I have lots of readers here in the central Iowa area, so it came as no surprise to me that when I began hearing an ad frequently on local radio advertising a particular mortgage product in terms that were a bit on the confusing side, I received an email about it. Jim writes in:

I just heard an ad on the radio offering a 3.99% mortgage. That makes sense to me. Where I’m confused is when the ad then mentions a 4.22% APY immediately after that. What does it mean? What interest rate will I actually be charged?

First, let’s break down the terms.

APR, or Annual Percentage Rate, defines the interest rate that is charged to the principal of the loan. You will be charged a total of 3.99% interest on that loan over the course of a year.

APY, or Annual Percentage Yield, describes the percentage of the principal of the loan that you’ll have to pay over the course of the year.

The trick here is to understand that we’re talking about two separate and somewhat different things. An example will illustrate this difference clearly.

An Example: Quarterly Interest
Let’s say you have a loan from a bank that has 3.99% with interest that is compounded quarterly. That means that every three months, your loan is charged 1/4 of the interest for the year, which would be 3.99% divided by 4, or 0.9975% interest.

Let’s say your loan has a balance of $100,000 at the start of the year, to make the math more clear.

At the first quarter, your $100,000 loan will be charged 0.9975% interest, or $997.50. This gives your loan a new balance of $100,997.50.

At the second quarter, your loan has a balance of $100,997.50 and that balance will be charged 0.9975% interest, or $1,007.45. This gives your loan a new balance of $102,004.95.

At the third quarter, your loan has a balance of $102,004.95 and that balance will be charged 0.9975% interest, or $1,017.50. This gives your loan a new balance of $103,022.45.

At the fourth quarter, your loan has a balance of $103,022.45 and that balance will be charged 0.9975% interest, or $1,027.65. This gives your loan a new balance of $104,050.10.

Over the course of a year, your $100,000 loan turned into $104,050.10, earning $4,050.10 in interest. That’s 4.05% of the balance of the loan, which is your APY.

Thus, this loan has a 3.99% interest rate, but a 4.05% APY.

In the United States, APY is legally defined as being the rate achieved when using daily compounding. In this case, that would give you an APY of 4.07%. So, where does the rest of that 4.22% come from?

The Other Parts of a Mortgage
What the radio ad isn’t telling you is that in order to get that 3.99% interest rate, you’ll have to pay some fees and possibly a discount point or two. These are up-front costs that add to the balance of the loan.

In this specific case, the fees and points will add enough to the balance of the loan to raise the APY from 4.07% to 4.22%. In other words, the total of the fees and points will be somewhere around $165 on a $100,000 loan, or about $817 on a $500,000 loan.

These fees will be rolled into the true APR that the lender has to give you (not that nominal rate given on the radio that doesn’t include these fees), and it’s that APR that you should be paying attention to if you’re intending to live in the house for a long time.

Another point worth considering is the fact that banks are allowed to advertise interest rates as much as 0.125% lower than what they’ll actually give you. In theory, this is done to allow for market fluctuation between the time you hear the ad and the time you sign on the dotted line, but lenders often push this so that they can advertise with seemingly incredible low rates.

What’s the moral of the story? Two things.

First, shop around. Getting a mortgage is a major financial decision, one that will have an impact on you for a long time. You owe it to your finances to shop around.

Second, get the APR on paper. Remember that APR takes into account most loan costs (points, most loan fees, mortgage insurance), but doesn’t account for some other charges, like application fees, title insurance, title examination, appraisals, document prep, and so on. You’ll likely have to come up with some additional cash for those when you move forward with the loan.

No matter what, never take out a mortgage based on an advertisement. This is far too important of a decision to do it based on a radio ad. Spend the time doing your homework and shopping around first, even if your favorite radio host is recommending a particular product.

Kelli writes in:

My husband and I are sitting on a thirty year mortgage (with twenty six years left to go). We still owe $330,000 on our home. A week ago, a very similar home to ours two blocks away sold for $220,000, so we’re under water by at least $100,000. We are thinking of just walking away from this mortgage and renting an apartment for a while until our credit clears up. What do you think?

First of all, there’s a strong personal moral element to this type of decision. Is it morally wrong to walk away from a mortgage? You’ll get strong, impassioned answers on both sides of the question. Some will argue that if you make an agreement with another entity, you’re obligated to stick to it to the best of your ability. Others will argue that banks know what they’re getting into with a mortgage and that foreclosure is a risk they accept in the agreement, so you’re just doing something within the bounds of the agreement.

