Thursday, August 14, 2008

Finances for Writers


As you know I always teach my readers what it is I have done to reach success. Today I want to talk a bit about finances for a writer.

However, today I'm not going to share with you what I'm currently doing. Unfortunately, my husband was diagnosed with Cancer 3 years ago and it hit our finances pretty hard. We were blessed to have savings when it happened, but only about a month's worth. We are in the process of digging out of that right now. [And he is now 2 years cancer free!!!]

But for those of you who did not have a calamity I read last week something that Randy Ingermanson has done to help get his mortgage paid off. I think it could be a good idea for the right person. He has seen a significant reduction in his debt through the process and I wanted to pass his information along. Thankfully Randy has allowed me to copy this article in its entirety for you to read.

Randy is known for his Snowflake method and his Fiction 101, 201, 301 series. I've seen him at writer's conferences and you'll find his fiction programs among my suggested readings. So today I will allow him to teach you a bit about your finances. And I'm not a financial advisor, just a person who hopes this will help someone out there.

Organizing: The "HELOC Trick"

Several months ago, a friend of mine invited me to come
listen to a talk by one of those debt-reduction people.
The talk would supposedly show us a way to pay down our
mortgages a lot faster. My friend wanted me to tell him
if the math was legit, because it sounded too good to
be true.

I am always skeptical about money games like this. My
experience says that when something sounds too good to
be true, there's a catch somewhere.

I was right, there was a catch, but it turned out that
there was a lot of truth in the idea. I'd like to share
it here, for the simple reason that most writers I know
are often concerned about money. Any idea that can
reduce a writer's pesky money worries is a good idea.

If money is not an issue for you, then skip this
article. Next month, I'll be back to my normal article
on organizing your time or whatever. But just for this
month, I'll be talking about that vile money thing.

Here is my standard caveat: I am not a financial
advisor. I don't give financial advice. Nothing I say
here should be construed as financial advice. I am a
math guy, and I am pretty darn sure that everything I
say here is mathematically correct, but any action you
take is your own decision, not mine.

By the way, in the last 12 months, I've reduced my
total debt by almost exactly 10%. At that rate, I'll be
debt-free in a bit more than six years (because of the
compounding effect).

Now, not everybody believes that it's smart to be
debt-free. There are lots of good folks who think that
debt is terrific and that you should be in debt up to
your eyeballs, as long as it's debt for an investment
(such as a house or a business).

If you believe debt is wonderful, then that's fine, I
won't argue with you, but this column is not for you;
skip on down to the next column. If you e-mail me
telling me that I should love my mortgage because I'm
using other people's money to get rich in real estate,
I won't even bother to answer you. I don't love my
mortgage anymore. If you love your mortgage, go ahead
and kiss it, marry it, live happily ever after with it.
I want to burn mine.

Let's get back to the story. My friend took me to hear
this guy talk about debt-reduction. To my astonishment,
I saw right away that the plan would actually work. The
math was completely legit and it had some nice
psychological advantages that would help even more.

The problem was that the speaker was selling a $3500
software product to "help you do the math." To be
blunt, I didn't think the product was worth that kind
of money, when I could easily "do the math" with a
pocket calculator in one minute. I'd have been happy to
pay fifty bucks for the idea, but not three and a half
Big Boys.

For that reason, I won't give the name of the product
or the company that sells it. You can easily find it
with a search engine after you've read this article.
You'll see that a lot of financial advisors think the
product is a load of hooey.

But the idea is rather clever and I was incensed that
I'd never thought of it myself, because it's obvious to
any math guy. I call it "the HELOC Trick."

OK, so how does "the HELOC Trick" work?

Before I answer that, I'll talk about what problem
we're trying to solve. After all, as any of those
financial advisors will tell you, the way to get out of
debt is to spend less than you earn and apply the
difference to your debt. If you do that, you'll
eventually fry your mortgage. Duh, right?

