It’s good for the wallet. Meat is expensive. Pound for pound, tofu is kind of expensive too if you get the organic stuff, but let’s face it, when you’re looking at entrees on a restaurant menu, the vegetarian options are always cheaper. As it is, at the Korean wholesale place, I get them for $1.50 a block (about 14 ozs).

3. It’s good for the environment. Most corn in the US is actually used as animal feed for the animals you like to eat most. I read somewhere that it takes like 16 lbs of grain to make 1 lb of beef. It also takes a lot of water and fertilizer to make 1 lb of grain, so any quantities of those inputs have to be multiplied by 16. You can reduce your carbon footprint quickly by cutting meat from your diet.

I’m not ever going to give up all meat unless my doctor says I have to. But I’ve been eating more meatless entrees, or halving the portion of meat I do eat. Consider trying a meatless meal once or twice a week. Track your grocery spending. You might find you’re saving money. (Just be mindful of your cheese intake. That kind of negates #1 and #3.)

For the rest of you, here is the reason that gas prices are so high. There is a little known office, high atop an office building in mid town Manhattan. In that office, on the 3^rd Tuesday of every month, there is a meeting of an even lesser known group of people, almost exclusively older, white, men by the way, who shape the future of world economics.

In these meetings they discuss how to separate the absolute maximum amount of money from the poor and downtrodden to enrich themselves, hopefully at the expense of all that is good and decent. The name of this secretive organization is the Commission for the Maximization of Oil Derived Revenues (CoMODR). They have been known to resort to all manner of tactics to not only achieve their stated goal of keeping gas prices, and other petro product prices, as high as possible.

Not only that, but more than a few good people have died trying to penetrate the inner workings of their organization, all to no avail. As can be seen when you drive by any corner gas station, gas prices are still going up, largely thanks to the efforts of these men. Thanks to modern technology and good old fashioned greed, their efforts to drive up gas prices are more successful than ever. Once, the thought of $125 barrels of crude oil and $4.00 gallons of gasoline were but pipe dreams to these men, something they could only hope to achieve.

Okay, so that’s all a total load of crap, but you would probably find that story a pretty easy sell to at least some of the aforementioned 203 million American drivers and the burgeoning crowd of conspiracy theorists spawned by ever increasing gasoline prices.

So, why is gas really so high? Is it all due to a secret conspiracy, or reckless oil company profiteering? Actually the reason gas prices are so high is a bit more simple than that.

As noted there were 203 million drivers and 244 motor vehicles in the U.S. in 2006. Worldwide, there were an estimated 850 million vehicles (Organization of Arab Petroleum Exporting Countries figures). Contrast that to 1973. In 1973 the U.S. had approximately 122 licensed drivers and 126 million motor vehicles. Worldwide, OAPEC estimates reveal about 298 million vehicles in 1973.

According to the International Energy Studies Group at Lawrence Berkeley Laboratory, the average fuel economy of U.S. driven, light duty, motor vehicles, the group that includes the cars and light trucks that are the predominant transportation resource for American drivers, was only 13.3 mpg. In 2006 that figure had increased to 21mpg (EPA figures). The fuel consumption figures will improve even further in the U.S. due to recent legislation, and the higher price of gasoline and diesel pushing consumers toward more efficient vehicles.

So fuel economy has increased, but not nearly enough to offset the increase in the number of drivers and motor vehicles. This is especially true when worldwide fuel usage statistics are considered. As the world economy has improved and population has increased, so has the demand for petro-products, including gasoline.

Here is the underlying reason why gas prices are so high.

Total U.S. refinery capacity (approximate):
1973 – 13.5 million barrels / day
2004 – 17.5 million barrels / day
This reflects a refinery capacity increase of 29.6%

World Wide Crude Oil Production (U.S. DOE):
1973 – 55.68 million barrels / day
2006 – 73.45 million barrels / day
This reflects a crude oil production increase of 31.9%

World Wide Crude Oil Consumption (U.S. DOE):
1973 – 57.24 million barrels / day
2006 – 85.01 million barrels / day
This reflects a crude oil consumption increase of 48.5%

Consumption increase far outstripped production increase for the period from 1973 – 2006.

U.S. Crude Oil Production (U.S. DOE):
1973 – 9.21 million barrels / day
2006 – 5.14 million barrels / day

This represents a crude oil production decrease of 55.8%

Total U.S. transportation related petroleum consumption:
1973 – 9.05 million barrels / day
2006 – 13.98 million barrels / day
This represents a transportation related crude oil usage increase of 64.7%

Also note that in 1973 U.S. refinery capacity exceeded transportation related demand by 49.2%, while in 2004 (transportation related crude oil demand was 13.76 MBD) they exceeded demand from the transportation sector by only 27%. As 100% of refinery capacity is not available at any given time for a variety of reasons, this, coupled with the fact that demand for motor fuel has risen, while U.S. capacity has been slashed by about 40%, means that we now import much of our gasoline, rather than producing in excess of our demand, as we did in 1973.