As with most morality questions, I can’t tell you what to think. I personally feel walking away from your agreements when you have the capacity to fulfill them is morally wrong, akin to lying. If I were a lender, I would never lend to someone who walked away from a mortgage because I would simply view them as too big of a risk. But I’m not a mortgage lender.

Aside from that moral concern, though, is it really a good financial choice? I think it can be, but it depends on the other choices that the person makes.

First of all, walking away from a mortgage will drop your credit rating by 150 points and it will take several years to recover. Such a drop has a huge impact if your credit is good, but a much smaller impact if your credit is already bad.

What kind of impact? It will become incredibly difficult to get a car loan or another mortgage with any sort of competitive interest rate. Lenders will look at your credit score and if your score is low, they won’t offer you a prime loan (if they offer you one at all). You have to accept that you’ll either be paying for cars and homes in cash for the next several years or you’re going to be taking out loans with incredibly painful interest rates and down payments.

If you’re going to do this, your best approach is to make sure you have housing and automobiles lined out for the next several years before your credit collapses. If you’re going to get a mortgage on a second home, do it now and get a fixed rate mortgage while your credit is still good. If you’re going to rent, get your rental agreement set up now before you walk away. If you’re going to need a car in the next seven years, you might want to make the move now (unless you’ll have the cash to do it later).

Another impact is that many other services use your credit ratings to determine what to charge you and whether to do business with you. Insurance is one example of this – most insurance companies regularly do a “soft pull” of your credit and use declining credit as a reason to raise your rates. Many upscale renters will do the same thing and not rent to people with poor credit, which may limit the places where you can rent your housing. Potential employers often pull your credit (I’ve had two employers in the past do this) and use that as an element of their hiring decision, often leaning towards people with good credit over people with poor credit. These are all serious additional costs of walking into foreclosure.

In the end, I don’t think Kelli should walk away from her mortgage as a first response. She should try several other avenues first that would preserve her credit and perhaps even allow her and her family to remain in the home.

First, I’d simply talk to the lender. Explain your situation and discuss options available to you. It’s often easier for a lender to just refinance with you (sometimes even removing some of the principal) than it is to put the homes in foreclosure. Many lenders are currently focused on refinancing in this way rather than taking on more foreclosed homes, so it’s certainly an option.

Second, I’d look at the extra financial costs of what will happen if you do foreclose. Run the numbers carefully here. Include all the extra costs – a serious bump in your insurance rates, for example – and make sure you also include some estimate of the cost of the risks mentioned above – the extra cost of a new car or the challenge of finding a rental home or a new job. Those things have serious financial costs if they occur – or they might have no cost at all. A good way to appraise it is to figure out the cost if it does happen, then estimate the odds of it happening. So, if something has a cost of $100,000 and has a 40% chance of happening, it’d be a $40,000 cost.

You might be surprised to find that staying put is the best option, even if you happen to be underwater in your mortgage. If you still find that abandoning is the best option. then it becomes the moral question discussed above – and moral questions are things we all have to decide for ourselves.

Howie writes in:

My wife and I have been running our own home-based business for three years now. We rent and work out of a smallish 2-bedroom apartment in the very expensive SF Bay Area. One of those bedrooms is an office that we both share as an office. We spend day in/day out working together in this small space.

About a year ago we realized we could afford to buy a house in an outer suburb of the Bay Area now that the prices have come down. After a year of looking, we’ve now found ourselves in contract on a wonderful 4-bedroom house that we love. However, it’s at the top of our price range–about 30% of our income would go to the mortgage.

I realize that typically this would not be a good idea, as at least at the beginning, we would be stretched. However, the biggest reason we are looking to move right now is to gain more space so that we can grow our business. Currently, we feel like we’ve reach critical mass with what we can do in our small office. With this house, we feel it could be an income-generating asset for us in that it will afford us more space for us to grow our business and make more money. I very much feel like if we had more room to operate and a more official dedicated workspace, we could increase our income significantly.

Most financial advisers I’ve been reading say to buy a small, inexpensive home. This would be fine for us if we didn’t both work from home, but we simply need more space to operate our business.

Of course we could buy a small house and rent an office somewhere, but I’ve done the math on that too, and when you combine smaller house mortgage with separate office rent, the cost is essentially a wash.

The other option would be to rent a bigger house. Rents in the Bay Area are still high, and we would spend about $200/mo less doing this. I know every bit counts, but I don’t know if this savings outweighs the emotional benefits that go with working and living in a home that we own. We also want to start a family and are ready to put down roots.