Yes, that's pretty obvious, but most people don't do
it. I had a mortgage on my last house for 12 years, but
I hardly ever applied any extra money to my mortgage.
Why not? Two main reasons:

* I knew that if I paid extra money on my mortgage, I
wouldn't be able to get that money back out. Those
meanies at the bank won't give it back once you pay it

* When I had extra money, I put it in savings in case
of an "emergency." When the savings got big enough, I
started feeling "rich" and spent the money on something
I didn't need.

So after 12 years of paying my mortgage, I had paid the
bank MORE than the original value of the house and had
actually paid down ALMOST a quarter of the value of the
house. Pretty sweet deal, eh? Sweet for the bank,

Fact is, I made money on the house when I sold it,
because house prices were skyrocketing in those days.
But house prices aren't skyrocketing right now. Not in
most places. For sure not where I live. I don't really
want to pay for this new house 2 or 3 times over. I'd
be happy with paying for it only once. I'm funny that

So here's what I've done in the last several months to
start knocking down my debt. When I started this game,
I had two debts: a mortgage on my house at 6.25% and a
car loan at 6.4%.

a) I went to my bank and opened a Home Equity Line Of
Credit (a HELOC). You can take money out of a HELOC any
time you want, but you can also put money in any time
you want. They charge you interest daily based on the
amount you owe that day. The bank didn't charge me
anything for my HELOC, and they gave me quite a big
credit line -- a LOT more than I needed to make this
plan work. At that time, the interest rate was 7.19%.
It has since dropped to 4.94%.

b) I used the HELOC to pay off my car loan completely.
(It always makes sense to pay down the debt with the
highest interest rate first. If I'd had credit card
debts at the typical usury rates, I'd have paid those
off first.)

c) Right after my next paycheck, I took almost all the
money in my checking account and paid it into the
HELOC, leaving only a few hundred bucks in the checking
account. This also reduced my HELOC debt to a
comfortably small number. And it reduced my daily
interest charge to a very small amount.

d) Throughout the next month, I paid bills by writing
checks out of the HELOC account. So the debt in my
HELOC gradually increased throughout the month from a
small amount to a larger amount.

e) Every month since then, I've repeated steps (c) and
(d). Right after I get paid, I move most of the money
in my checking account into the HELOC. Whenever I get
any extra cash (tax refund or whatever), I move it
straight into the HELOC. At the beginning of each
month, I do a simple calculation and then pay some
extra money out of the HELOC against the principal in
my mortgage.

What is that "simple calculation?" I have a target
amount that I want to owe on my HELOC after paying the
mortgage. I look at how much I owe and subtract it from
the target amount. I pay the difference on my mortgage.

For example, if my target HELOC debt was $10k and I
owed $8k on the HELOC on the day my mortgage was due,
then I'd take $2k out of the HELOC and pay it to my
mortgage company. If I only owed $5k on the HELOC on
that day, then I'd take $5k out of the HELOC and apply
it to the mortgage. If I owed $10k on the HELOC, I'd
pay the mortgage payment but no more than that.

By following this strategy, I always owe roughly the
same amount on my HELOC, and any "extra" money goes to
pay down my mortgage.

Notice that my total debt is the sum of my mortgage
plus my HELOC debt, so that "simple calculation" above
doesn't have to be very precise. It really doesn't
matter who I owe that money to; I owe it to somebody.
My goal is to reduce the total as fast as possible.
That's why every spare dime I get goes into the HELOC
right away.