You may note that according to U.S. DOE figures worldwide crude oil consumption exceeded supply in 2006 by an average of 11.56 million barrels per day. I triple checked the figures on that, because it seems patently impossible that world wide consumption could outstrip supply by such a large margin.

That would mean that in 2006 the world used 4.2 billion more barrels of crude oil than it produced. Is there a giant tank of crude oil somewhere that I’m unaware of, or are these figures calculated using different methods. If those figures for supply and consumption are indeed true, that’s the reason for gas prices to be so high and be prepared for them to rise even further.

Here is a post on some Tips to Save Gas.

A sweet moment with my husband between picture poses.

This post was written as an entry to the Best Wedding Tips and Stories Contest at Moolanomy. If you want to enter, find out more about it here. The prize is a $50 Amazon GC or $50 cash!

These days the average cost of a wedding in the United States is between $18,000 and $21,000. $21,000 is more money than I made my first year out of college!

Fortunately for those who don’t want to spend the cost of a new car on their wedding, there are options. When my husband and I got married almost 13 years ago, we spent less than $5000, and we have no regrets about our wedding. Here’s what we did to trim the costs.

Utilize People You Know

People love to help out for a wedding. We enlisted the help of a lot of people. We found that when we hired people we knew, they would often give us a discount or provide their services free of charge as a wedding gift to us. To be clear, we didn’t ask for or expect discounts, but we accepted services that were offered as wedding gifts.

A friend’s aunt made the bridesmaid dresses from fabric I found on sale. The bridesmaid dresses cost much less than they would have, if I’d used a bridal shop. That saved my bridesmaids a good deal of money.

A woman from our church made our wedding cake. It was absolutely gorgeous, and it was less expensive than the store-bought counterpart.

A friend of my husband’s took our wedding pictures. We got tons of pictures for a minimal price, and we got to keep the negatives. Most professional photographers won’t let you keep the negatives, so you’re stuck paying exorbitant prices if you want to order more pictures.

Friends and family donated their services in running the sound board for the ceremony and videotaping our wedding.

Saving On Decorations

Consider making your own decorations. That’s what I did, and I’m not even that crafty. They turned out great, and it saved a lot of money. I did splurge on flowers, because they were important to me (and my mom).

We also used balloons for the reception. Balloons are inexpensive, fun, and festive. They’re also easy to put up and take down. And kids love them too, so any children at your reception will be easily entertained.

We made our own wedding favors by wrapping Jordan Almonds in tulle and tying them with a pretty bow. And the birdseed that was thrown (in lieu of rice) was also wrapped in tulle by my friends and me.

We have friends who saved on decorations by holding their wedding in December. In December most churches are beautifully decorated with lights and red poinsettias. No other decorations are needed.

Saving on Food

Timing is important here. We held an afternoon wedding, so we didn’t have to provide dinner. If I remember correctly, we had some snack food for the guests and plenty of wedding cake and punch. And that’s all. Our reception was short and informal. We knew we’d want to move on to the honeymoon after the wedding was over.

For our rehearsal dinner, we had a barbeque in our church’s fellowship hall. It was my dad’s idea, and I was skeptical, but it turned out great. Some distant relatives ran the grill, friends of mine brought side dishes, and the meal was delicious. We also had room for everyone we wanted to invite to the rehearsal dinner, and we were in a relaxed atmosphere. My husband and I got to visit with every person at the rehearsal dinner without feeling rushed.

After the rehearsal dinner, friends and family pitched in to decorate the fellowship hall for our reception the next day.

Our wedding definitely wasn’t the high society event of the year, but that was OK with us. We wanted a relaxed time to celebrate with family and friends, and we didn’t want to begin our marriage deeply in debt. And we accomplished both of our goals.

The important thing to remember is that a wedding should be about marriage, and you don’t want to put your marriage in jeopardy by starting off in debt from your wedding. Stick to your budget, don’t go into debt, and have a great time.

Do you have any money-saving wedding tips? I’d love to hear them!

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A British paper is claiming the U.S. is in “the Great Depression of 2008″ and cites some alarming statistics about the use of food stamps as support. Read it here. OK, it’s just one article, but these types of stories are becoming very prevalent.

The Wall Street Journal points out that the credit crunch is now affecting our savings accounts! What! That’s a blow to this savvy saver! It makes me feel like there are no good decisions to be made. I think my Emigrant Direct account is no longer keeping up with inflation. Grrr…

The New York Times says the average consumer is carrying $9,000 in credit card debt from month to month. (That can’t be right, can it?)

And Fortune is freaking out about the proposed new finance regulations and the mess on Wall Street. (Don’t worry if it’s over your head, nothing’s likely to happen very soon.)

We’re so grumpy-pants we’re even hating on SATC today.

Will Summer please get here soon so we can return to sunshine and happiness?