Finally, we could ditch the Bay Area entirely and move somewhere much cheaper, such as Oregon. While there is some risk in leaving a few of our local clients behind, we could do this with not much risk, as most of clients are all over the country. This option would put us where we want to be financially, but as I mentioned, we want to start having kids soon, and most of my family is here in the Bay Area. Moving away seems daunting.

First of all, your emotional argument is clearly in favor of buying the home. Most of the argument you lay out here is one that makes the case for buying above all else.

Most of the time, regardless of the dollars and cents, people operate with their emotions. They’ll find ways to make the dollars and cents work. In fact, that’s when personal finance really cooks – people spend time soul searching, discover the key things they really want, and then stop wasting money on the things that don’t really matter to them.

In this case, it’s clear that the home matters to you. What things are less important in your life that you’re willing to trade for it?

The maintenance costs of home ownership are far higher than renting. When you buy a home, you no longer have a landlord to call when a toilet breaks or a hot water heater goes out. Instead, you’re calling a repairman – or doing it yourself – and all expenses come out of your pocket. You also have lawn maintenance costs. You also have homeowners’ insurance. You also have property taxes. You also may have association fees. Those can be enormous – they can be enough to break the back of someone who thinks they can afford home ownership.

Beyond the financial cost is the time cost. Suddenly, you’re spending time mowing the yard. You’re spending time changing filters and doing maintenance work on your equipment. You’ve also got more space than you had before, so you’re spending more time cleaning.

Paying these costs – in addition to merely writing the check for your monthly mortgage payments – will exact a toll on your life as you currently live it.

In exchange for that toll, you will gain other things – the room to grow your business and the room to house your family.

It’s an emotional decision that you have likely already made. There are just two things I would suggest seriously evaluating before you actually make the leap to buy.

First, do you have an adequate down payment? This is important for two reasons. First, if you don’t have the financial fortitude to save up that payment while living in a rental unit, where the costs are much lower, you may not have the fortitude to handle the costs of home ownership. Second, without a 20% down payment, you’ll be paying a higher interest rate and/or mortgage insurance costs.

Second, do you have a written, clear plan for how you will make ends meet and how you will utilize that space to grow your business? These both may be nebulous concepts for you right now, but if you buy, they will become your reality. Spend some time actually planning for both of these events. Make a home budget. Make a business plan. Make sure you can actually do this with some breathing room (and an emergency fund) intact.

Yes, this seems like a lot of planning that takes away the “fun” of buying a home. Without that planning, though, you’re quite likely to find yourself losing that very house in a few years. A little planning now makes your dreams come true.

A few months before we bought our current home, my wife and I toured literally dozens of different houses, trying to find one that was right for us. We had come up with a budget for our purchase and knew what our firm spending cap was.

On one bright spring day, my wife and I were visiting three homes for sale on the same block that were all having open houses at once. None of them really struck our fancy, but we did notice a fourth house on the corner that was for sale at a price about $60,000 over our price range.

We toured that house. We fell in love with that house. Even now, it’s really obvious to both of us that it was our favorite house that we toured.

But it wasn’t the house that we bought. We ended up with another home that was within the price range we had originally set.

It was a difficult choice. It was a choice that, if we had entered into the home-buying process with less planning and less self-control, probably would have turned out differently. It would have been quite easy to simply give into our desires and buy that house, but if we had, we would have been drowning in mortgage payments now. It was also a choice that many people made differently – and that difference in choice caused the housing bubble and a giant mountain of foreclosures.

It is so easy to just let our emotions take control when we’re making a major buying decision. It would have been so easy for us to walk into that house, tour it, smile at each other, recognize that we could probably make the mortgage payments, and then sign the papers.

But that one choice puts us on a different life trajectory. I would have been much more worried about leaving my full-time job. In fact, I probably would have wound up choosing it instead of choosing a writing career – and that would have meant the closing of The Simple Dollar. I would have had less time to spend with my kids – instead of taking them to the zoo or the Science Center of Iowa or just spending afternoons with them at the park, I would have been behind a desk somewhere. We would have had more money stresses on our marriage. We would likely have never chosen – or even considered – having a third child.

Yes, I would have loved to have that house. Yet, when I step back and look at all the good things that happened in our life because we stuck to the budget, I wouldn’t trade any of it for that house.

A house is not a home, after all.