That's pretty much it. It sounds like a shell game,
doesn't it? How could it possibly work? What does it
cost, and what does it gain me?

a) Opening a HELOC cost me nothing. Some banks charge a
fee to open one, but my bank paid the fee because they
wanted to earn interest from me.

b) Paying off the car loan with the HELOC didn't change
my total debt. I still owed the same amount. This cost
me nothing and saved me nothing.

c) Moving most of my money from my checking account
into the HELOC immediately began saving me interest. My
checking account earns no interest. The HELOC costs me
interest, but the interest is computed on the daily
balance. Mathematically, moving my money into the HELOC
means that I am now earning interest on all the money
that WAS in my checking account.

d) As I pay bills out of the HELOC throughout the
month, I gradually increase my debt. The bank will
charge me interest on this debt, but they charge it
each day on the daily balance. Early in the month, that
daily balance is low. Near the end of the month, the
debt rises back to almost its original level. (Since I
spend less than I earn, the debt doesn't quite reach
the original level.)

e) Whenever I get any extra cash, that money goes
immediately into the HELOC, and I effectively save the
interest I would have paid on that money throughout the

As any financial advisor can tell you, the above
hocus-pocus will earn you a few hundred bucks per year.
Many advisors will tell you that it isn't worth your
time to do this. In a world where people act with pure
mathematical logic, they would be right.

However, in the real world I live in, hardly anybody
acts with pure mathematical logic. Very few people
floss daily, for example, even though it's one of the
cheapest and easiest things you can do for your health.

The reason the above hocus-pocus has led me to reduce
my debt so sharply is that it has changed my entire way
of thinking.

I used to think: "I have money in my checking account,
so I might as well spend it."

Now, I think: "I have almost no money in my checking
account! I have this huge debt that I have to pay off
someday! I'm not going to spend any money unless I have

I used to think: "If I get extra cash, I'd better save
it in case of an emergency."

Now, I think: "If I get extra cash, I'll put it in the
HELOC and save some interest. If an emergency does come
along, I'll take it back out of the HELOC. In the
meantime, I'll have saved some interest."

This change in thinking is what makes the whole thing
work. If you were to buy that un-named $3500 product
that I mentioned earlier, the sales-droid ought to tell
you that this psychological shift is what makes it all

The sales-droid will likely instead tell you that it's
the "debt-cancellation effect" that makes it fly. Um,
sorta. There is a smallish "debt-cancellation effect"
thanks to the fact that interest on a HELOC is computed
daily. It's a few hundred bucks a year, and so "the
math works."

But "debt-cancellation" is a small effect. The main
thing has been to change my thinking. If I want to pay
off my enormous debt, I need to get that enormous
number in front of my face every time I spend money. I
had to quit thinking I'm "rich," when in reality I owe
tons and tons of money.

Now it should be obvious that none of this would work at
all for me if ANY of the following were true:

* I don't have a mortgage
* I don't want to eliminate my debt
* I have no equity in my house
* I spend more than I earn
* I don't want to do the calculation every month

If any of the above were true, then the "HELOC Trick"
wouldn't work.

People often get over-excited about the "HELOC Trick"
and think that it will solve all their problems right
away. Nope, sorry. For that there is a faster but much
riskier solution called "winning the lottery." The
"HELOC Trick" works for me because it helped me change
from a "spend the extra" mentality to a "save the
extra" mentality.

The "HELOC Trick" helped me grow myself a spine. That's
all. But it's enough.

Once again, you are a thinking, autonomous, intelligent
human with the ability to make your own decisions. I
make no recommendations here. I give no advice. I have
put a bug in your ear; what you do with the bug is your

If you're in town six years from now, you're invited to
my mortgage-burning party.

Award-winning novelist Randy Ingermanson, "the
Snowflake Guy," publishes the Advanced Fiction Writing
E-zine, with more than 12,000 readers, every month. If
you want to learn the craft and marketing of fiction,
AND make your writing more valuable to editors, AND
have FUN doing it, visit

Download your free Special Report on Tiger Marketing
and get a free 5-Day Course in How To Publish a Novel.

Your Coach for the Journey, Tiffany Colter


Randy Ingermanson said...

Hi Tiff:
Thanks for posting my article on the HELOC Trick on your blog! There aren't any magic tricks to becoming financially responsible. Somehow or other, it's necessary to find some discipline. This one is working for me (and it appears for many other people).

Carol Collett said...

Great idea, but just won't work in our case. We don't have enough equity in our house right now to do anything with! Thankfully, there are several roads to freedom from debt.