How can I save money after the New Year?

It took a while to realize the true breadth of the question. After all, there are countless ways to save, some of which we reject because of our need to balance the enjoyment of living today with the security of having enough for tomorrow.

A couple by the name of Bob and Mary’s stepped into my office with this specific situation and the answer to my caller became clear. Like the caller, both have jobs outside the home, earn average salaries and have no children. They bought a new home three years ago and mortgaged 90 percent of its cost at a favorable 5.75 percent interest rate. The house appreciated substantially and both have vehicle loans with modest balances.

Although both couples have money to spend on what they want and need, as well as pay their bills and cover larger known expenses that come on an annual basis, there are still practical ways that these couples can save money.

One way is to pay off auto loans with a home equity line of credit. For instance, in Bob and Mary’s case, the couple has $40,000 in auto loans that could be paid off with their credit line. Mary protested, noting that the auto loans are at 6.80 percent and the home equity rate is 8 percent.

In reality, their true home equity rate is just 4.80 percent because they weren’t considering the income tax factor. The stated rate is 8 percent, but the interest paid on a home equity loan is tax deductible, while that on a car loan is not. Since their combined tax rate is 40 percent, the true rate is just 60 percent of the stated rate, or 4.80 percent. A 2 percent savings on a $40,000 balance amounts to $800 next year.

There’s one catch: Apply the cash previously earmarked for auto payments to another loan to realize these savings.

A second way to save money is to eliminate your Private Mortgage Insurance (PMI). Bob and Mary paid more than $120 per month for Private Mortgage Insurance that was originally necessary since they borrowed more than 80 percent of the home’s value. However, significant home-value increases in the past three years and a new property appraisal might suggest the loan-to-value ratio is now in the 70 percent or less range. If so, request that the PMI be dropped. The appraisal cost would be covered in months and the savings would be nearly $1,500 annually.

A third and final way is to increase your 401(k) savings rate 1 percent annually. While Bob and Mary were taking advantage of their employers’ 401(k) matching program, they could have been saving much more. While it’s hard to adjust cash flow to substantially increase your 401(k) contributions immediately, try increasing your contribution percentage by 1 percent next year and each year thereafter until reaching the maximum allowable contribution. The increases will go unnoticed and likely offset by compensation increases.

Dave Hinnenkamp, CPA, is CEO of KDV Wealth Management of St. Cloud, Minn. He may be reached at 320-650-0216.