The next time you’re about to make a major purchase, whether it be a home or an automobile or even just a high-end home electronic device, and you’re thinking about jumping outside of your budget for that purchase because you fell in love with somethng that dazzled you, step back for a moment and ask yourself about what you’d be giving up for this thing. Would you be tied even more to your job, at the mercy of your boss? Would you not have the financial resources to take advantage of opportunities that came your way? Are you going to have to push yourself more to earn more, taking away time from the other things you value in life?

On the other hand, if you simply stick to your budget and get a slightly downscale model, you gain the freedom to choose the life you want. What’s better, after all? The 2,000 square foot home that you have time to enjoy, or the 2,800 square foot home that requires you to work tons of extra hours?

Houses and cars and televisions and boats are just stuff. Don’t sacrifice your life for them because you want them in this moment.

This is the tenth of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This entry covers the eleventh chapter, finishing on page 202. The next entry, covering the twelfth chapter, will appear on Wednesday.

This is a stage that I see us approaching as time goes on. We’re not quite there yet, but we’re close. Right now, I’m trying to knock out my final student loan (it’s a doozy), and then start focusing on my home mortgage.

Our home mortgage payment is just shy of $1,100 – that doesn’t include homeowners’ insurance and taxes, so when we get the house paid off, we now have $1,100 more a month to spend on whatever we choose.

I, for one, would roll that extra amount directly into savings. I’d simply change the automatic payment to be an automatic transfer into a savings account of some sort – perhaps an index fund. Then I just keep living life as normal until one day that account is full of cash for something great. For us, that “something great” is our long-dreamed-of house in the country, with a small barn out back, a big garden, and a chicken coop.

Is It A Crazy Goal?
My parents recently finished off their home mortgage after paying on it for thirty years. They’re pretty much debt free at this point for the first time in their marriage. So, for me, I have a great example in front of me that you can get rid of all of your debt. However, many people don’t have that example and it seems like an impossible goal. On page 186:

Anytime I speak about paying off mortgages, people give me that special look. They think I’m crazy for two reasons. One, most people have lost their hope, and they don’t really believe there is any chance for them. Two, most people believe all the mortgage myths that have been spread.

The “hope” factor is something I see popping up over and over again whenever I talk to people about money. Many people I talk to view their mortgage as simply a fact of life. If they were ever in a position that their mortgage became really easy to pay, it wouldn’t be time to double-up on the payments – no, no, it would be time to upgrade their homes.

I think this points to a prevalent mindset out there when it comes to debt. Many people simply view debt as a way to leverage the lifestyle they want now. It comes from a lack of patience – people don’t want to live in a small apartment watching their savings grow slowly when they could just get this loan and be in that house now – even if it costs them hundreds of thousands of dollars.

I think patience is one of the biggest tools a young professional can have when it comes to his/her money. Just wait for a while – you’ll be way better off over the long run.

The Tax Deduction Myth
Owning a mortgage just to get a tax deduction is something of a fool’s game, as outlined on page 187:

If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would, in fact, lose the tax deduction, so they myth says to keep your home mortgaged because of tax advantages. [...] If you do not have a $10,000 tax deduction and you are in a 30 percent tax bracket, you will have to pay $3,000 in taxes [...] According to the myth, we should send $10,000 in interest to the bank so that we don’t have to send $3,000 in taxes to the IRS.

All the tax deduction does is lower the effective interest rate you’re paying on your home loan a little bit.

In fact, Dave doesn’t even make the case as well as he could. If you’re using your mortgage interest on your tax return, that means you’re foregoing your standard deductions because you have other things to deduct. So, take our situation – we have two adults in our home. Our standard deduction in 2009 is $11,400. If we choose to itemize our taxes (which we’d have to do to deduct our home interest), we have to have more than $11,400 in interest on our home mortgage (or other deductible expenses) to beat what we would already get.

So, if your only significant deductible expense is your home mortgage – and your mortgage isn’t gigantic – you’re not actually gaining much of anything at all in terms of taxes.

The Risk of Having a Mortgage
Another disadvantage of holding on to a mortgage is the risk – if something goes wrong in your life, it’s a lot better to not have a mortgage payment than it is to have one. On page 189:

If I own the home next to you and have no debt, and you (because of your investment adviser guy) borrowed $100,000 on your home, who has taken more risk? When the economy moves south, when there is war or rumors of war, when you get sick or have a car wreck or are downsized, you will run into major problems with a $100,000 mortgage that I will never have. So debt causes risk to increase.

I think this is a vital, overlooked point. Having a mortgage – or any debt – is a type of risk. You’re gambling that your future will be stable, no different than putting cash down at the roulette wheel. With a mortgage, your life is simply more at risk than it was before.

I have two young children at home. Risk stares me in the face every day. I encourage our children to push their limits a little, but I still stand very close by when my three year old grabs onto playground gymnastics rings and hangs there. Having a mortgage is something like telling my three year old to grab the rings for the first time while I stand far away. Sure, he might hold the rings for a while and then drop without a problem, but my distance increases the chance of a hurt elbow or a broken arm.

The risk of owning a fat mortgage is much like the risk of putting your child on a bike for the first time and shoving them down the sidewalk. Sure, they might ride like the wind, but they might also fall flat on the pavement. Instead, it’s better to do a bit of planning (like saving for a home) and then let go when they’re ready (like when you have enough saved up for a house). No broken bones, no broken lives.

Thirty Years Versus Fifteen Years
Many people advised me to get a thirty year mortgage instead of a fifteen year mortgage, arguing that I could make an extra payment each month and get the same speed benefit of a fifteen year without the risk of the larger minimum payments. That’s a bad idea because something will often come up, as is spelled out on page 190:

A big part of being strong financially is that you know where you are weak and take action to make sure you don’t fall prey to the weakness. And we ALL are weak. Sick children, bad transmissions, prom dresses, high heat bills, and dog vaccinations come up, and you won’t make the extra payment. Then we extend the lie by saying, “Oh, I will next month.”

A higher minimum payment is actually a good idea, because it forces us to work with what we have left over. A lower minimum payment means that we just have more to work with – if that extra payment isn’t required, it’s easier to argue that something else is more important for the moment.

With expenses like prom dresses, heat bills, bad transmissions, and dog vaccinations, you can always find ways to make it work. If you have a decent emergency fund, it shouldn’t be too tough at all.

What do you get in exchange for these little sacrifices? Your mortgage goes away in half the time. You find yourself free of that load much, much faster. Plus, the interest rate on a fifteen year loan is lower, meaning your payments won’t actually be anywhere close to double what they would be for a thirty year mortgage.

Home Equity Loans Make Poor Emergency Funds
One common question I get from readers is whether or not they should take out a home equity loan to deal with some problem in their lives. My feeling is that if you’re in that situation, you need to rethink about your emergency fund. Sure, the home equity loan might be the right solution for right now, but if you’re living your life in such a way that it has to be used, you might want to rethink how you’re managing your money.

On page 197, Dave dips his toes into this idea:

Even a conservative person who doesn’t have credit card debt and pays cash for vacations can make the mistake of the HEL by setting up a loan or a “line of credit” just for emergencies. That seems reasonable until you have walked through an emergency or two, and you realize very plainly that an emergency is the last time you need to be borrowing money. If you have a car wreck or lose your job and then borrow $30,000 against your home to live in while you make a comeback, you will likely lose your home. Most HELs are renewable annually, meaning they requalify you for the loan once a year.

Think of it this way. You’re using your home equity loan as an emergency fund. You lose your job, so you take out $30,000 to live on – it’s fine, since you have tons of equity in your home, right? Well, the end of the year comes and you still don’t have a job. The bank says, “Sorry, we’re not renewing your loan,” and they call in the $30,000. You don’t have it. They repossess your house. Any equity you built up is gone.

An emergency fund needs to be cash, period. If it’s not liquid or it puts you at risk to get it, then it’s not an emergency fund.

Our local credit union has hinted to us that we should have a home equity line of credit. I have torn up every single offer they have sent to us. I’m not interested in that kind of risk.

Paying Cash for a Home Is Impossible
I agree with Dave that it is indeed possible to pay for your home with cash. So why don’t people ever do it? It’s not easy. It’s a lot harder to go this way than it is to just go get a mortgage. On page 198:

Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.

I think the problem is that many people view their home as more than just living quarters. They view it as a status symbol – they need a house they can show off to family and friends. It’s more impressive to live in a house than an apartment, isn’t it? So, if you back up and think about it, you pay hundreds of thousands of dollars in interest, home maintenance, and other costs – not to mention time – in order to impress others.

Again, the only people impressed with such things are people that you never speak to, who don’t matter in your life. They look at you and admire your home, but they don’t build a relationship with you. The people you build lasting relationships with like you, not your house.

We chose to buy a home with a mortgage. I don’t regret it, but if I had to do it all over again, I would have looked intensely for a great rental situation instead (since we originally lived in an apartment too small for two toddlers and two adults – we had to move) and kept saving.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the twelfth chapter – Build Wealth Like Crazy.

Eventually, every homeowner finds a sizable home improvement project that they’d like to tackle. Perhaps the project is rebuilding a deck. Maybe it involves putting new concrete in the driveway.

Whatever it is, it’s big. You could tackle it yourself, but you’d be working on it after work for weeks, losing many, many hours that could be spent on other activities. So you either dig into the drudgery yourself, put it off, or, worst of all, hire someone to do it.

I suggest a different route.

A few years ago, a close friend of mine decided that something needed to be done about his cracked driveway. One Saturday, instead of putting it off yet again, he pulled a big grill around to his front yard, iced up some coolers with a bunch of tasty beverages, and invited a bunch of friends over to help. They all worked together getting the old, busted cement out of the driveway and adding a fresh new batch. One friend was a carpenter who took charge of the operation, but more than a dozen guys offered up their labor, knocking out chunks of concrete, carrying things out of the way, putting forms in place, and smoothing freshly-laid pavement. Along the way, they enjoyed freshly grilled brats for lunch and some excellent thick steakburgers for dinner.

In one day, my friend got his driveway refinished with no labor costs – his only expense was a lot of beverages and a fair amount of food. Everyone else there got two free meals, a lot of free beverages, and an afternoon spent outside with a bunch of fun people.

How can such projects work? In order to make it happen, you need to plan ahead in several different ways – but the extra planning and effort will really pay off later. Here’s what you need to do.

Always volunteer to help with projects that others are doing. If a friend of yours needs a hand with a project, don’t hesitate to burn an afternoon helping to put up a deck, assemble a shed, re-shingle a roof, or install a driveway. Even if you don’t believe you have any skills to offer, there are always things you can be doing, even if you’re merely a gofer or you wind up being the food preparer. Every task that you can help with helps the entire project move forward.

Give some advance notice. Don’t just call people on the morning you plan to get started on the project. Instead, give them a couple weeks’ notice at least, and keep track of the ones who seem at least interested. Let them know that there will be plenty of people, food, and beverages – don’t just focus on the work.

Plan out your work. Know exactly what your project is going to entail. Have all the supplies you’re going to need on hand well in advance of the working party. Have a plan in place that details what needs to be done and in what order the tasks need to be accomplished.

Be organized. On the day of the working party, get all of the supplies you’ll need out and organized before anyone else arrives, so that they can easily be found when work begins. Do some of the early steps yourself – measuring, marking, and so forth. This way, when people begin to arrive, the real work can begin.

Don’t be afraid to ask for extra help from experts. If you have a friend who is skilled at carpentry, don’t be afraid to ask for a bit of extra assistance and advice from this person. Invite them to come over earlier – and don’t hesitate to give them some gift of appreciation if they go beyond what you might reasonably expect from them.

Have a wide array of beverages available – and plenty of them. Water and sodas are good choices for earlier in the day – beers are usually good choices for the end of the day. If you’re unsure what you should get, ask people when you call them. Make sure you have more than enough.

Keep the beverages cold. Take empty milk jugs, fill them 2/3rds full with water, and fill your freezer with these jugs in the week before the party. The day before, ask around for coolers to borrow – try to get two or three of them. That morning, take out the jugs, smash them, and fill the coolers with beverages and ice. Make sure you don’t run low on cold beverages – on a warm day where people are outside working, it’s vital that you keep plenty of cold beverages available for them.

Thank everyone that shows up, both when they arrive and when they leave. This is simply good manners and goes a long way towards ensuring that people don’t leave with a bad taste in their mouth. Thank people for coming as soon as they arrive, let them know where the beverages are and when/where the food will be, and brief them on what’s going on.

Work hard. Never stand around while others are working on your project. Be involved at all times – and if you’re not directly involved, be doing something else clearly productive or purposeful. There’s no better way to sour the mood of a working party than to have the host standing around while other people are building his or her deck.

Have someone focus on food preparation. Although you’re the host, your role should be out there working as hard as anyone else on the work project. This means that, for food preparation, someone needs to give a hand. One great tactic is to simply ask someone appropriate – your spouse is a good choice, as is someone who might have a physical handicap that makes it possible for them to prepare the food, but difficult to engage in the work. Arrange this ahead of time so that it’s not a concern.

Make it fun. Have a radio available, and tune it to something that many of the people will find interesting. Growing up, when my father would have events like this, he would make sure that the radio was tuned to a baseball game of one of the local teams – this is actually a pretty good suggestion. At the same time, keep conversation going – and keep people talking. Introduce people to each other if they don’t know each other well.

If you’re called later by someone who helped you, help them. These types of exchanges are often the beginning of a long-term relationship that will be beneficial for both of you.

A working party can be a great way to build friendships, have fun, and get a major task accomplished at a very inexpensive rate – but it does require a lot of work and preparation. Good luck!

A few years ago, there was a very widely circulated statistic from the National Association of Home Builders about the increase in home sizes over the last sixty years. According to their numbers, the average American home grew from 983 square feet in 1950 to 2,434 square feet in 2005.

I grew up in a home that measured about 850 feet of floor space. It was a three bedroom house, though one of the bedrooms was extremely small. Growing up, I shared a bedroom with both of my older brothers for several years, then eventually inherited that room as my own as the older ones moved out.

We currently live in a home that’s very close to 2,000 square feet. It’s far larger than the home I grew up in – it has four bedrooms, for one. Our two children share a bedroom together – there’s also the master bedroom, an office, and a guest room.

Both houses have a kitchen, a living area, a dining area. Both houses have plenty of room for two adults and two kids to live.

What’s really the difference between the two situations? What makes up the added value in that extra 1,200 square feet?

In the end, it’s mostly used for storage.

I think I realized this most clearly over the past weekend, when it seemed that time and time again, all four of us wound up congregated in the same room. We spent a lot of the day in our living room, playing with toys, reading books, and enjoying the relative freedom that a family weekend brings.

On an average day together, we spend most of our time congregated in either the family room or the living room (which could easily be one room). At nap time, both kids fall asleep in a single bedroom, and we sleep in a second bedroom. We use the kitchen and the dining room for meals. As for the rest? The guest bedroom is often unoccupied. I could do most of my writing at a small corner desk in the family room instead of using an office. The laundry room could basically just take part of the space used for the entryway. We could eliminate all but one of the bathrooms without a real crisis.

And suddenly we’re living in a 1,000 square foot home.

Does this mean I regret this house purchase, and that I’m now looking to downgrade to a smaller place? Not at all. I like the area in which we live, where there are children the same age as my son (or within a year or two) in virtually every direction. Last summer, my kids spent almost every evening and good chunks of every day running around in the yard with other children their age – well-mannered children who are also being raised to be intellectually curious. We have a nice big yard that borders on a field and also on other yards, creating a huge green space for our children (and other children) to play together on.

What I did learn is quite simple, though: the square footage shouldn’t be the primary factor when choosing a house. Although there are times when it feels good to have room to spread out, most of the space is completely unused most of the time (except for storage of things we probably don’t really need to keep). Even more important, choosing a lower square footage usually means much less expense over the long haul – you don’t really lose living space, but you do lose storage space, which means that you can’t accumulate as much stuff, which thus means you’ve got less money invested in material items that are just tossed into storage.

One thing’s for sure – as my wife and I consider these factors and re-work the plans for our retirement home, the plans are slowly growing smaller and smaller.

Over the next few days, we’re going to take a look at five common New Year’s resolutions that people often adopt for their finances, evaluate some of the traps that people fall into with regards to that resolution, and come up with some real actions that can turn a challenging New Year’s resolution into a success.

On New Year’s Eve 2005, my wife and I made a solemn commitment to start seriously saving for a down payment. We had a one month old child and were living in a tiny apartment that, even with just the three of us, was already getting tight for space. We knew that we would have to upgrade our living quarters soon and so together we resolved to make a change.

It didn’t go so well. Just four months later, we reached our financial low point – and we realized that just making such a resolution didn’t really help anything at all. We needed a plan in place if were were going to make things work, and so we got down to business with a real plan for saving for a down payment. Today, we’re happily entrenched in our own home.

What could we have done differently back then to make our resolution work? Here are some tactics that we used later on for our down payment plans that would fall right in line with such a hefty resolution.

Set a very clear goal right off the bat. So, you want to save up for a down payment. How much money is that?

Surprisingly, many people stumble even at that first question. The idea for a down payment is very vague in their head. I know that our original thoughts on the subject were incredibly vague – we just knew that we needed to save quite a bit of money.

Chasing after such an intangible goal is almost a guarantee that you will fail. Instead, do some basic house hunting in your area and get an idea of the prices on the type of house you would like to buy, then set a savings goal based on that price.

Let’s say, for example, that you decide that a $200,000 house is right for you. How much of a down payment on that house are you going to save for? A 10% down payment? 20%?

The larger the down payment, the better. You’ll need 20% down in order to get a typical fixed rate mortgage at a low interest rate. If you have less than that, you’ll usually have to get separate mortgages (an 80% mortgage along with an additional 10% mortgage) or, if they’re still being sold, an adjustable rate mortgage of some kind.

These two numbers will tell you what your dollar goal is, but what’s your timeline? Are you intending to save $40,000 in four years? That’s roughly $10,000 a year – $800 a month will get you there.

Your timeline, you see, will help you break down this big goal into smaller short-term goals. $800 each month – can you do that? Can you do it if you get creative with it? $800 is a tangible goal that you can shoot for each month – a vague notion of “saving for a down payment” will never push you towards your goal.

Make sure the goal is a realistic one. Once you’ve started breaking things down into real numbers, you’ll probably start gasping at the high amounts. Can I really afford that? Likely, you can make a pretty strong goal each month if you put your mind to it, adopt some frugal strategies, and settle in for the battle.

However, there is often a temptation to make the goals too high. If you’re attempting to save 50% or more of your monthly income for this goal, you’re probably not going to make it.

My suggestion is to try your savings plan for a month or two and see how it works for you. If it’s beyond your means, go back to the drawing board. Don’t be afraid to toss your plans aside and adjust things. Perhaps you can expand your timeline. Perhaps you can set your sights lower in terms of the house you intend to buy.

The key is to not decide that things are hopeless just because you’ve decided that your first attempt at a plan is just too much. Step back, look at the overall plan, and make some adjustments. Don’t just walk away because you find it too difficult.

Figure out where that money is going to come from. So, you’ve elected to save a certain amount of dollars each month. Where is that money going to come from?

In some situations, people are already natural savers and they already spend less than they earn, but this seems to often be the exception rather than the rule. Quite often, people who make a resolution about a down payment aren’t saving much at the moment to begin with, and coming up with a savings plan is going to be difficult.

First, look for ways to easily cut your spending. Look for big pieces and also ones that repeat monthly. Instead of leasing a car, perhaps you can buy a late model used one and drive it for many years, saving yourself a car payment that you can put away for your down payment. Perhaps you can eliminate that monthly Netflix bill, or maybe you can cut back on your cell phone usage – do you really need that many minutes or that big of a text message plan? Maybe you can adopt a “one meal out a week” plan instead of dining out every other evening – that will likely save you $10-20 a meal at least.

Second, adopt some simple long-term cost savers. Install CFLs throughout your apartment to cut down on electrical use. Install a programmable thermostat in your apartment (check with your landlord) and program it so that you’re not wasting money on your heating or cooling bills while you’re at work. Put your home electronics on a switch so you’re not paying for your cable box to sit there idle while you’re not at home. These solutions will save you significant money on your energy bill without thinking about it.

Finally, look for some extra income. Perhaps you could work a part-time job to earn some extra cash, or maybe you have some marketable skills that would work well in a freelance environment. If you can bring in extra cash, that cash could go straight to your savings without skipping a beat.

Automate the savings. As you begin to save, you’ll find that it’s often tricky to keep your savings in balance with your normal spending. You’ll try hard to keep money swept into a savings account, but it doesn’t always work smoothly.

Make it smooth. Institute an automatic savings plan with an online bank that has a good rate of return on their savings account (I use ING Direct). Then, each week, have the plan automatically withdraw a certain amount from your checking account. $190 a week, for example, equals out to roughly the same amount as $800 a month over the course of a year.

With an automatic savings plan, you know that the amount will be withdrawn each week, and you can plan ahead for it. It’ll force you to be much more careful with your spending, even if you seem to have the cash on hand to afford something frivolous. Even better, after a while, you can check that new account and see that the savings is really starting to add up.

Utilize windfalls effectively, even small ones. Another useful tactic is to immediately pass along any windfalls that come your way straight into your savings. Did you just get a small inheritance? Don’t spend it foolishly – instead, apply it directly to your savings without a thought.

This goes for little savings and windfalls, too. Let’s say you find a $20 bill on the street. You might be tempted to spend it on something fun, but why not just go ahead and put it towards your big dream? The same goes for any small savings you might make – let’s say you don’t eat out at all this week and save $25 in the process. Go ahead and sweep that straight into your savings.

What this will do is accelerate your dream just a little bit, and perhaps take some of the pressure off.

The real key to making a resolution to save for a down payment work is persistence. This isn’t a goal that will happen overnight. Instead, you need to provide a degree of constant focus in order to make it work. Good luck!